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APRA Executive Director of Insurance – speech to Future of Insurance 2024

Underwriting the future – building resilience through transparency

This conference aims to peer into the future of insurance. That is not an easy task as we face a future that seems more uncertain than ever. None of us can say with confidence what the insurance industry will look like in a decade or two from now. The future is yet to be written and the actions we take today will help determine how the story unfolds. With that in mind, I will share some perspectives on the current state of the industry and the actions that can help underwrite a strong future.

Insurance plays a critical role for the community and the wider economy. It protects and provides peace-of-mind for individuals and families, enables investment in critical infrastructure, allows businesses to operate, communities to thrive, and it supports consumer confidence and the overall stability of our economy.

It is in recognition of the importance of insurance that APRA has its role as the prudential regulator of the insurance industry. APRA sets and enforces prudential requirements to safeguard that insurers are financially strong, with the capacity to pay legitimate claims to policyholders. It is in all our interests to see a future in which general, life and private health insurers can continue to offer protection as a stable pillar supporting our communities.

But will we see a future in which insurance continues to provide this crucial role?

Australia, like many other countries around the world, is experiencing increasingly damaging impacts from severe weather events. Our community is facing serious cost-of-living stress and we are seeing levels of hardship across mortgage borrowers. Insurance premiums are rising and the “protection gap” is widening as some lines of insurance become harder to obtain, especially for those who cannot afford higher premiums or are simply unable to access suitable cover.

The industry is also under scrutiny, being subject to multiple inquiries, including the House of Representatives Standing Committee on Economics’ current inquiry into the industry’s response to the 2022 major floods across Queensland and Northern NSW. 

The future of the insurance industry hinges on its response to these challenges, which means facing some tough questions:

  1. Will everyone who needs insurance protection still be able to afford and access it in a decade or two, or will this essential product become a luxury?
  2. As the ability of insurers to differentiate risk segments improves, could traditional risk pooling be undermined? And what would that mean for high-risk customer segments if they are priced out of the market?
  3. What action can be taken to reduce the protection gap and how can we develop products that are fit-for-purpose and future-fit to protect our communities?

Of course, these questions become easier to answer if we are able to reduce the underlying risk. In some cases, such as the risks associated with natural disasters or the rise in mental health problems, mitigation requires system-wide solutions involving collaboration by a variety of parties, including various levels of government, regulators, industry bodies and policyholders.

In some areas the first steps are being taken to work collectively on risk mitigation. But there are also actions that insurers can take themselves to help confront these challenges and to shape the future of the industry.

It is time to make a difference.

Current state of the industry

Let’s take a step back for a moment and review the current state of the industry.

Australia’s insurance industry is financially strong and well-capitalised. Policyholders can have confidence that their insurer will have the financial capacity to pay all valid claims in their time of need.

In 2022 around 85,000 Australians received over $11 billion in payments from life insurance claims.

Over the last financial year, APRA-regulated general insurers paid almost $40 billion in claims to policyholders, with $9 billion of this paid to households.

In the private health insurance industry membership is on the rise after years of decline, especially among younger members. This may reflect a reassessment of the value the community places on healthcare in the wake of the COVID-19 pandemic.

These numbers show the important role the industry is playing in helping our communities recover from disaster.

The industry has also heeded APRA’s call to get “back to basics” and has been working on improvements to governance and risk management. The life insurance industry has increased its focus on the sustainability of its products and general insurers have been acting on the lessons learned about insurance risk management in the wake of business interruption cover disputes.

There is a lot of work underway to identify and address gaps in cyber controls and to enhance operational risk management across the industry. This includes preparations for compliance with APRA’s incoming operational resilience prudential standard CPS230, which takes effect in July next year. This work will strengthen the industry’s management of operational risk, improve business continuity planning and the management of risks arising from the use of service providers.

