The past five years have been difficult for Australia’s insurers. The 2017 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry uncovered long-standing patterns of professional misconduct related to overcharging commissions, unethical sales practices and mishandling claims. As the industry grappled with a subsequent regulatory overhaul, the country’s economy was hit by the fallout of the covid-19 pandemic, a string of natural disasters, deteriorating relations with China, and disruptions caused by the Russian war in Ukraine. The sector also took a further hit due to low interest rates, weak investment returns, a decline in underwriting fees1 and the exit of Australia’s big four banks2 from the insurance business.

Despite all this, Australia’s insurance industry remained profitable. Jamie Smith, CIO of The Hollard Insurance Company, describes the sector as “beaten up, but resilient”. “The last five years have been some of the toughest that the industry has experienced,” he says. Nevertheless, “it’s weathered the storm reasonably well. There is still growth in the market, and despite cost and supply chain pressures we’re able to fulfil our promises when it comes to claims.”

“Australia’s insurance industry is a mature market that has seen declining new business growth in recent years. This combined with some challenges in disability product lines has brought sustainability challenges for the sector,” says Megan Beer, CEO of Resolution Life Australasia. “We’ve seen consolidation, and a number of market participants exit non-core parts of their offering.” Global life insurers—which used to dominate the Australian market—have opted to shift their investments to faster growing markets in Asia and banks have exited the life insurance space, resulting in a significant shift in the industry’s structure. After five challenging years that have buffeted its economic and structural foundations, has the future-readiness of the Australian insurance sector been harmed?

Is the insurance sector future ready?

“That was probably the first true test of the industry as a whole, dealing with an industry-wide upheaval.”

Scott Leney, head of risk management, APAC Australia at Marsh & McLennan

According to the Future-Ready Business Benchmark, the insurance industry, across the ten countries evaluated, ranked at the top3 of all pillars and categories in overall future-readiness. Scott Leney, who is the head of risk management, APAC Australia at Marsh & McLennan, says that the sector’s “brilliant performance” during the initial months of the pandemic, rapidly transitioning to remote work and ensuring it could still serve customers and clients, might go some way towards explaining its high scores. “That was probably the first true test of the industry as a whole, dealing with an industry-wide upheaval,” he says.

The industry earned the highest score in most core areas under the first pillar on business preparedness. These included long-term planning, developing technology modernisation and data-driven strategies, and leveraging data to improve operations, processes and products/services (Figure 1). Mr Smith says that regulatory changes following the Financial Services Royal Commission forced the sector to do things it might not have otherwise, including product innovation. “Because we now have target market determination [using data], we have the opportunity to know our customers better and to modify products appropriately, as opposed to [following] a one-product-fits-all approach,” he says.

“Because we now have target market determination [using data], we have the opportunity to know our customers better and to modify products appropriately, as opposed to [following] a one-product-fits-all approach.”

Jamie Smith, CIO of The Hollard Insurance Company

“We’ve had to lean into digital transformation and use this to help drive business transformation,” says Mr Smith. “Many insurers started modernisation programmes a few years ago and are now reaping the benefits of that. I suspect this has contributed to us ranking higher than perhaps we have in the past, but I suspect it’s not consistent across the industry. There will be smaller insurers that are more agile and nimble than perhaps larger insurers with more complex, fragmented systems and platforms.”

While the overall performance on business preparedness looks promising, there continues to be room for improvement.

Cybersecurity challenge

The overall insurance industry scored a middling rank of fifth in cyber-threat evaluation and prevention. These findings align with the situation in Australia as well. Based on The Economist Intelligence Unit’s operational risk indicators, the Australian insurance industry’s cybersecurity preparedness has worsened recently. Its risk score increased from 0 to 1.4 in Q4 2020. Similarly, the risk score for the likelihood of a cyber-attack went up from 2 to 3 in Q2 2021 (Figure 2).

