Historical summary
Since its inception, the financial services industry in Australia prospered immensely from the life insurance mutual companies that existed for nearly 150 years by protecting and raising the standard of living of the nation’s people.
Intermediaries were introduced to facilitate the realisation of consumers financial aspirations and/or concerns into direct obligations via life insurance policies or wealth creation strategies. By doing so, the financial sector improved both the quantity and quality of peoples’ lives whilst simultaneously contributing immensely to the country’s economy.
Unfortunately, in the 1990s the industry in Australia abandoned its long-held conservative principles and the new breed of managers went on a frenzy devouring itself. One household brand after another was lost in a steady stream of amalgamation and buy-outs that saw one group after another disappear.
Not only did Australia lose long-established mutual groups like Colonial Mutual, National Mutual, Mercantile Mutual and City Mutual, other brands like Norwich, Scottish Amicable, Legal & General, T & G, Prudential, AC&L, Friends Provident and Tyndall were lost too.
To compound the dilemma, in 2001 the intervention of government in seeking to improve the performance of the financial sector has proven not to have been beneficial or constructive.
In fact, many will argue the detrimental effects of regulation on both the structure of the financial services sector and the real economy have worsened the situation.
Industry reform fatigue and constant legislative/regulatory changes have contributed to many advice practitioners’ decision to terminate their careers and exit the advisory sector. It’s been estimated that over 6,000 planners (predominantly life insurance specialists) will exit the industry by 2026.
If matters couldn’t get any worse, after having been the ultimate beneficiary of industry amalgamation, the major banks are now seeking to jettison their insurance/wealth sector arms.
The mutual model – why it was successful
A mutual, mutual organisation, or mutual society is an organisation (which is often, but not always, a company or business) based on the principle of mutuality, not too dissimilar to the co-operative model.
However, unlike a true cooperative, members or policyholders of a mutual life insurance company usually don’t contribute to the capital of the business by direct investment. Instead, they derive their right to profits and votes through their customer/policyholder relationship.
Hence, a mutual organisation or society is often simply referred to as a ‘mutual’.
The mutual existed for the purpose of raising funds from its membership or policyholders which were then used to provide common services to all members of the organisation or society.
A mutual was therefore owned by, and run for the benefit of, its member policyholders. Without external shareholders, there was no need to divert member benefits in the form of dividends – thus maximising the profits and gains for the members.
To ensure the ongoing sustainability, security and growth of the organisation, necessary financing was used for operational purposes. The profits generated were then re-invested for the benefit of the members.
This was a very simple and effective business model that had been successful for nearly 150 years until the 1990s, when the industry lost direction resulting in a downward spiral.
The inevitable return of mutual model
Although it’s impossible to undo the failures of history – there is hope for the future if legislators and industry could revisit the mutual life insurance model with a modern-day adaption that would restore much-needed certainty, trust and confidence to the life insurance sector.
The efforts of the federal government to bring about change and restore confidence has only resulted in the industry experiencing a state of constant and reactive chaos. The Hayne Royal Commission legacy has shown that the post mutual era has been a disaster and against this backdrop of the major banks and AMP reconsidering their positions, the re-emergence of the mutual insurance model in Australia could be the answer to the industry’s future viability.
For mutual companies to succeed they need to be aligned with the best interests of their policyholder members. What’s more, mutual companies are owned by their policyholders, not shareholders – and that’s a very important and crucial distinction.
Mutual companies share their profits with policyholder members, look after their interests and needs first and develop products and services accordingly. This differs from the current bank-owned model that sells and markets products to generate profits / dividends for their shareholders without necessarily benefiting policyholders.
Furthermore, the profits of mutual insurance companies are distributed to policyholders in the form of lower premiums or bonuses on policies.
Two further differentiators to shareholder ownership are:
- Mutuals are driven by decisions that deliver long-term benefits to their members as opposed to short-term gains to equity holders
- Policyholders can be elected to the board as opposed to shareholder owned institutions.
The Hayne Royal Commission and adverse media coverage have highlighted the depth of reputational damage and how much work is needed to restore the public’s trust and confidence in the life insurance sector and industry more broadly.
At the core of the industry’s failings has been principle that shareholders’ interests are prioritised ahead of those of consumers.
Then there were the revelations surrounding conflicted advice and denial or avoidance of claims that highlighted the misalignment of internal interests that in turn drove the behaviours that adversely impacted policyholders.
A horse with two jockeys can’t win the Melbourne Cup. This also applies to financial services with the competing interests between shareholders and policyholders.
The interests of the institutional shareholder will always be the priority, whilst on the other hand, the mutual will only have one jockey and priority – the policyholder!
The re-emergence of the mutual in a modern-day format and entity in Australia will be inevitable.
