Australian Insurance Firms Adjust Rewards and Workforce Plans for a Changing Economy

Published: April 2020

 

With Australian insurers already facing headwinds prior to COVID-19, firms are rapidly adjusting rewards and hiring plans amid economic turmoil and uncertain times ahead.

The insurance industry in Australia was already facing significant headwinds prior to the COVID-19 pandemic as it adapted to market growth challenges in a highly regulated environment. And now, like all other industries, insurance companies are challenged by even more obstacles and difficult decisions, with the humanitarian and economic toll of the COVID-19 pandemic continuing to climb. In times like these, it’s important to take a step back, assess the situation and use data to map out scenarios for the uncertain road that lies ahead.

In this article, we provide an overview of the Australian insurance industry, emerging obstacles resulting from the current environment and the potential impact this could have on future rewards planning, with a decline in forecast budget spend already evident in our April 2020 Aon Remuneration Reports. [1]

Industry Look Back and Outlook

Over the past year, the general insurance industry in Australia [2] experienced a net profit decline of 7.9% against 2018 to $3.1 billion, while net premiums increased 6.6%. This consisted of a 34.9% decline in underwriting offset by a 55.4% increase in investment income. On the other hand, the life insurance industry experienced [3] a significant decline in both net premium (down 25%) and net profit after tax (-143%), resulting in a loss of $249 million compared to a gain of $583 million in 2018).

Numbers reveal a somewhat different story for private health insurers. This group experienced an average 2.5% increase in premium revenue and 21% [4] increase in net profit after tax.

The combined financial results were reflected in rewards decisions made by companies in the 2019 Aon Industry Remuneration Report, which included:
 
  • Subdued growth in fixed remuneration at the median for the same incumbents compared to 2018 (2.4% for general insurance and 2.1% for life insurance and superannuation, down from 2.9% and 2.6% respectively the year prior), with approximately 10% of the population not receiving any increase.
  • Limited participation in incentives, with only 49% of the general insurance population and 24% of the life insurance and superannuation industries receiving a short-term incentive.

The overall outlook for the combined insurance industry in Australia remains difficult, especially as the negative effects of the COVID-19 pandemic continue to grow. Here are some of the main challenges firms should look out for in the coming weeks and months:
 
  • The impact of the pandemic and oil price wars on investment income;
  • 2019 results for general insurers did not fully reflect immense loss claims experienced last year, which passed $2.3 billion [5] due to a turbulent season of declared natural catastrophes, including bushfires;
  • S&P downgraded its outlook for life insurers from stable to negative on 30 March 2020 [6]; and
  • Health insurers have announced delays [7] in increases to premiums, which were originally planned to go into effect on 1 April 2020, in response to financial hardship faced by members.

With these realities come continued focus and pressure on cost management for insurance companies during a sustained period of crisis management.
 

Changes to Rewards Planning

For the time being, the immediate impact of the COVID-19 pandemic and continued cost pressures are overshadowing highly anticipated regulatory changes, with the Australian Prudential Regulation Authority (APRA) announcing that it would suspend its initiatives until further notice. That said, The Department of The Treasury has not announced delays to the implementation date of the proposed Financial Accountability Regime (FAR), which is intended to align with APRA’s proposed CPS-511 prudential standard on remuneration and governance. Whilst the COVID-19 pandemic has taken the heat off insurers to prepare for impending regulatory changes, it is incumbent on them to focus on their operating capacity and continue to underwrite insurance during very uncertain times.

A large share of firms have also taken immediate steps to adopt key workforce safety measures, including work-from-home policies, travel restrictions or shift schedules where relevant (and permitted by the government).

As insurers journey beyond crisis management to focus on sustaining their businesses, we expect to see an increased focus on cost management, which will be reflected in constrained salary budgets and restricted discretionary spend on allowances and benefits.

Aon’s recently conducted COVID-19 pulse survey for financial services clients in Australia and New Zealand reported that approximately half of participating firms are taking a “wait-and-see” approach to compensation adjustments as they continue to monitor market signals. Additionally, 29% of respondents are considering bonus reductions and 21% are considering salary freezes or deferring merit reviews. Specific to the insurance sector, the 2020 April release of the General and Life Insurance Industry surveys indicate that:
 
  • 16% of respondents are re-forecasting salary budgets from a pre-adjustment range of 2-3% to a post-adjustment range of 0-0.5% for the current 2019-20 financial year.
  • 22% of respondents are re-forecasting salary budgets from a pre-adjustment range of 2-5% to a post-adjustment range of 0-2% for the upcoming 2020-21 financial year.

