And then, just like that, the iconic mutual life insurance industry was gone

Regulatory changes by the Australian Government can have unintended consequences and Australia's smaller mutual credit unions and health insurers could do well to learn from the demise of the mutual life insurance industry during such a change, Deakin University's Monica Keneley believes.

Associate Professor Keneley, who is based at the University's Warrnambool Campus, has looked at the impact deregulation of Australia's financial sector had on Australian life insurers during the 1990s.

"While the intent of the change was to improve the competitiveness of Australia's banks and ensure the Government could introduce effective monetary policy, the lifting of restrictions on what the banks could and couldn't do had a number of unintended consequences, including the disappearance of the life insurance industry's long-established mutual tradition," she said.

Associate Professor Keneley said mutual life insurers had their origins in the self-help movement and the friendly societies of the 1800s.

These societies were established before the provision of government social welfare and private insurance. They provided a range of social welfare functions such as sickness, retirement and unemployment benefits to their members and their dependents.

"Mutual life insurers were the leaders in the Australian life insurance market for well over a century," she said.

"In 1900 five mutual life insurance firms accounted for 80 per cent of assets and premiums sold.

"This situation did not change until the 1970s when more players entered the market.

"However the largest change occurred with deregulation."

Associate Professor Keneley said before deregulation, banks and other financial institutions could not compete directly in the life insurance market, so they made use of subsidiary companies to sell insurance products. This increased the cost of supplying such products and made banks less competitive in this area.

In the early 1980s the Federal Government began to lift the controls which had been placed on banks allowing them more freedom to engage in other market activities.

"With the changes, banks moved rapidly to establish their own insurance businesses," she said. "This put pressure on the firms that were already in there.

"The lifting of regulatory controls, for example, allowed banks to make more efficient use of their own sales networks.

"By making use of their existing sales networks, banks were able to sell insurance more effectively than previously.

"Within five years of entering the life insurance market the three largest banks in Australia were ranked within the top 10 life insurers with respect to new business sales."

Associate Professor Keneley said deregulation also stimulated structural change in the finance sector.

"The market trend both in Australia and overseas was for financial firms to become larger, spreading into other financial markets to improve their competitive advantage," she said

"In Europe, bancassurance (combining the business of banking and insurance), was spreading.

"In Australia a similar trend was evident as the large banks and insurers recreated themselves as 'financial services providers'.

"The implications for mutuals like the AMP, National Mutual and Colonial were enormous.

"To maintain their market position they had to adapt with the times.

"This required a change in organisational structure which required capital."

Associate Professor Keneley said the nature of the insurance business also changed.

"There was a move away from traditional insurance business into asset accumulation and risk products," she said.

"New types of insurance products and new ways of selling insurance emerged as computer technology opened up new marketing possibilities.

"The demand for the old kind of life insurance product, that had been the foundation of the mutual society, declined.

"This led people to question the validity of mutual structures which had been designed to provide a mutual help mechanism for members."

Associate Professor Keneley said faced with these pressures the mutual insurers tried to reinvent themselves by moving into banking, different products, and expansion overseas but were not placed to do so.

"Hampered by inward looking management practices and sales systems that were not able to adapt quickly to the emerging financial environment, mutuals faced increased costs and falling income," she said.

"By the mid 1990s the pressure on firms to demutualise i.e. list as private companies grew, and by 2000 there were no mutual providers of life insurance.

"The mutual system of life insurance that had been a foundation of the Australian market for 150 years had ceased to exist."

Associate Professor Keneley said this mattered because mutuals were more than financial institutions providing life insurance.

"Mutuals were an iconic part of Australian society and they touched the lives of Australians," she said.

"During their long history they had played an important part in the development of the Australian economy.

"They were among the first businesses to adopt a platform of corporate social responsibility seeing their role as that of working to improve conditions in the broader Australian community."