Insurance: A wish list
David Whyte, the Laird of Takapuna (aka as the general manager AIA) outlines his 2002 wish list, abd poses a few questions for players in the industry.
Monday, January 28th 2002, 12:29PM
by David Whyte
Taking a broad look back at 2001 and some likely prospects and wishes for 2002, the Laird of Takapuna has the following observations, remarks and questions to place on record.
Like many commercial enterprises, the insurance industry was stunned by the cruel ferocity of the September 11 attacks in Washington, Pennsilvannia and New York.
As a dominant player in the US market, AIG (AIA's parent company) was emotionally and psychologically affected by events. The long-standing financial prudence consistently exercised by AIG senior management successfully absorbed the immediate impact of the terrorist attacks.
This ability to withstand such catastrophes is the underlying strength of AIG and of our industry worldwide.
While we may yet see casualties in the insurance industry, the overall reaction of hardening rates and increasing premiums has pointed to an end to the extended soft market period of unsustainable pricing and undercharging for risks in order to gain market share.
This is the likely scenario for 2002 on the fire and general side, as reinsurance facilities come into their renewal and renegotiation period during the first quarter of 2002. Whether this extends to the life insurance industry remains to be seen.
Winners and losers
For too long in New Zealand, life companies have chased market share, rather than profitability, as a measure of success. The price of this has been the reduction in choice for advisers and consumers alike with the disappearance of household names such as Prudential, Norwich, Guardian, NZI Life etc.
Now there is a fairly strong argument to suggest that these less "efficient" companies would have been weeded out eventually, and that their departure from New Zealand was a result of free market forces anyway. But if the concentration on market share strategy has produced winners and losers, it would be unfortunate if the consumers, whom the industry serves, turn out to be the real losers in the long term.
We have already seen massive increases in disability income premiums in the past five years, and this trend is certainly set to continue into 2002 and beyond.
Despite soothing, spin-doctoring efforts by the bigger players and their reinsurance partners, imprudent underwriting, poor policy wording, less than prudent benefit "innovation", and inadequate claims management, have combined to produce the level of losses which resulted in players in the US and elsewhere abandoning the product.
The Laird can still recall one reinsurance senior executive indicating in 1995, that they "had their pricing pretty much right", and that they were happy with their major treaty client's progress.
The 100% increase in rates from that reinsurer since then, tells a whole different story.
We should prepare ourselves for an annual rate adjustment in disability income (DI) premiums, pretty much like the developing pattern in the medical insurance product area.
The claims yet to emerge, of course, are already within the existing books of business on the DI side, and little, if anything, can be done to minimise the impact on profitability once these claims surface.
Gerling's excellent market research report - highly recommended reading - suggests that some of our Australian colleagues have yet to wake up to the pending difficulties the industry will face in this area.
There are early signs that trauma or critical illness products may follow a similar path. Claims disputes over policy wordings, definitions, terms and conditions, preceded by marketing department pressure to "liberalise" policy restrictions suggest a problematic future for this product too.
Better research needed
At this point, the Laird would like to address an issue which grates with some product manufacturers.
Research houses are being more widely used than ever before to justify product selection by advisers. If we accept that there is more to research than mere inter-product price comparison, then the criteria for assessing relevance and merit should go beyond the current crude and unsophisticated maxim - "what's best for the consumer just now?"
There are broader implications for consumers beyond the narrow parameters suggested by this approach, which the research houses would do well to investigate more thoroughly than their current efforts indicate.
Premium volatility recorded by price movements are a matter of public record; claims loss ratios, suggesting product "sustainability" should be requested and, if declined, the refusal to release should be published as a finding, to indicate to advisers that the company is declining to provide important information which could materially affect product selection.
The research houses have some way to go before fulfilling a comprehensive range of needs.
Two big issue
On the broader industry front, adviser regulation is on the agenda, and activity will certainly take place in 2002.
Newly appointed Securities Commission chairman Jane Diplock is a highly experienced and very able individual and her appointment from an Australian regulatory background, is indeed no coincidence.
