Three major trends, each of which has been the result of government intervention, have shaped today’s Australian life insurance and retirement savings landscape: i) the introduction of superannuation and the unbundling of risk and savings products; ii) deregulation and the emergence of bancassurance models; and iii) demutualization and changing business models.
With the emergence of superannuation onto the Australian financial landscape, risk and savings products effectively became unbundled. Compared to the rest of Asia Pacific, where there is still significant opaqueness in product structures and, therefore, high embedded margins in life policies, Australia presents the opposite picture.
To understand this, one must appreciate a bit of history. Superannuation schemes were introduced in Australia after World War II as a way of providing for servicemen in retirement. During the 1960s, these schemes emerged as major competitors to the traditional savings and risk management products of life insurers. By the end of the 1960s, superannuation had taken over from traditional products as the way Australians thought about savings and retirement.
To address this new form of competition, Australian insurers responded through innovation in product design. In particular, during the 1970s, they started to unbundle traditional life insurance products into separate risk and savings products. There were a number of reasons for this. Unbundling produced products made them much easier for retail consumers to understand. The new products could then compete directly with those from the superannuation industry. Furthermore, it allowed investors the opportunity to better tailor their product portfolio and have greater control over decisions, such as where their funds were invested.
Also, government intervention has completely changed the face of the insurance industry through concessionary tax treatments and the introduction of compulsory superannuation contributions in 1992. Compulsory superannuation quickly enlarged the size of the industry to such an extent that it is now a fundamental element in the Australian financial system. Many Asian governments have studied the superannuation scheme, and a few countries have actually put mandatory systems in place, such as the Central Provident Fund (CPF) in Singapore and the Mandatory Provident Fund (MPF) in Hong Kong. The impact of superannuation schemes in Australia is an interesting study in the effect of government intervention on a nation’s financial system. However, the extent to which superannuation took off in Australia and “crowded out” retail financial products is truly unique. None of the markets has anything close to the 360-kilo gorilla that superannuation has become in Australia.