The proposed changes to life insurance rules for the young outlined in last week’s Federal Budget is expected to trigger a surge in the price of premiums on policies for the rest of the working population – and this could hurt the profitability of our listed insurers. Around 70% of Australians take out life insurance through their superannuation funds due to tax advantages but superfunds expect the vast majority of the five million superannuants under the age of 25 will drop their cover, according to an Australian Financial Review article. The Turnbull government is changing the rules to make life…
To keep reading, enter your email address or login below.
The proposed changes to life insurance rules for the young outlined in last week’s Federal Budget is expected to trigger a surge in the price of premiums on policies for the rest of the working population – and this could hurt the profitability of our listed insurers.
Around 70% of Australians take out life insurance through their superannuation funds due to tax advantages but superfunds expect the vast majority of the five million superannuants under the age of 25 will drop their cover, according to an Australian Financial Review article.
The Turnbull government is changing the rules to make life insurance an “opt-in” process for members under the age of 25 and those with super balances below $6,000 or have inactive accounts – a move that is estimated to save this group $3 billion in premiums.
This has left industry insiders in a panic as they are warning that the change will leave young households, particularly those with dependents, financially vulnerable to mishaps.
If consumer behaviour is any guide, the warnings won’t convince many in the affected group to take up life insurance and that means the rest of us could be paying 30% higher premiums, according to analysis by KPMG.
What will also probably happen is that only the more at-risk group of young members will opt to take up life insurance and this group is more likely to make claims, which in turn will also add downward pressure on insurers margins and upward pressure on premiums.
The big rise in premiums should shield our listed insurers like QBE Insurance Group Ltd (ASX: QBE), Suncorp Group Ltd (ASX: SUN) and AMP Limited (ASX: AMP) from any risk to their profits, but that’s assuming that demand for life insurance is as elastic as a limbo dancer.
By elastic I mean the demand of a product of service is relatively unaffected by changes in the price. The fact that most of us take up insurance through our super fund means there is a level of elasticity and insurance is not seen as a discretionary option to many.
However, such a big surge in premiums could prompt customers to lower their level of cover or cut back on other products like income protection insurance.
Insurance Australia Group Ltd (ASX: IAG) is one provider of income protection insurance, although it seems to have less exposure to life insurance (it offers this through its NRMA brand) and more on other types of insurance like motor, home and professional indemnity.
It’s still a little early to try to quantify any impact on the profit line of our listed-insurers but make no mistake that the proposed rule change to life insurance is a big shift for the industry, and such shifts tend to have significant consequences for the industry and investors.
On a brighter note, the experts at the Motley Fool have identified three blue-chip stocks that are well placed to outperform the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) in 2018.
Follow the free link below to find out what these stocks are and why they should be on your radar.
For many, blue chip stocks mean stability, profitability and regular dividends, often fully franked..
But knowing which blue chips to buy, and when, can be fraught with danger.
The Motley Fool’s in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool’s Top 3 Blue Chip Stocks for 2018."
Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.
The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand – and how quickly the share prices of these companies moves – we may be forced to remove this report.
Click here to claim your free report.
Motley Fool contributor Brendon Lau owns shares of Insurance Australia Group Limited. The Motley Fool Australia owns shares of Insurance Australia Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.