According to the International Cooperative and Mutual Insurance Federation (ICMIF) in its Global Mutual Market Share 10 report released in February, the mutual and cooperative insurance market has been the fastest growing part of the global insurance industry in the ten-year period since the GFC:
- Premium income of the global mutual/cooperative insurance sector grew by a total of 30% over ten years
- The global market share of mutual/cooperative insurers rose to 26.7% in 2017
- 922 million members/policyholders were served by mutual/cooperative insurers in 2017
- 1.16 million people employed by the sector in 2017 – a 24% growth since 2007
In the foreword of the report, Hilde Vernaillen, Chair of ICMIF said, “At this financially volatile time, as consumer trust, consumer spending and interest rates plummeted, the cooperative/mutual insurance sector began to emerge, even flourish, outperforming the insurance industry average and capturing more market share.
“Additional qualitative research carried out by ICMIF during this period suggests that this positive performance is linked to consumers’ preference for providers that can demonstrate characteristics most commonly associated with cooperatives and mutuals: trustworthiness, security and service excellence.”
Specialist insurance company PPS Mutual has announced the widening of the eligibility criteria for its members, increasing its target market by 25 percent.
It has also extended the citizenship requirements to include New Zealanders working in Australia.
PPS Mutual Director of Proposition, Matthew Pilcher, says the decision to widen eligibility criteria was made due to a high amount of interest from professionals who were not originally eligible.
The company’s initial eligibility requirements meant that several professionals could not become members, specifically those engineers who were not members of Engineers Australia and also certain Allied Health Professionals.
The wider eligibility now includes engineering professionals with other bodies as well as town planners and surveyors. Eight new professions have been added in the medical space, including medical radiation practitioners and occupational therapists. In the commercial sector they have added public accountants and now also accept accountants and lawyers who are no longer practising.
“Whilst the criteria has been widened it was important for our members that we maintain the exclusivity and the benefits of being in a pool with others with a similar profile, especially as they share in the profits of the products they buy,” said Pilcher.
Insurer PPS Mutual is strengthening its relationships with its advice partners with two senior appointments.
Steve Salter has been named as State Manager for Western and South Australia, and will manager key financial adviser relationships and support PPS’s offering in those states. He was formerly a senior business development manager for Asteron Life. He will report directly to Director of Distribution Brian Pillemer.
David Lowe has been appointed as Senior Underwriter at PPS and will deliver comprehensive underwriting support to the insurer’s adviser partners. He was previously a senior underwriter at ANZ Wealth, and also has experience as a private wealth protection planner.
Mr Lowe’s capability to foster relationships with reinsurers and advisers will be pivotal to his role, says Head of Claims and Underwriting Marcello Bertasso.
PPS also launched a super fund earlier this year to offer customers a complete life insurance solution through a partnered financial adviser.
PPS Mutual’s Michael Pillemer presents the case in this article for why consumers will be better served when dealing through an adviser for their life insurance needs…
Despite the headlines, insurance advice can be critical
Following the conclusion of the Royal Commission process, it is now safe to say that the financial advice industry’s reputation has taken another battering. Further regulatory and market changes, including removal of grandfathered commissions and the imminent sale of some large vertically integrated advice groups, are now afoot as the industry struggles with the burden of consumer distrust.
However, one area of the industry where the discoveries of the Commission were not so clear cut was life insurance. While there were certainly some case studies heard around inappropriate products being recommended to clients by advisers, the spotlight at the Royal Commission was on the sale of policies to vulnerable members of the public over the phone – known as direct insurance.
The final report served serious consequences on this sector of the insurance industry, most notably the proposed prohibition by ASIC of outbound phone-based life insurance sales. The report emphasised the importance of quality advice in improving outcomes in the industry, saying the most damaging case studies of the Commission’s hearings involved consumers who were “…unlikely to be armed with the information they needed to assess critically the features of the (usually complex) product that was being offered.”
Following the public scrutiny of both financial advice and direct insurance over the course of the Commission’s hearings, consumers who need life insurance to protect themselves financially may be asking themselves which channel they can trust to provide the best outcome in terms of product quality and security. The answer is that financial advice is still the best way for consumers to ensure they purchase the right type of life insurance that will not be denied at claim time.
Indeed, the Association of Financial Advisers recently criticised the Royal Commission final report, claiming the inquiry failed to acknowledge the value of financial advice. In a paper released by the association in March, AFA general manager of policy Phil Anderson said Commissioner Hayne’s final report failed to acknowledge that most financial advisers work for the benefit of their clients. “[The Commission] seems to have little idea what a good adviser does for their clients or understand the impact they can have on financial and emotional outcomes,” Anderson said.
Adviser value at claim time
Recent data from the Australian Securities and Investments Commission (ASIC) and Australian Prudential Regulation Authority backs this assertion, revealing that over the year 2018, 87% of TPD insurance claims were paid where the policy was purchased through an adviser, while just 59% were paid where the policy was bought directly.
This is because not only will a good adviser advocate for the insurer to pay the claim efficiently, but they will also help the client understand the underwriting process and any disclosure obligations when they purchase the policy. This drastically reduces the chance that the client’s claim will be denied down the track, as misunderstanding of these technical issues of the policy is one of the most common reasons for claim denial.
