The $1 billion reason AMP's insurance business suddenly turned red

Claes Oldenburg’s Study for a Rotten Apple Core, Two in New York. Mario Tama/Getty Images

The sudden collapse of profitability in what AMP calls wealth protection — essentially life insurance — is behind the full year loss posted by the the financial services giant.

The selling of life insurance has been a staple of AMP since it was formed in 1849.

Insurance is a numbers game. Work out how long people are going to live, set premiums against expected payouts and bank the margin – the difference between premiums collected and whats paid to claimants – as profit.

But the underlying assumptions for the calculations have suddenly changed.

In the 2016 year AMP’s wealth protection business posted a loss of $415 million, a big change from the $185 million profit in 2015.

Add to that a $668 million charge for goodwill impairment and the wealth protection has had a drag of more than $1 billion on AMP’s business in just 12 months.

This is the key reason AMP, which has insured generations of Australians, just posted an annual loss of $344 million.

AMP has been hit by increasing claims across all types of customer and all forms of insurance.

The reason can’t be put down to any one factor.

“What we’ve seen is a more broadly based increase in the level of claims generally,” CEO Craig Meller told a media briefing today.

“I think it’s a coincidence of a number of things coming together.”

Among the factors are a rise in claims for depression-related illnesses, more payouts for workers compensation, an ageing customer base and better science able to diagnose illnesses earlier and with more precision.

“I think the improvement in the capacity in the health industry to diagnose illnesses has meant that illnesses that historically may not have been picked up and are now being picked up and claims made,” says Meller.

“The changing nature of of diagnosing mental health … there are a whole series of factors.”

And AMP has a high proportion of older customers who don’t need insurance as much as those in the middle of their life with mortgages and children to support.

“An older population will claim more, that’s why your premiums are higher when you are older,” he says.

“People’s needs do tend to reduce as they get older as well. As you age, so your kids leave home and you don’t have to same potential liabilities because you’ve paid more or all of your mortgage off.”

And as premiums increase the older the customer, the drop out rate — those ditching insurance altogether — rises.

Another factor is that people have become more aware that they have insurance and, in the right circumstances, are entitled to a payout.

In the past, many may have not realised they even had insurance, because it was hidden within a superannuation fund, and if they did they perhaps thought they could only claim for death and not disability.

Job uncertainty is also a factor. AMP paid out $54 million in 2016 for income protection policies, more than 10 times the $5 million of 2015.

AMP’s response has been to cut costs and to start using re-insurance — spreading the risk.

The problems are industry-wide.

Suncorp, reporting its half year results today, posted a 52% fall to $11 million in life insurance profit after tax.

Statistics compiled by APRA (Australian Prudential Regulation Authority) shows a steady decline in life insurance premiums over the last few years.

Total industry premiums in the September quarter were $11.406 billion, down 13% over 12 months from $13.123 billion.

Revenue has been falling and costs rising, as this chart shows:

Source: APRA

AMP’s problem is now a problem for everyone in the insurance industry.

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