The Commonwealth Bank of Australia (ASX: CBA) share price climbed for the second day in a row today after investors hit the buy button on news that the latest capital adequacy requirements imposed on the banks are not as tough as some analysts expected.
Also today, The Australian Financial Review is reporting that the CBA may be considering selling its life insurance business, although according to the paper's sources the decision to potentially sell is not related to the need for CBA to lift its capital reserve ratio.
The changes to capital adequacy rules over the last few years have reportedly made life insurance a marginally more capital-intensive business and in response National Australia Bank Ltd (ASX: NAB) and Macquarie Group Ltd (ASX: MQG) decided to sell their life insurance businesses.
Return on capital considerations aside, life insurance businesses have struggled all over Australia and globally over recent years due to the increasingly competitive market, rising policy terminations and higher-than-expected claims.
AMP Limited's (ASX: AMP) life insurance business has been the poster boy for the problems in the sector, with large amounts of policies lapsing as customers seemingly decide they offer insufficient value for money.
The other key driver of the tumbling profitability has been higher claims experience, whereby the insurers blame the problems on customers claiming more than expected. The underlying cause of this can be related to inadequate underwriting procedures with coverage and premiums being inefficiently measured.
Whatever the real causes behind the decline in the life insurance industry it's always been a scale game in search of delivering appropriate returns on capital, which is why the likes of CBA are looking to spin off their operations, usually to giant specialists such as Zurich, AIA, Prudential and AXA.
For CBA investors any deal or not for the insurance business is not likely to be material to a bank valued at $145 billion, with full year profits greater than $9 billion.
