Distribution of Life Insurance in Australia

2. The Distribution of Life Insurance in Australia The original intention in writing this paper was to describe the history of life insurance over the past 10 years or so. However since a ‘tectonic’ shift in the life insurance industry took place in the early ‘80’s, it was felt worthwhile to begin there. Like our Asian neighbours, life insurance in Australia to the ‘80’s was distributed via tied agents, a model with origins from the United Kingdom (UK) and the United States of America (USA). As we look at how this changed over time, it is helpful to keep in perspective broader market changes (for example how products being offered were evolving also) to provide a context. The premise presented in this paper is that the three most significant forces have helped shape the market are changes or advances in: • Government regulation (including taxation legislation) • Technology and • Consumer attitudes and preferences. These forces will be explored further in Section 4 of this paper

Agents formed groups (agencies) as they tried to gain scale for greater negotiating leverage.

These would negotiate agreements with a handful of insurance companies, including

commission write backs etc.

There was also product differentiation - there was the entry of Preferred Term, Universal Life

and Variable Universal Life. Preferred Term = blood tests, underwriting, 5 occupational

categories - sharper pricing.

In the UK and Canada, provision of estate tax has been a selling point for insurance. Not sure

that this is the case here.

The History of Life Insurance Distribution In Other Markets

North America

The life insurance market in the US still represents the largest market in the world. The

Canadian/US story is important because distribution models prevalent in Asia today have

their roots based on the USA particularly AIA (USA) and Prudential (UK).

The primary distribution model in the USA used to be the tied agency model

. Agents are

recruited out of college and given modest stipends during their training. There tends to be a

high drop off rate but if they were still around by year three, they would then typically go on

for a long time. This model has been around for a long time, perhaps the ‘20’s or so.

The predominant products sold were WOL. These tended to offer better commissions 80% -110% of first year premiums as opposed to 35% - 55% for Term.

The ‘80s saw the rise of the independent broker breaking out of the ranks of tied agency

forces as they tried to negotiate higher margins for themselves.