Insurance: The gathering pace of change
The insurance industry has changed markedly in the past five years and it promises to change even more radically over the next five years.
Wednesday, February 4th 2004, 10:00AM
The insurance industry has changed markedly in the past five years and it promises to change even more radically over the next five years.
While people outside this industry pass comment on its apparent staleness, lack of innovation and general reluctance to embrace change, make no mistake this industry is as dynamic as any industry worldwide.
Four areas of change include continuing medical challenges, product sustainability, legislation and, of course, commissions.
Medical changes and health challenges
What impact will ‘new’ illnesses have on the insurance industry?
In the late 80s we saw the rise of HIV-AIDS and its impact on the insurance industry, and while the HIV-AIDS incidence rate in New Zealand has been relatively low there is still a requirement for insureds to complete a long HIV-AIDS declaration. Now, the great fear worldwide is the spread of HIV-AIDS to ‘new wave countries’ such as Russia, China and India – a source of many of our new immigrants.
Most recently we saw SARS ‘fever’ grip the world and although we were lucky in New Zealand, the impact of SARS cannot be ignored. Fatality rates for those contracting SARS in Hong Kong were up to 52% (for those aged over 65). One should not rule out the re-emergence of another SARS type illness that could have far more devastating effect – such as the 1968 Hong Kong flu that killed 700,000 people.
The increase in incidence of hepatitis B and C has also received a lot of coverage in New Zealand This will directly impact on underwriting costs and, ultimately, on the decisions made on offering coverage. There are some two billion people worldwide with hepatitis – this number is increasing by four million per year.
Product sustainability
A lot continues to be made of the pressures being brought upon Income Protection. Recent commentary by reinsurers continues to support the proposition that the product is not yet ‘out of the woods’ – though I do believe future premium increases will be at a more manageable level. While a lot of effort and attention has been focused on managing Income Protection, there is a need to highlight issues that surround other products.
Critical Illness is one such product. To my mind it suffers at times from a lack of purpose or identity. Critical Illness has over the years moved away from its intent; we have seen an unnecessary growth in cover amounts and conditions covered. As mentioned earlier, the changes in medical technologies have greatly affected the product – definitions that were up-to-date when issues arose 18 months ago are now no longer valid.
One of the trends that I see happening is a move toward renewable contracts. This will ultimately go a long way to future proofing the sustainable nature of the ‘non-life’ business. As products have ‘stretched’ over the years, we have continued to offer products that were typically the domain of the fire and general industry.
Legislation
The outdated legislation that this industry works in is finally getting an overhaul. The 1908 Life Insurance Act and the Insurance Companies (Ratings and Inspections) Act 1994 are undergoing their first public review through the Law Commission. The Law Commission is tasked to report on the most appropriate way to regulate life insurance offices in New Zealand. International research is being carried out on other regulatory regimes, particularly in Australia. With such an implied heavy reliance on Australia’s experiences, should this be a hint on what way we will be moving as an industry.
The Insurance Companies (Ratings and Inspections) Act 1994 seeks to ensure that all insurance companies have some form of financial strength rating through an approved agency. This will quite clearly define the market strength of insurers. These reports are well worth reading and can be accessed at: www.med.govt.nz
Commission
Reducing commission is a perennial discussion point, and while there is no denying that commission levels “are where they are” due to the insurance companies, there is widespread acknowledgment that commission levels are coming down.
The move towards lower upfront commissions and higher renewal commissions will gather pace this year – this has been evidenced already with medical insurance. I am in no doubt that a more balanced approach (lower upfront commissions and higher renewal commissions) will be the best for the industry as a whole. For advisers, it adds value to their existing book and for the insurers, it ultimately adds sustainability and price affordability to various product lines.
Bernard McCrea is the general manager of AIA New Zealand
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