Delivering the right solution for the client’s circumstances
Life insurance complaints are also usually claim related, but they can likewise occur if a consumer is being overcharged for cover or benefits they don’t need – another common issue raised during the insurance hearings of the Commission. Again, a good adviser should be able to help their client strike a balance between premiums that are affordable for their income level, and a policy that ensures there are not going to be gaps in their coverage if they have to be off work for a considerable time.
The issue of product quality is important when it comes to life insurance. Advised products tend to have better definitions and a wider range of policy options that can be customised to the client’s circumstances, financial commitments and life stage. Direct insurance products have much simpler features that can’t be dialled up or down in this way.
As a result, these products tend to be easier for your everyday consumer to understand, but they are also unlikely to be able to address every aspect of cover that is needed to protect a person’s livelihood. The spread of scores from research and software company IRESS, which provides product ratings for the life insurance industry, illustrates this point – out of a total score of 100, advised products are typically rated between 70 and 100, while direct products rate between zero and 70.
Regardless of the issues that no doubt need addressing in the industry, consumers shouldn’t let the fallout from the Royal Commission deter them from taking out life insurance, and more specifically getting the right advice around that insurance. It could be the most important financial decision they and their family ever make.
We are surely near the end of AMP as we know it. This canʼt go on much
longer. In Mondayʼs session AMP sunk to a miserable $2.03: a new alltime
low. A takeover, a privatisation and even a re-mutualisation (yes
there is such a thing) must now look attractive to many insiders, as well
as long-suffering shareholders.
The outlook for this lame duck listed company is dreadful. As post Royal
Commission legal cases mount, new operators such as NetWealth are
quite simply running circles around it.
The AMP remains one of the most storied financial groups in Australia,
but just now the 170 year old mothership faces two emergencies.
First, the money is rolling out to industry funds. In fact, outflows from the
group are accelerating.
Second, the advisers are rolling out too and starting up afresh under new
licences, or quitting the industry entirely. Even so, AMP remains the
biggest player in the adviser network sector, with 2400 on the books,
even if 140 advisers headed for the exits last year.
No wonder the short traders are all over AMP, with no less than 8 per
cent of total stock held by hedge funds and related parties. As for stock
recommendation, there is not a single buy recommendation for the group
among the eight largest stockbrokers in Australia.
For older shareholders in particular, it must be galling to watch what was
once one of the most revered brands in the local market sink to such
lows. Moreover, many of the promises made to those investors at the
time of the de-mutualisation in 1997 – about how the group would be
more competitive and more efficient in raising capital – must now ring
hollow. (Demutualisation allowed mutuals to convert to private companies
and list on the sharemarket).
As it turns out, mutuals are far from dead. In fact, while AMP has been
slowly sinking, the Swedish insurer Skandia recreated itself across
Scandinavia in an elaborate series of corporate manoeuvres which have
turned it back into a mutual.
Certainly the concept of AMP relieving itself of publicly-listed status is
viewed with enthusiasm by key organisations within the group, including
the AMP Financial Planners Association. Its members have to deal every
day with the double trouble of a trashed share price and a reputation
badly damaged by the Hayne royal commission.
Could a re-mutualisation actually happen?
Insurance academic Ian Enright –who was the insurance adviser to the
royal commission says “itʼs feasible but complex”.
In reality, an external party would have to appear in the picture, providing
both capital and a mutual status. And that would require an awful lot of
risk capital.
Michael Pillemer, the CEO of PPS Mutual Australia, says: “Nobody could
have known losing mutual status at AMP was going to cost so much long
term. I expect anything is possible from here.”
Even just four years ago AMP shares were at $6.00: That price now
seems fanciful. A new research note from stockbroker Morgans says it
expects “tailwinds to persist in the medium term, including: a record level
of licensee and adviser movement”.
Either way, for investors, nothing the management – led by chairman
David Murray and CEO Francisco De Ferrari – has said or promised
seems to make the slightest difference. So the slide continues.
Specialist insurer, PPS Mutual, has announced the launch of a new risk-only superannuation fund.
Named the PPS Mutual Super Fund, the insurer says the fund allows it to offer a complete life insurance solution for eligible professionals through a PPS Mutual accredited adviser.
A statement from PPS Mutual says the new fund will facilitate its policy holder members to fund their insurance premiums via rollovers from their standard accumulation super funds.
It says the Super Fund approach has been especially requested for younger graduate medical, legal, accounting and engineering professionals and that this extra flexibility has become increasingly important for advisers wanting to offer clients the option to pay insurance premiums through super.
Matthew Pilcher, Director of Proposition for PPS Mutual, noted: “The launch of the fund is an important step in allowing us to bring the mutual model to a wider selection of adviser clients and offer Australian professionals a radical reappraisal of how life insurance can work.”
He added, “When you purchase PPS Mutual insurance you’re not just a customer, you’re a member. This means you have a real stake in the business and the profits generated by the products which is a differentiated proposition in the Australian market.”
PPS Mutual in Australia notes it is supported by PPS South Africa, which it says is the largest multi-disciplinary group of graduate professionals in the world and the largest mutual company in South Africa.