Cybersecurity also affects the insurance business indirectly, through insurance pay-outs to customers in the aftermath of attacks. As digital connectedness expands, one attack on a central digital infrastructure can pose risks to customers around the world, leading to large insurance claims. Australia saw a 13% increase in cybercrime reporting in fiscal year 2020/21 (July-June) compared with the previous year.4 The Russian war in Ukraine is expected to further increase this volume.5 Mr Leney observes that this is something the industry is struggling with, given the increasing rate of cyber-attacks and the constantly changing methods that attackers use.

Challenges with suppliers and ESG, but progress towards the frontier is being made

The industry—aggregated across the ten markets—also ranked last in compliance and ethics in supplier selection. The indicator assessed the importance that firms allocate to regulatory compliance and ethical issues like cronyism, nepotism and corruption when selecting suppliers, which is an increasingly relevant concern in an environment of greater data-sharing. The low scores are unsurprising for Australia, considering that the Financial Services Royal Commission highlighted several recommendations to tackle compliance and ethical issues in the industry. These include a ban on hawking insurance, deference of sales for add-on insurance, incorporating codes of practice and an obligation to co-operate with the Australian Financial Complaints Authority on dispute resolution.

Despite the areas for improvement highlighted, strong business preparedness of firms in the insurance sector successfully placed the industry, across the ten markets, at the top of the second pillar on progress towards the frontier as well. The areas it excelled in include firm fundamentals for operational improvement, using technology for value proposition, using technology for talent value creation and ensuring well-targeted technology adoption. Mr Smith says that growing operational costs have forced insurers to digitise parts of their business, while ensuring they have a workforce that has been appropriately skilled and trained. “We’ve got the right tools for them to do the jobs [and] the right products in the market for our [customers],” he says.

Research, across the ten countries, in this pillar found some areas for improvement as well. One such example is ESG, particularly when it comes to employing renewable energy.

Addressing climate risks while meeting customer needs

Over the last four years, the Australian insurance sector has been focused on maintaining steady revenue and returning to profitability while coping with the increasing incidence and severity of climate-related disasters. “That’s really been a huge focus for us,” says Mr Leney. The Australian Climate Council notes that climate change is causing an insurance crisis, as premiums become increasingly unaffordable in parts of the country impacted by extreme weather. It predicts that over half a million properties will be considered “high risk” and uninsurable by 2030.6

Moving forward, insurers will need to find a way to produce sustainable earnings and remain customer-focused while adapting to a rapidly changing market, uncertain economic conditions and an ever-more challenging physical environment.

Meeting customer needs

Rebuilding trust is a key priority for Australian insurers after the Financial Services Royal Commission. “We know we need to do more,” says Ms Beer. “We need to step up our trustworthiness with customers,” she says. Major life insurers recently collaborated on the Life Insurance Professional Standards Framework, which set minimum standards of professionalism for underwriting and claims personnel to rebuild trust, demonstrate minimum standards, and attract new talent.

“We need to step up our trustworthiness with customers.”

Megan Beer, CEO of Resolution Life Australasia

The Consumer Data Rights legislation, introduced by the Australian Federal Government in 2020, will [also] create an opportunity to meet consumer needs that insurers need to embrace, says Simone Dossetor, CEO of Insurtech Australia. The legislation is designed to give customers control over their data including who it is shared with and the purpose of sharing. It currently only applies to banking but there are plans to roll it out across the economy including finance and general insurance sectors.

Companies “shouldn’t wait to be dragged kicking and screaming” as they will be required to share data under the legislation, remarks Ms Dossetor. Forward thinking insurers and insurtech [companies] are already considering how to create new opportunities that come from having much more consumer choice around products and disclosures. “Soon customers will have easier ways to understand their current insurance products and claims, be able to seamlessly take that data to an alternative provider, and get better choices around products and a better understanding of what they’re already covered for.”

“Soon customers will have easier ways to understand their current insurance products and claims, be able to seamlessly take that data to an alternative provider, and get better choices around products and a better understanding of what they’re already covered for.”

Simone Dossetor, CEO of Insurtech Australia

Companies will also have an opportunity to better understand their customers, the segments, and the risks that insurers are underwriting. “Those that are able to integrate that into their systems quicker will be able to build on that opportunity, creating the potential for more competition and the ability to attract more customers,” says Ms Dossetor.