Facing the challenges

Insurers are making good progress in strengthening the stability and resilience of their organisations, which is essential to support the long-term future of the industry. But another critical element of the industry’s long-term sustainability is understanding and meeting the insurance needs of the community. This means more than developing a range of product solutions. It also means ensuring that customers clearly understand their risks, as well as the products and choices that are available to them to balance cost and protection and whether there is anything they can do themselves to help mitigate their risks and reduce their insurance premiums.

It is tempting to say that achieving this goal is simply a matter of effective communication, but there are additional layers that are important here.

One of these layers is trust. As we know from the Financial Services Royal Commission, trust is easier to lose than to gain. Without trust effective communication becomes far harder. For example, how can an insurer have a productive conversation with a customer about the level of cover they really need if that customer is deeply suspicious that the conversation is simply an attempt to increase their premium?

Another layer is transparency. All communication involves a decision about what to communicate and what not to. The principle of transparency involves continuously challenging yourself to communicate more rather than holding back important information. This is a balancing act: there will always be circumstances where certain information cannot be shared, but commitment to transparency can help build trust and, in the case of insurance, has the potential to be an important tool to incentivise greater risk mitigation and to help the community better manage its own risks.

I encourage all insurers to think seriously about how their processes and communication could make it clearer to their customers what they can do to make their home, car or health more resilient and to what extent that could have an impact on their premium.

Accessibility and affordability: the growing protection gap

Earlier, I spoke of the growing gap in the protection of our community. What does this protection gap actually look like? Some data can bring this issue to life:

  • As many as 1 in 25 Australian homes are expected to be uninsurable by 2030 according to analysis by the Climate Council. With expectations that climate change will drive the frequency and severity of extreme weather events, this projection has been described by some as an emerging insurance crisis.
  • For motor and household, insurance premiums rose 16.3 per cent in the year to November 2023, the fastest rate of any consumer spending category. Coming at a time where broad-based inflation and higher interest rates are creating cost of living stress, this increase will inevitably affect the ability of some people to continue to afford full cover.
  • The premium increases in individual disability income insurance over the three years from 2020 to 2023 were double the increases experienced over the three years prior. And looking more broadly at cover for death, disability income, total and permanent disability, and trauma together, we have seen a fall in retail sales of over 50% in the last 5 years. It is hard to be confident that this shift has been fully compensated by adequate cover through life insurance in superannuation.
  • While membership trends have improved in private health insurance, we have seen a trend in customers managing the cost of their policy. Over the past 10 years policyholders have downgraded their hospital coverage levels to the point where full coverage has declined from one half to one third of policies and we are also seeing excesses increasing.

The concerns about the resulting protection gap are widely shared throughout our community. Basic insurance at an affordable price is becoming out of reach for many. If you insure a house and its contents, a car, hold private health insurance, life insurance and potentially other covers, the cumulative cost of insurance is becoming an increasing percentage of income for many. People and businesses are having to make the hard decisions to underinsure, select high excesses and a long list of exclusions, or not to take out insurance at all. This means that a higher level of risk will be retained within our communities.

Over time, changes in the total amount paid out in claims by insurers will flow through to premiums. There is a wide range of factors increasing claims costs and contributing to the declining affordability and accessibility. These factors are complex and vary across different lines of business.

For household insurance, for example, claims costs are driven by a combination of the frequency and severity of events, particularly weather events affecting multiple households, by the extent of housing development in higher risk areas, by supply-chain disruption, skills shortages and inflation on rebuilding costs.

In the life and health sectors increases in medical costs well above broad-based inflation and aging demographics have been contributing to rising claims costs.

When premiums increase as a result of rising claims costs, they provide a price signal of the underlying risk. This signal provides us with a call to action that needs to be answered by all of us in collaboration.

The need for mitigation

To address the growing protection gap, the underlying risks need to be reduced urgently, especially the risks associated with natural catastrophes. Work on this front is not easy and we do not expect insurers to fix the industry’s issues on their own. Potential responses are multi-faceted, requiring a collaborative approach with those who have the relevant skills and industry knowledge. This includes engagement from different levels of government, the insurance and reinsurance industries, industry bodies and local communities.

