The view from a start-up perspective: Is competition broken? How can it be fixed?
Insurtech, fintech and disruptor are the new buzz words. Ask me a few years ago what these words meant, I would have pictured a mix of bohemian tech-savvy hipsters in a trendy office, a place not for the traditional actuary. I was wrong, there are many actuaries working in fintech and insurtech start-ups.
Viewing the insurance industry from a start-up perspective, I have had an unconventional insight into the challenges associated with entering the insurance industry. Barriers to entry have resulted in an ever more concentrated industry, damaging innovation and increasing premiums. It is evident that clear changes are needed to increase competition.
How does Australia compare to the rest of the world?
When compared to other OECD[i] countries, Australia has one of the most concentrated insurance industries globally, particularly in general insurance. The general insurance industry is highly concentrated among 4 main licence holders (IAG, AAI, QBE and Allianz) with 73%[ii] of gross earned premium in 2017-2018. Furthermore, the number of licensed insurers has fallen in recent years with a net decline of 25 over the past decade[iii].
Notes: Bubbles typically represent OECD economies or large US state economies.
Bubble size represents population. b: 4-firm; c: 5-firm. Unshaded bubbles mean that fewer firms are represented
Prices keep rising
A lack of competition has likely contributed to premium increases. Premiums have increased at a faster rate than average weekly earnings and for some products this trend is accelerating. According to the Australian Prudential Regulatory Authority (APRA) private hospital cover in Australia in 2017 fell to its lowest level in five years[iv], policyholders are dropping out and choosing not to be insured.
Source: Motor Premium Growth: Insurance Council of Australia,
AWE: Australia Bureau of Statistics (Series ID: A84998735A), Health Premium Growth: www.health.gov
The side effects of reduced competition
As prices rise, there are two options, keep paying or be uninsured. 55%[v] of the world’s population is uninsured and domestically, the Insurance Council of Australia (ICA)[vi] estimates that 29% of homes do not have contents insurance and 3.8% do not have buildings insurance. More alarming is that people who are more likely to be uninsured are those most vulnerable to financial loss. The Australian Council of Social Service found more than half the adults on Newstart Allowance and Parenting Payment lacked contents insurance[vii].
The lack of competition is a serious problem in Northern Australia. The Australian Government has directed the ACCC[viii] to conduct a wide-ranging inquiry into the supply of home, contents and strata insurance in Northern Australia. The goal is to help address concerns about insurance availability and affordability and promote a more competitive insurance market.
Regulatory reform is needed
Attempts to help innovation and competition through introducing regulatory sandboxes have not been fully realised. In 2017, the Australian Securities and Investments Commission (ASIC) issued Regulatory Guide 257[ix], to help start-ups test products. Unfortunately, the relief for general insurance only applies to home contents insurance, personal and domestic insurance products. Major markets such as motor have been excluded and each individual insurance contract needs to have a sum insured less than $50,000 and a portfolio total exposure less than $5m. This gives (assuming $20,000 on each contract) a maximum of 250 customers, not enough to have a statistically robust sample and recover development costs. The sum insured does not consider potential reinsurance which could mitigate the exposure. Furthermore, the ASIC sandbox only relates to the distribution of products with the full prudential regime applying to all products sold through the sandbox provisions. This hardly facilitates a small trial from a new start company when that company still needs to meet the hefty prudential criteria (and lead times).
APRA’s Prudential Standards should be reviewed to encourage innovation. Firstly, APRA’s minimum prescribed capital amount of $5m for a new general insurer is not appropriate for start-ups. For example, is $5m a suitable prescribed capital amount for a start-up selling an insurance product to 100 policyholders with a total exposure of $100,000? Secondly, the siloed approach to licensing is problematic. A new entrant needs 3 licences to sell a combined product with health, life and general insurance benefits. Thirdly, operational risk is distorted by levies and not suitable for start-ups offering products with a duration less than 12 months. APRA could leverage from the changes adopted in the European Union under Solvency II. The Prudential Regulatory Authority in the UK has recently established a new insurer start-up unit[x] following concerns that regulatory barriers have created an impossible task for start-ups to enter the market. Could APRA do the same?
Sharing data will increase competition
In 2017, Scott Morrison when treasurer, mandated comprehensive credit reporting for major banks to increase competition and reduce fraud in the system. There is no such general insurance industry data sharing equivalent. The general insurance industry does have a claims database through the Insurance Reference Service Limited (IRS) however, the IRS is a member-based organisation. Membership to the IRS requires membership to the ICA. The Board of the ICA, comprising of executives of the large incumbents, votes on the acceptance of new members, creating another barrier.
The insurance industry would benefit from an open-access claims database and blockchain technology could be used to create such a database with ease.
We will all benefit from change
Whilst I have highlighted some barriers, the Royal Commission will likely highlight more barriers and lead to change which will make insurance fairer for everyone. Start-ups entering the market facilitate innovation, bring new products and put downward pressure on prices. This will benefit us all and we should all be advocates for change.
[i] Organisation for Economic Co-operation and Development
[ii] APRA, Quarterly General Insurance Institution-level Statistics June 2018 (August 2018), https://www.apra.gov.au/sites/default/files/0818-qgiils-june-2018-database.xlsx
[iii] Australian Prudential Regulation Authority (APRA), Annual Report 2015–16, p. 24.
[iv] ABC news – Private health insurance ‘junk’ policies ripping Australians off, AMA says, 21st August 2017
[v] 6/2010 Microinsurance – Risk protection for 4 billion people, Swiss Re
[vi] Analysis of demand for home and contents insurance – Insurance Council of Australia: 4th August 2015
[vii] ACOSS 2008, Who is missing out? Hardship among low income Australians, p. 20.
[viii] Australian Competition and Consumer Commission
[ix] RG257 “Testing fintech products and services without holding an AFS or credit licence”, https://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-257-testing-fintech-products-and-services-without-holding-an-afs-or-credit-licence
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