Competition, innovation and communication are essential if trust is to be rebuilt in the wake of the Royal Commission.
This is according to an expert panel speaking at the FSC Life Insurance Conference.
Competition provides the platform
Recent consolidation within the life insurance industry (e.g. One Path to Zurich, CommInsure to AIA) has led some to question whether the sector is sufficiently competitive. Mr Jason Falinski MP, who previously worked at Insurance Australia Group, suggested that an unintended consequence of the Royal Commission could be increased consolidation.
“I’m really worried about competition,” said Falinski. “George Stieglitz, in his Nobel Prize winning paper, said that all regulation starts off as an aim to improve consumers' outcomes, but always ends up protecting producers. I think we need to be very clear, [the Royal Commission report] said that we have the appearance of competition without there being actual competition. That was mostly reflecting on the banking sector, but I think that goes across the financial services sector.”
Falinski emphasised that any legislation and regulation flowing from the Royal Commission must not create insurmountable barriers for new market entrants. The panel included Chris Powell, the MD and CEO of a recent market entrant, Integrity Life. He said that the barriers to entry are already high because of the difficulty of securing private equity from risk-averse Australian investors. To kick start Integrity Life, Powell said he had to raise capital from overseas.
Innovation must not be stifled
Powell argued that “there is sufficient competition” in the life insurance market but that innovation around customers was the key to restoring confidence and trust in the industry. “Integrity Life does that through our model of listen, learn and act – and then repeating that,” said Powell. “So we listen to the customer, we learn from the customer, we act on what the customer says, and then we repeat that. And we use that to co-develop our products and services.”
Falinski agreed on the importance of innovation and cautioned that regulation must not stifle the ability of institutions to develop better services for consumers: “Innovation needs to [be driven by institutions] who are customer-facing. And the more regulation we introduce that interferes with, or constrains, the customer relationship, the lower the competition you have.”
Shadow Assistant Treasurer, the Hon Matt Thistlethwaite MP, argued that there may be competition at the front end of insurance, but that this doesn’t extend across the whole of life of products. “You only need to go online and Google a particular insurance that you're looking for, and there's a wealth of products that will come up,” he said. “What's important is that perhaps there's been too much competition at that front end – in the sale of the product up front – and not enough competition over the life of the product.
“This isn't just around life insurance; it's got a lot to do with a lot of other financial products as well. These are some of the issues that have been identified by the Royal Commission and others, about how you provide that value over the life of the product, particularly if you're talking about a 10 – 20 year lifespan, and how you provide service to the customer and get better competition in that area.”
Clearing up confusion
The current rate and scale of change in the life insurance sector risks adding to the already high level of confusion among consumers, according to Mike Taylor, the Managing Editor of Money Management and Super Review: “One of the things that one of our publications has done over the past 14 years or so is run a survey of super fund executives and trustees, and we've always said to them, ‘Do you think that your members actually understand the insurance inside superannuation?’ It hasn't changed much over all those years – the majority of them just say, ‘Look, honestly? Our members don't really get it’."
Powell agreed with that assessment: “We've got a problem where we need to explain life insurance in more clear and simple terms, not only to people in group insurance, but to retail customers as well.
“The overwhelming evidence is that people don't understand what they're buying in life insurance. And when you don't understand what you're buying, you don't buy it. You actually steer away from it. And when the process is complicated and long and difficult to go through for an application, you don't buy it. So we've got to do better in that.”
Falinski highlighted that consumers have a responsibility for their own financial wellbeing, but that insurers must make it significantly easier for them. “People need to be aware of what they're buying and not buying,” he said. “Where there is asymmetric power, Parliament can make that more clear for everyone by forcing producers of goods and services, like life insurers, to provide a terms sheet that makes it very clear as to what you are getting, and what you're not getting. And to be blunt, if you can't explain it to a retail or normal consumer in between one and four pages, that is probably a product that shouldn't be available to the general public. I think that's where this sector can go in terms of rebuilding trust.”