Inside Project 42: Commonwealth Bank’s dramatic life insurance exit

It’s been a tough few years for Commonwealth Bank. A series of controversies in its financial planning, business banking and insurance divisions have been compounded by calls for a royal commission, a money laundering scandal and, finally, action by AUSTRAC and a probe by the prudential regulator.

But at least the team has managed to keep their sense of humour.

When deciding on a codename for the sale of their CommInsure and New Zealand life insurance businesses, they settled on “42”.That magic number, is, of course, the nonsensical answer to the meaning of the universe in Douglas Adams’ famous book, The Hitchhiker’s Guide to the Galaxy.

But in the CBA context, the meaning of life (insurance) was much simpler – this was a business it didn’t want to be in.

Chief executive Ian Narev says the $4 billion sale of the life insurance business to Asian giant AIA Group was a case of get big and be the best, or get out. Without the global scale of AIA or its peers, CBA couldn’t compete and it seemed that it didn’t really want to.

“This is not an environment where being third or fourth best is any good,” Mr Narev said on Thursday following the deal.

Beneath CBA’s scale problem though, there is a litany of other issues inside the 140-year old life insurance business that has grown via a variety of mergers and acquisitions.

For the $13 billion bank the problems started, publicly at least, with a highly critical Four Corners and Fairfax expose into practices in its life insurance business.

Criticism of CommInsure’s claims process, included assertions that doctors in the bank were being pressured to change their assessments of customers to avoid payouts, delaying payouts to terminally ill customers, and a refusal to honour claims to former staff who were medically retired.

The Fairfax/ABC investigation also alleged CommInsure had engaged in other unethical behaviour, including not paying out heart attack victims based on a technical and outdated medical threshold.

The Australian Securities and Investments Commission (and three CommInsure-commissioned reports) cleared the insurer of any illegal activity and found doctors were not pressured to alter their opinions on insurance claimants.

But the reputational damage was done.

While the fact that CommInsure used outdated medical definitions for heart attacks and rheumatoid arthritis did not amount to a breach of the law, ASIC deputy chairman Peter Kell said, poor claims handling and claim denials led to “highly distressing experiences” for some policy holders and consumer protection laws needed to be strengthened.

The fallout continues with ASIC still investigating concerns that CommInsure’s advertising of life insurance policies to consumers contained potentially misleading or deceptive information before March 2016.

Before the scandal, CommInsure was a well-regarded player that provided life cover to about 3 million super fund members, with around $1.8 billion of in-force premiums. It provided cover through nine industry schemes, including QIEC Super, HESTA and Vision Super, and two public sector vehicles ahead of competitors like TAL, MetLife and new partner AIA.

But in the year following the high profile and damning customer issues, previously loyal customers deserted CommInsure.

In May, $37 billion HESTA moved insurance coverage for its its 800,000-plus members to AIA.

In November last year CommInsure lost a $50 million contract with $4.3 billion TWUSuper to the country’s largest life insurer TAL.

In September, the $5 billion NGS Super did not renew its $50 million CommInsure contract and also switched it to TAL after 28 years with the CBA. One month earlier, Melbourne-based CareSuper switched its insurance provider from CommInsure to MetLife. The value of that contract was about $100 million.

Julie Lander, the CEO of Care Super, said her fund’s decision to move its 10-year old contract to MetLife was due to a number of factors including services, pricing, digital capability and alignment of values.

“It [the scandal] was certainly not a catalyst to tender, but we were very mindful of how they did respond and the impact that those events had on the perceptions by our members and we had to manage that.”

Even CommInsure’s decision not to attend an annual super industry event in the weeks after the scandal – and the fact it didn’t sponsor its customary coffee cart – irked some. An insider says that the unwillingness of CBA to back itself and face the music was the reason behind the loss of at least one contract.

CommInsure still provides insurance for its own CBA-employee fund and it won one $8.5 million contract this year to provide cover for 43,000 member Nationwide Superannuation Fund.

Michael Rice, the CEO of actuarial company Rice Warner, says 70 per cent of all insurance cover is taken out within superannuation, making this the largest segment. Consequently, the loss of these clients is a damning indictment.

“[Group insurance] is the best value for money for all members and the leading companies that operate in it like TAL, MetLife and AIA are all strong and focused businesses. CommInsure used to be like that but they’ve lost four industry clients in the last year. You’d have to question why was that,” he said.

Outside of reputational issues, CBA was also grappling with industry-wide thematics that made being in life insurance less than appealing.

At a parliamentary hearing investigating issues with the county’s life insurance sectors in September, outgoing wealth boss Annabel Spring acknowledged all Australian insurers are grappling with anaemic returns in an increasingly crowded, capital-intensive market.

“There are lots of changes in the global life insurance market. Consolidation is a theme globally and there are a number of features with respect to reinsurance and diversification. As we look at the different returns in the market, yes, the returns are lower,” she said.

“The number of players [in the sector] has increased, the size of the market has increased and the competition has increased as have the regulatory dynamics. The markets are more competitive than they used to be.”

AMP chief executive Craig Meller said in August margins across the life insurance sector would continue to be lower and in July, the CEO of TAL, Brett Clark, told the The Australian Financial Review competition in the group insurance sector had pushed prices down, while mental health claims kept rising.

“Cost claims increased significantly over a relatively short period of time and were well in excess of premiums. That was obviously a difficult time for the industry, and [superannuation] funds too,” he said.

Ms Spring says the money its life insurance arm spends on mental health claims has doubled in the last five years and the bank admits it is struggling to appropriately price its policies so they are cost-effective.

With pressure coming from all angles the message on Thursday from CBA was that it no longer saw manufacturing as a natural fit for the bank, instead looking set to focus on its skills as a distributor.

“This is an industry where we have distinctive assets against anyone in terms of distribution. And when we look at where the world is going on the manufacturing side, we were doing a good job with that,” said Mr Narev.

“But you have increasingly global scale players able to invest with economies of scope and scale, and to innovate at scale, it is very hard to compete against that, given everything else we have going on.”

A mass exodus away from owning life insurance business looks to be on the cards. ANZ is tipped to sell its life insurance business in the coming months, while Suncorp and AMP also considering the future of their life units. In 2016, the National Australia Bank sold 80 per cent of its life operations to Japanese insurance giant Nippon Life and in 2010 Dai-ichi Life, also a Japanese company, bought all of TAL for $1.2 billion.

But industry commentators say it may not be life insurance that is the problem – it might be the failings or misalignment of the businesses.

CLSA analyst Brian Johnson says banks like CBA have no clear competitive advantage in life insurance; rather it is their ability to distribute products that sets them apart.

“They are natural distributors, but not natural owners,” says Mr Johnson.

Mr Rice says there has been lack of innovation in the space from the banks and he is glad to see specialists taking over.

“The banks claim they are getting out of life insurance because there is a low return on equity, but in my opinion the low return is largely just because the business has been badly managed, with poor levels of sales to bank customers,” he says.

“The fact that there are buyers prepared to pay higher prices, shows that there are organisations still focused on this industry and still believe that it is profitable. For example, BT still have a thriving life business under Westpac.”

AIA clearly thinks it can make a go of it and may even be something of a white knight for Australians who still require life insurance.

Damien Mu, AIA Australian and New Zealand CEO, said the deal, which includes a 20-year distribution deal between the new partners, is a “very effective way to meet customer needs”.

“From our perspective we saw this is a strategic fit because life insurance products and services is all we do. We are the natural home for a life insurance company,” he said.

CBA’s sale could just be the start of a bigger exodus, as ANZ considers the future of its wealth business, and AMP and Suncorp considers the future of its life insurance units too.

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