At McGing we provide comprehensive advice to Life Insurance Friendly Societies.
A Friendly Society is an organisation formed voluntarily by groups of individuals to protect the members against debts incurred through distress, illness, death, or old age. There are deep historical roots for Friendly Societies that have contributed to the growth of the Life Insurance industry and Trade Unions. The vision and values that Friendly Societies have align very closely with McGing’s vision and values – to create sustainable growth and have better outcomes for our customers. We are proud to partner with a significant number of Friendly Societies in Australia.
Over the years, in Australia, the prudential regime has introduced requirements for insurers, including Friendly Societies, to hold sufficient money to cover adverse events such as the Global Financial Crisis or a pandemic. Holding extra money to cover adverse events means that not all the money can be released to its existing members in the event of distress, illness, or death. Furthermore, there is increasing complexity and cost with the introduction of new Accounting Standard AASB 17 (an interpretation of the global IFRS17).
For mutual organisations, raising additional capital is always a challenge. Money to cover capital requirements or additional expenses must come from existing members.
In the recent times of low interest rates, there have been some challenges with being able to generate good returns on investments to cover expenses and provide members with bonuses on products that have guarantees.
Over the next few years, we see the top three challenges facing Friendly Societies are:
Interest rate environment
Rates remain at lower levels relative to historic rates, reflecting emergence from the RBA intervention, which was like central bank interventions overseas. This also flows through to expectations of lower long term returns for all mainstream assets, which means lower future Funds Under Management and related management fees. This means a potentially lower income to pay the expenses of running the Friendly Society and servicing its members. We expect volatility of asset values to continue.
However, we expect interest rates to increase over the next few years due to inflationary pressures globally persisting to some degree and expectations for strong global and local economic growth leading to lower unemployment rates. But this will take some time. An increasing interest rate environment creates challenges too. For example, as interest rates rise, asset valuations are anticipated to lower. This can lower the present value of assets such as long duration bonds and equities.
Inflation and managing expenses
We are seeing the emergence of inflation. This is coupled with low unemployment in Australia. There is upward pressure on costs from higher regulatory requirements, specialist advisor fees such as actuarial costs and wage inflation. An ongoing core challenge is to ensure that the Friendly Society’s expenses are managed to be sustainable in real terms so that profitability is maintained.
The key determinant as to whether AASB 17 applies to a Friendly Society is whether the Society issues contracts containing significant insurance risk. If this is the case, some investment contracts and contracts with discretionary participation features will also be subject to the requirements of AASB 17.
If no significant (material) insurance risk exists, then a Friendly Society should try to avoid the requirements of AASB 17. Instead AASB 9, Financial Instruments, will apply.
There will need to be time to implement the extensive and complex requirements of AASB 17 to ensure compliance with the standard from the commencement date, which is 1 July 2023, including comparative information for the year ending 30 June 2023.
APRA has also requested feedback on its proposed changes to Capital Reporting to enable use of AASB 17 financial reporting data.
With over 18 years global experience in actuarial, superannuation and investment consulting, Neekhil is the Principal Consultant and conduit to clients and the McGing team of analysts.
Neekhil and the team at McGing Advisory & Actuarial provide a wide range of life insurance and superannuation support services including investment governance and transition, and actuarial advice.