The first steps are being taken. There have been targeted policy responses such as the establishment of the Cyclone Reinsurance Pool, which is now in its early phase of operation.

The Federal Government established the Disaster Ready Fund, now in its second year, administered by the National Emergency Management Agency (NEMA). The Hazards Insurance Partnership (HIP) was established just over a year ago, bringing industry and government agencies together with the aim of ensuring that resilience initiatives put downward pressure on premiums. APRA is an observer at the HIP and part of the data working group which is developing a “national data asset” to provide a clearer picture of Australia’s natural hazard risks to target resilience efforts accordingly. Concrete measures include building dams and levees to mitigate flood risk, and ideally avoiding housing development in high-risk flood areas.

The House of Representatives flood inquiry, while primarily focused on insurers’ responses to the disaster, is also considering insurance affordability pressures and could be another source of recommended actions.

Increasing transparency

Returning to the topic of transparency, APRA, alongside our peer agency ASIC (Australian Securities & Investments Commission), believes that transparency is critical to improving a range of consumer outcomes.

But what do we mean by transparency in insurance? It includes being clear on:

  • what is and is not covered by a policy;
  • the factors that drive consumers’ premiums;
  • which mitigation actions by consumers will, or will not, reduce premiums; and
  • how insurers will use information provided, such as the results of genetic tests.

A lack of transparency erodes trust, which undermines the effectiveness of communication. Over time, an investment in greater transparency can help to build trust. While that has broad benefits for insurers – not least it should lead to a reduction in complaints – how does it help increase resilience and reduce the protection gap?

Much of the resilience work I have already discussed, such as the Disaster Ready Fund, targets community level action. This is important, but so is action at the level of the individual household. Insurers are well-placed to provide guidance – and incentives – to their customers about the risks they face, how they can increase the resilience of their own homes, manage the level of their cover or excesses. But without trust, without transparency this will be hard to do.

Product innovation also has the potential to help address the protection gap and is another area that could benefit greatly from transparency. To design sustainable products that work for both you and your customer, today and in the years ahead, I challenge you to:

  • design products and services that are of demonstrable value to the community;
  • ensure these products reach the most suitable target market: be clear who the products is designed for;
  • simplify your products and processes and review them regularly to adjust to changing consumer needs;
  • use plain English product disclosures and don’t hide the devil in the detail;
  • be fair and clear in your pricing, ensuring it aligns with good product features; and
  • ensure you have a clear, open, empathetic, fair and speedy claims process.

Increasing transparency will not always feel comfortable: no one wants to tell someone they have just bought a house in a high flood risk zone. But speaking up and finding a way to be transparent about risk will help to deliver solutions.

Conclusion: The future isn’t waiting

The industry is on the right track with the basics of good insurance risk management. This is fundamental to ensuring it has the financial capacity to fulfill its purpose: supporting their current and future customers in times of need, when their house flooded, their car crashed, or their health deteriorated.

However, communities today are facing real challenges regarding affordability and accessibility that need to be addressed.

APRA recognises that closing the protection gaps in insurance is an example of a “wicked problem” that poses complex issues and will require sustained action by industry, all levels of government and the community. APRA highlights the issues facing the insurance industry and we are supporting the collective work on solutions.

I encourage all insurers to take ownership of these challenges and to find opportunities to make a difference. Harness the talent and innovative power we have in the industry to help shape the future. I call on insurers to reflect on my challenge to increase transparency. I believe that a more transparent industry is a more trusted industry. Transparency will help build a more resilient community.  

With the actions we take today, we are writing the industry’s future. It is hard work, but I certainly hope that together we are able to shape a “Future of Insurance” where a resilient and sustainable industry can meet all of the protection needs of our community.

Sean Carmody

The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, mutuals, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding around $9 trillion in assets for Australian depositors, policyholders and superannuation fund members.