Reserve Bank flags commission rates, solvency
The Reserve Bank has raised questions about the insurance sector in its latest financial stability report.
Wednesday, November 27th 2019, 9:05PM 
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The report, released on Wednesday, said that low interest rates could be putting pressure on insurers' solvency buffers.
The Reserve Bank will consider whether there should be a requirement for insurers to have additional solvency buffers when it reviews the Insurance (Prudential Supervision) Act 2010.
Interest rates are near historic lows, and that could be a problem for some insurers, the report said.
It had sought information from 22 life insurers on their sensitivity to interest rate movements and detail of how they were managing the risks.
“Initial analysis shows material impacts on the solvency positions of some New Zealand life insurers. The Reserve Bank is actively discussing the impacts with the most affected insurers and has requested that they prepare plans to mitigate and manage the impacts. The current difficulties highlight the potential need for stronger solvency standards to be incorporated within the supervisory framework.”
The report also reiterated earlier reports' comments on life insurance commission rates being high and potentially problematic for the sector.
“The New Zealand life insurance sector has high commissions relative to other countries, with first-year commissions around 200% of annual premium,” the regulator wrote in its report.
“This adds significant cost to customers, and risk to insurers because the business needs to persist for a number of years before acquisition costs are recovered. If advisers churn their customers from one insurer to another, this crystallises losses to insurers and further increases costs through the payment of another set of commissions by the second insurer.
“High commissions also act as a barrier to new entrants and competition because securing market share requires substantial capital to fund acquisition costs.”
The report said life insurance was about 24% of the insurance market and health insurance 14%.
Within each sector, 50% of premiums and liabilities were with three or fewer insurers.
The Reserve Bank noted the ongoing conduct work in the sector with the Financial Markets Authority and said it "continues to have dialogue" with the sector around raising and improving its level of compliance.
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Insurance advice businesses don't run on fresh air and nor do client's want to pay fees for something they would rather not talk about. Some do and will granted, but the target majority that need advice and need the coverage won't and don't.
It is not only myopic but roundly tone-deaf to continue this discussion without any constructive suggestions for debate. It is akin to standing on the road tossing rocks at a green house and wondering why the glass breaks.
If Mr Orr is so hell bent against commissions then we need to understand why and he needs to explain himself in ways that are both reasonable and backed by research.
The present approach to the discussion is unproductive and unhelpful. It insinuates issues that have little to no proof of systemic harm, and casts all advisers under a dark cloud created by a minority for the small number of issues discovered.
Frankly it makes the RBNZ sound like a rabid anti-vaxer; there's a problem over there somewhere, I smell smoke but it's not much, so there must be a fire. Rather than the planted reality of a cast off cigarette butt that has little relevance.
The ignorance of the FMA public reports on churn is also astounding, these showed the real problem to be the banks and the VIO’s not advisers. VIO’s aren't driven by commission.
Find another soap box, as this one is destroying any trust or credibility the insurance industry may have in the RBNZ’s ability to understand the insurance industry.
The FMA is demonstrating they are learning, understanding, and engaging. The same cannot be said for the RBNZ.
And no I don't think 200% commissions are reasonable, however, the majority of advisers don't earn 200% commissions, it's not even the rate they have a base access to. Many who are doing the right thing are often paid substantially less than this is the reality, after they take into account existing cover requirements, new cover that is at lower commission rate, and all manner of provider fish hooks that limit commissions when you're doing the right thing for the client.
Manage the behaviour, not the income. We need that to do the job expected. The new rules, managed as they should be, will bring that behaviour change.
Commission and income cuts will reduce sustainability and drive good advisers into different industries. Because it is both costly and financially risky to run an advice business, especially so going into the new regime.
Lastly we haven't seen any commission cut in any market where a sustained reduction in premium was passed on to the consumer. This thinking is wishful thinking against the reality of the world.