For super funds and their advisers

A new problem for super, insurance consolidation


As superannuation and life insurance consolidation continues apace, risk firm Retender warns that the government cannot rely on the invisible hand of the market to ensure competitive outcomes.

It’s well understood that big super is getting bigger. That’s as a result of both “Your Future Your Super”, which drives consolidation by closing underperforming products and stapling members to their first funds, and the natural competitive dynamics that already existed within the industry. Life insurers too are rapidly declining in number. The question is whether what’s left could get “too big to fail” – and what can be done if it does.

“The principle of consolidation is that it theoretically increases scale, lowers costs and creates headline growth opportunities. It weeds out the underperformers that are encumbered by structural limitations,” says Ilan Leas, managing director at Retender, in a new report titled “When the music is playing, you have to keep dancing”.

“However, from a future competition perspective to benefit consumers…the long-term favourability of these outcomes is less sure. In particular, we are dancing incredibly close to a number of thresholds that in isolation might be fine but when considered in the context of their aggregate impact, suggest that we may have a new problem.”

While short-term competition will likely increase with funds no longer able to rely on default distribution,  Australia may wind up having 10-20 mega funds which move closer to index tracking to avoid the disastrous consequences of underperformance while depriving consumers of the benefits of more innovative – albeit riskier – investment strategies.

The same anti-competitive dynamic could also rule the life insurance industry, to which the other half of the paper is devoted. In the life insurance space, the top five firms could wind up controlling 85 per cent of the market, with Leas noting that the reviewable nature of life insurance – that is, the ability for life insurers to increase premiums within a short period of time after the policy is purchased – can “lock certain consumers into having no choice but to either accept the increases in price or reduce their cover levels to balance affordability.”
“If consumers become captive in this way, and do not have the power to exercise choice themselves because of the nature of life insurance risk, then it is all the more important that competition is nurtured and flourishes at an institutional level to drive optimal consumer outcomes,” Leas says.

As Leas notes, competition actually comes second to financial stability for the prudential regulator, a dynamic that would only be heightened were consolidation to create just a handful of index-focused megafunds and a smaller number of life insurers – the former an outcome that APRA appears to be happy with, given its recent rhetoric on the subject. And while the ACCC is nominally responsible for approving mergers, it does not engage with the industry on the matter on an ongoing basis. Leas proposes a third solution – a different type of government intervention – based on that old adage: “What gets measured gets done”.

“An annual report for government will take that first step to transparently reflect how the objectives of prudential stability and competition are being balanced in practice to seek the best outcomes for consumers.”

Leas notes that the UK’s Prudential Regulation Authority (PRA) is required to provide an annual report on how it has facilitated effective competition in markets for services provide PRA-authorised providers. The report measures research being done on competition as well as a number of competition indices for banks, which could be modified to fit super funds and insurance providers in the Australian context.

“Increased capital requirements, repricing power, lower reinsurance capacity, more regulation, less competition – all of these mean higher cost for consumers,” Leas says. “In the current environment where member retirement erosion, cost and affordability are critical performance indicators, what is the point of all this industry change if we aren’t focused on these latter measures as primary outcomes?”

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