The opportunity for cost reductions will be limited for employees covered by Enterprise Agreements (EA) which, in many cases, mandate specific annual salary increases for the term of the agreement. We have observed a story of two speeds in salary movements in the Australian market, where same incumbent movements for EA employees have been consistently 1% higher on average than those on individual contracts. We expect this gap to widen as the urgency to contain non-statutory human capital costs intensify.

APRA’s guidance [8] in early April stated that dividends should be deferred until the outlook is clearer and executive cash bonuses should be limited for prudent capital management.

In terms of hiring, the impact of the COVID-19 pandemic is already apparent for the financial services industry in Australia and New Zealand. Sixty-nine percent of participating firms reported having a more cautious hiring outlook and 14% are considering potential workforce downsizing. This will offset the increase in underlying workforce we have observed in the insurance industry since 2017, with headcount up 2% for general insurance and 9% for life insurance.

It is unclear at this stage whether economic recovery will take the form of a quick decline and rebound (a “V- shaped” recovery) or be more gradual (a “U-shaped” recovery). In any case, cash flow and cost management have been disciplines long practiced by the insurance industry before the COVID-19 pandemic, and we expect this to continue unabated.

In the current environment, where the Australian unemployment rate is forecasted by The Department of The Treasury to double from 5.1% to 10.0% in the June quarter, many employees are accepting that people-related operating costs must be reduced to protect jobs. Even though it is still too early to predict the time horizon for recovery, it is undoubtedly challenging for executives and people leaders to make tough decisions in the immediate term whilst limiting the impact on staff engagement and the employment brand over the longer-term. Firms that can balance these priorities usually do well in actively engaging their people in business conversations and consulting on the management of cost reductions.
 

Next Steps and Additional Resources

Aon’s scheduled April release of the general and life insurance surveys for the Australian market is now accessible to all survey participants. This release shares an updated forecast on salary budget and the timing of salary reviews. As insurers start to look beyond business continuity and towards recovery on the horizon, we will continue to provide insight on fast evolving market practices and offer practical advice.

To read more articles on how rewards professionals can respond to the COVID-19 pandemic, please click here.

To download complimentary results of our latest pulse survey on Adjusting Total Rewards Programs and Workforce Strategies in Response to COVID-19 in North America and Europe, please click here.

For additional questions about the impact of COVID-19 on the insurance industry in Australia, please contact one of the authors or write to rewards-solutions@aon.com.


Sources:

  1. 16% of survey participants re-forecasting salary budgets from a pre-adjustment range of 2-3% to a post-adjustment range of 0-0.5% for the current financial year. Aon General Insurance Industry Remuneration Report and Aon Life Insurance and Superannuation Industries Remuneration Report, April 2020 release
  2. APRA: Quarterly general insurance performance statistics December 2019 released 27 February 2020 https://www.apra.gov.au/quarterly-general-insurance-statistics
  3. APRA: Quarterly life insurance performance statistics December 2019 released 27 February 2020
  4. https://www.apra.gov.au/quarterly-life-insurance-performance-statistics
  5. https://www.apra.gov.au/sites/default/files/2020-02/Quarterly%20private%20health%20insurance%20statistics%20December%202019.pdf
    https://www.insurancenews.com.au/analysis/hellish-predictions-come-to-pass ‘Insurance Council of Australia (ICA) statistics show the catastrophe declared on November 8, which incorporates losses in NSW, Victoria, SA and Queensland, has now seen 20,000 claims totaling $1.65 billion. Add to that earlier bushfire catastrophes in northern NSW and southern Queensland, and hail-related losses, and the loss figure for the catastrophe season passes $2.3 billion.’
  6. https://www.insurancenews.com.au/life-insurance/life-industry-faces-rough-ride-from-pandemic-disruption-sp
  7. https://www.savings.com.au/savings-accounts/the-list-of-health-funds-freezing-premium-increases-today
  8. https://www.apra.gov.au/capital-management

COVID-19 Disclaimer: This document has been provided as an informational resource for Aon clients and business partners. It is intended to provide general guidance on potential exposures, and is not intended to provide medical advice or address medical concerns or specific risk circumstances. Due to the dynamic nature of infectious diseases, Aon cannot be held liable for the guidance provided. We strongly encourage visitors to seek additional safety, medical and epidemiologic information from credible sources such as the Centers for Disease Control and Prevention and World Health Organization. As regards insurance coverage questions, whether coverage applies or a policy will respond to any risk or circumstance is subject to the specific terms and conditions of the insurance policies and contracts at issue and underwriter determinations.

General Disclaimer: The information contained in this article and the statements expressed herein are of a general nature and not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without the appropriate professional advice after a thorough examination of the particular situation.


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