The insurance market is segmented between general insurance, comprising personal and commercial lines, and life insurance, comprising risk products (death, disability and income protection) and investment products. There is also a reinsurance market: the insurers of the insurers.
The insurance sector has similar levels of concentration and profitability to the banking sector.
- The personal lines market for general insurance is concentrated. The top five insurers account for over 80 per cent of the market,50 with the top two estimated to have a 60 per cent share.51
- There is less market concentration in commercial insurance, where the five largest insurers have about 60 per cent market share of gross earned premium.52
- The life insurance industry is more fragmented than the general insurance industry, although several of the major insurers are owned by banks.
Although the sector has generally become more concentrated, some trends are moving in the opposite direction. For example, a number of new insurers have entered the market, including Youi, Hollard and Progressive. Banks and retailers have also entered the insurance market, usually by white labelling products provided by the main insurers, but with some underwriting themselves.
Returns on equity in insurance have been more volatile than in the banking sector. For general insurance, they have averaged 16.5 per cent since 2002 and around 13.5 per cent since the GFC.53 For life insurance, returns have averaged around 14 per cent since the GFC, although they fell to below 10 per cent in 2013 due to higher than expected disability claims and lapse rates on individual policies.54
As with banking, the main barriers to entry in insurance are commercial rather than regulatory. Incumbents benefit from well-established brands, customer bases and distribution networks. These advantages are particularly important in the direct marketed sectors, although annual renewal requirements in general insurance provide a trigger for switching that is not evident in many banking products.
Despite the high level of concentration, few submissions raise concerns about competition in the insurance sector.
Aggregator access to information
The main issue submissions raise in relation to insurance sector competition relates to aggregator access to information. Insurers in the home and contents and car insurance markets have been reluctant to share their product information with aggregators, slowing their growth. As a result, consumers in these markets must compare products without the assistance of aggregators, which may reduce price competition.
However, insurers argue that it is more complex to aggregate insurance products than other financial products, because they are tailored to individual circumstances. In addition, aggregators need access to insurers’ pricing models, or at least the outcomes they provide, to compare different product offerings. If this access was provided, it could potentially enable aggregators or other market participants to identify sensitive pricing information, such as premia differentials based on market research. Some stakeholders are also concerned that aggregator services could lead to consumers focusing too much on price and potentially underinsuring.
However, these concerns have not prevented aggregators from successfully assisting consumers to compare products in the life insurance, travel insurance and private health insurance markets. Therefore, there may be scope to improve aggregator access to general insurance product information.
Competition for statutory insurance schemes
Submissions from insurers and insurance brokers note that some state- and territory-based statutory insurance schemes are not open to private sector competition. The two main types of statutory schemes are workers compensation and personal injury motor accidents schemes. Submissions argue that some schemes operate like government monopolies and that consumer value could be improved by introducing competition from the private sector. The Inquiry notes that stakeholders have also raised these concerns with the Competition Policy Review. The Inquiry would welcome stakeholder views on this matter.
Policy options for consultation
Aggregator access to information
One option to enhance aggregator access to general insurance product information is to ensure aggregators are able to use automated processes to seek quotes from general insurance websites. This would not give aggregators direct access to pricing models, but may provide a route to discover them.
Another option could be to develop representative consumer categories based on key consumer characteristics. Insurers could disclose their policy premia for each category and consumers could then, potentially with the assistance of aggregator services, compare premiums from different insurers for the category that best represents their characteristics. The difficulty with this option would be developing enough categories so the majority of consumers fall within a category, while not creating too many categories, which could create complexity for consumers and compliance costs for insurers.
An issue with both of these approaches is that different insurance policies generally have different levels of coverage. Even if consumers are able to compare the premia of different policies, they may still struggle to compare coverage and overall value. The Inquiry welcomes input on how these issues could be managed.
The Inquiry would value views on the costs, benefits and trade-offs of the following alternatives:
- No change to current arrangements
- Ensure aggregators are able to use automated processes to seek quotes from general insurance websites
- Create comparison categories for insurance products that aggregators could use to compare the value of different products
The Inquiry seeks further information on the following areas:
- Would opening up state- and territory-based statutory insurance schemes to competition improve value for consumers?
- How could insurance aggregators provide meaningful comparisons of policies with different levels of coverage?
50 Australian Prudential Regulation Authority 2014, First round submission to the Financial System Inquiry.
51 UBS 2014, Australian Insurance Sector Update, Reality Check, UBS, 14 May.
52 Australian Prudential Regulation Authority 2014, First round submission to the Financial System Inquiry.
53 Australian Prudential Regulation Authority (APRA) 2014, Quarterly General Insurance Performance Statistics, APRA, Sydney, March 2014.
54 Australian Prudential Regulation Authority (APRA) 2014, Quarterly Life Insurance Performance Statistics,APRA, Sydney, March 2014.