To realise these opportunities, however, the industry needs digitalisation. The sector still lacks digital services that other sectors are already providing, Ms Dossetor says. “We’re lagging even on the fundamentals. For example, is there a database of all my insurance products I can tap into to understand my financial profile? We’re quite a long way from things that you can do in other sectors”, she says.

Preparing for the future

The insurance industry must balance managing climate risks with consumers’ needs. Climate change presents the biggest risk to the sector globally, and while companies have been moving fairly quickly on this front, there’s still a long way to go. The future focus for the sector will be its own carbon footprint, as well as that of its clients and customers, and examining the commitments that insurers can make to drive a smooth transition to net zero.

The role of the sector in this cannot be understated. It will need to figure out how to develop and apply consistent ESG ratings, measure ratings across organisations and industries, and encourage decarbonisation. Carbon-intensive companies’ holdings within insurers’ investment portfolios will also need to be managed and phased out over time.

In an era where uncertainty seems to be the only certainty, the insurance sector will continue to play a vital role in society. Having survived several crises, disruptions to the market and numerous quarters of low or negative growth, the Australian insurance sector has proven its resilience in the face of overwhelming change. Its return to higher profitability demonstrates that it is equipped to handle the challenges of the future.

Key takeaways

01
The Australian insurance sector has fared remarkably well through significant economic, environmental and geopolitical tumult over the past five years, coupled with regulatory change and market consolidation.
02
The industry has been leaning into digital transformation to better understand its customers and provide modified products, but room for improvement remains in cybersecurity preparedness and ESG.
03
Despite having experienced declining new business growth in recent years, the sector remains focused on maintaining steady revenue and returning to profitability while coping with the increasing incidence and severity of climate-related disasters.
04
Moving forward, insurers will need to rebuild trust, find ways to produce sustainable earnings and remain customer-focused while adapting to a rapidly changing environment.
 

About the research

This industry analysis forms part of Advance Australia prepare: how to make Australian businesses future-ready, the country-focused segment of a global programme, the Future-Ready Business Benchmark, developed by Economist Impact and supported by Cognizant. This benchmark—based on primary survey data from 2,000 respondents, interviews with business leaders and secondary data—provides a snapshot of future-readiness across ten countries and eight sectors while examining the broader environment influencing decision-making. It encompasses over 130 indicators grouped into three pillars that measure future-readiness: the external environment, business preparedness and progress towards the frontier. Industry analysis is limited to the latter two pillars, as the pillar on external environment measures future-readiness of the country as a whole. The resulting reports and analysis are available via the programme hub.

We would like to thank the following for their insights: Megan Beer, CEO of Resolution Life Australasia; Simone Dossetor, CEO of Insurtech Australia; Scott Leney, head of risk management, APAC Australia at Marsh & McLennan; and Jamie Smith, CIO of The Hollard Insurance Company.

  1. Leslie S, Industry Report, Financial Services, Australia, First Quarter 2022, Economist Intelligence Unit, March 2022.
  2. Australia and New Zealand Banking Group, Commonwealth Bank, National Australia Bank and Westpac Banking Group.
  3. The eight industries are insurance, banking, retail, media, utilities, life sciences, manufacturing and healthcare.
  4. Australian Cyber Security Centre, ACSC Annual Cyber Threat Report 2020-21, 15 Sept 2021, https://www.cyber.gov.au/acsc/view-all-content/reports-and-statistics/acsc-annual-cyber-threat-report-2020-21
  5. Gatlan, S, EU warns of Russian cyberattack spillover, escalation risks, 19 July 2022, https://www.bleepingcomputer.com/news/security/eu-warns-of-russian-cyberattack-spillover-escalation-risks/
  6. Hutley, N, et al., Uninsurable Nation: Australia’s most climate-vulnerable places, Climate Council of Australia, 2022, https://www.climatecouncil.org.au/wp-content/uploads/2022/05/CC_Report-Uninsurable-Nation_V5-FA_Low_Res_Single.pdf