Likewise the taxation basis of life companies will be under scrutiny. All those companies listed above, and some others, were sold for millions of dollars, yet some had paid not one cent of (non-policyholder) tax for years. Clearly, a situation about which the IRD would be asking questions.
These questions will prompt activity in this area in 2002.
A wish list for 2002
1. Somebody in government realises that an industry that looks after millions of New Zealand voters financial welfare, simply cannot be left to operate under a piece of legislation that is almost a century old. The 1908 Life Insurance Act and the 1977 Insurance Law Reform Act, represent the legislative requirements of a society which has long since passed into the history books. This legislation badly needs updating to reflect the contemporary needs of the community operating in a deregulated environment.
2. Life companies will cease trying to introduce "gee-whizz" ideas to capture the advisers exclusive loyalty. If as much effort was put into product development and improvement as goes into dreaming up $1 million hand-outs, or 225% upfront commission offers, preferred share option deals and the like, then we might improve the industry's image - and profitability, for goodness sake.
3. And here's one for my good friend Jim Minto, to whom I offer congratulations on his recent appointment; If these overseas incentive trips are so invaluable, but expensive and taxing (sic) on advisers, why must they be staged in Alaska instead of Albany, or New York instead of New Zealand?
4. And for my other good friend, and erstwhile former Sovereign colleague, Naomi Ballantyne from Club Life; do you think there is a possible conflict of interest when an adviser is a shareholder in the life company being recommended? And does disclosure eliminate that conflict?
5. And, tenuously linked to the above, I was privileged to appear in Dr Ian Brooks' opus magna Reality is Crazy (which is available through Good Returns' bookstore here), along with Naomi and a (very) few others. Whatever happened to Chris Erwin, Carmel Fisher, Summit Life, Spectrum and a host of other people, issues and items the Laird recalls during those heady days? Could it be that principal subjects of the unbounded praise contained in the book, did not wish to see anything too negative or too critical? The Laird has no wish to question the editorial integrity of his good friend and colleague Dr Brooks, but there are some items conspicuous by their absence in an otherwise excellent account of Sovereign's establishment, development and eventual sale to ASB Bank.
Perish the thought that there should be any misunderstanding over the new owners of Sovereign and their honourable intentions towards advisers clients, but if Dr Brooks would like a list of advisers and their contact phone numbers to discuss this issue further, the Laird has the information handy.
Much time and effort was expended in securing support from advisers while retained by the Clan chieftains at Sovereign, and as a service to all those advisers, here's a question for the board of ASB Bank (please note, a response is not required from the board of Sovereign); Are you prepared to offer publicly, a written guarantee that ASB Bank, or any subsidiary or associated company, will never make contact with, market products to, and/or communicate directly or indirectly with, any consumer, client or customer of any advisers holding an agency with Sovereign, now or in the future?
Regard any response carefully - no response speaks volumes for the future well-being of advisers and their client bases at Sovereign; a response confirming no cross-marketing strategy means that the advisers will have, in writing, protection of their practice assets and future earnings. Good luck!!
Finally, this piece opened with the international impact of events in 2001, and will close in the same vein.
The international financial political and economic climate will have a significant impact on our progress - as usual.
However, it's not what happens that determines your fate - it's how you react to what happens.
Those who are intent on destruction have already been shown the truth of the maxim - those that live by the sword, die by the sword. Their destiny awaits them in 2002 and beyond.
Our part in supporting the US stance against terrorism is right and proper. In a private meeting with the US Ambassador earlier, the Laird was greatly encouraged by the positive and supportive views expressed. We are likely to be in for a challenging time ahead, but as quoted often when regarding New Zealand's place in world affairs' "It's not the size of the dog in the fight, it's the size of the fight in the dog".
Yours Aye
Whyte of that Ilk
Laird of Takapuna
David Whyte was the general manager of AIA New Zealand and chief executive of the Ginger group. He know runs DCW Consulting.
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