Reserve Bank critical of life insurance
New Zealand’s life insurance sector appears to be relatively inefficient, the Reserve Bank says.
Wednesday, January 22nd 2020, 10:32AM 
11 Comments
It has released an overview of the sector which highlights the relatively low levels of coverage in this country, high commission rates and low claims rates.
New Zealand insurers were more profitable than peers in many developed OECD countries, the Reserve Bank said.
Bancassurers were the most profitable with the lowest expenses while life insurers distributing via advisers, 43% of the market, were less profitable. Those selling direct were the least profitable.
They also had high costs, driven by high commission rates, soft commissions, policy replacement activity and a lack of scale.
“High expenses have a detrimental impact on premium affordability and value for money for policyholders. Some individuals may be priced out of the life insurance market altogether,” the report said.
“They also have high costs relative to their international peers due to high commission rates and relatively high operating expenses. These characteristics may indicate poor value for money for some potential and existing policyholders as high expenses can drive up premiums.
"Additionally, high upfront commission rates and policy replacement activity, where policyholders replace an existing policy with a new one during the year, may undermine public confidence in the sector. Consequently, the level of insurance for personal risk may not cover actual financial vulnerability for some individuals in New Zealand.”
The commission ratio of New Zealand life insurers was 19%.
It said the aggregate solvency ratio for the sector had declined over recent years and was low compared to other countries’ rates.
“Some life insurers have low solvency margins over the regulatory minimum, which raises questions about their ability to comfortably meet the minimum requirements in the event of an adverse shock or a major loss event.”
New Zealand life insurers make greater use of reinsurance than their international peers, partly due to differences in product mix. Life insurers primarily reinsure to reduce the volatility of profit and transfer risk to reinsurers. Recently, there has been a greater use of reinsurance as an alternative to holding solvency capital.
It said the range of products in New Zealand was “relatively narrow”.
Life insurance penetration (the ratio of gross premiums to GDP) and density (gross premiums per capita) in New Zealand were well below the OECD average, the report said.
"These metrics indicate that the New Zealand life insurance sector is relatively small and may be partly explained by the low proportion of savings products in New Zealand and New Zealanders’ reliance on the government (ACC cover) to mitigate some risks that would otherwise be in the purview of the life insurance."
The gross and net claim ratios for insurers were also low.
“This means that a relatively small proportion of premiums are paid out as claims. New Zealand’s life insurers’ gross claim ratio is 58% (or 47% if insurers that primarily offer savings products are excluded). This is well below the OECD average of 79%.
"A low claim ratio may imply that the life insurance sector as a whole is relatively inefficient in returning money to policyholders and can indicate that insurance products are unsuitable. The life insurance conduct and culture review found evidence of certain products that provide poor value for policyholders. Some of the indicators of poor value products included low claim ratios, high rates of claims being declined and limited coverage. A low claim ratio also supports life insurers’ profitability.
"However, it is important to note that the claim ratio is an imperfect measure of the performance of life insurers as it includes claims on both risk and savings products, as well as intertemporal effects. There is a narrower range of life insurance products currently available in New Zealand, compared to other countries, which partly explains the differences in claim ratios. The claim ratio depends on the size and maturity of life insurers’ savings business, where higher claim ratios are expected for more mature markets."
Financial Services Council chief executive Richard Klipin said the report highlighted areas, such as solvency and conduct and culture, that its members were already working through with regulators.
“Conduct, culture and ensuring great consumer outcomes is paramount and good progress has been made over the past months, but the industry still has a way to go to build the trust of stakeholders and to ensure we are serving New Zealanders in a fair and transparent way.
“With close to four million insurance contracts in New Zealand and over $1.5 billion in claims paid to Kiwis in 2019 alone, we take our responsibilities seriously and expect strong scrutiny as an industry. This and other research provides valuable insight to the industry and, working with regulators and government, we are committed to building a sector that has good customer outcomes at its centre."
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Comments from our readers
1.) Once again, a comment on commissions. Firstly the assertion that 19% of the premium paid is in commission. Fine, I'll accept the claim, but realistically is this problematic? If we were to do a thorough analysis of New Zealand's markets and look at the costings from a provider to a client, would we see on average higher or lower than a 19% mark up going on the good to the business owner? I would say in a lot of cases (other than FMCG industries) it would be higher. This is only an issue when you don't consider advisers as businesses with expenses.
2.) 'Public confidence is being undermined', I actually agree with the RBNZ here. However it is not being undermined due to high commissions, but rather by the fact every three months at the moment they release a statement saying that the public shouldn't trust us.
Yes, you could say it's a little more DIFFICULT for life companies to get NZers to buy their product.
Quite frankly it's an-arse-about face argument from RBNZ.
Banks can also allocate acquisition expenses to other areas of the organisation. How much of the massive advertising budgets are reflected in the pricing of the bancassurance products?
Also, anyone who has ever constructed a net risk product with reinsurance funding support knows that the expense attaching to up-front commission levels has a modest impact on the retail premium. The reduction in solvency margins is more likely to be as a result of deteriorating claims experience in the non-can income protection account - as articulated by the Australian reinsurers.
Panned for reducing solvency margins, criticised for being more profitable and therefore able to support solvency, life insurers can't win.
But this is yet another example of a report filled with generalisation, inference, and hearsay. Are all licensed life insurance companies reporting the same reduction in solvency margins? If not, which companies are more 'at risk'? Are there any licensed life insurers in danger of failing to meet policyholder obligations?
Or is this just another example of regulatory 'groupthink'?
With regard to business replacement - peoples needs and circumstances change over time. Most of us move houses periodically, buy new cars, change jobs and even life partners - it's completely unreasonable for regulators to expect advisers not to respond to evolving client needs fresh recommendations.
The objective is to provide great customer outcomes. A competitive market place is the best way to achieve this outcome.
Finally, to be "concerned" about a lack of product variety compared to other jurisdictions seems irrelevant. Our societal conditions are different from other countries where cash value and accident policies are available. The real question to ask is are the products on offer relevant to the NZ population? A free market place sorts that out.
I've been shouting from the rooftops for a while now that Health Insurance at the very least should be tax deductible against personal income. Health is the second largest spend annually from the Government, people with health insurance are less likely to utilise this under the public system. But yet people with private health cover still pay tax on the money they earn to pay for a good with their nett income that makes them less likely use the public money. Absolutely absurd. Tax advantage is one way to make the cost relatively more affordable at least.
If only there was some sort of central body, that was a branch of the Government, that had lobbying power and influence of regulation and policy... oh wait!
It is unfortunate that they have taken this opportunity and several others to try pull the industry's pants down in public rather than actually use their position constructively.
I'm sure also that the funds previously allocated to incentive trips will be absorbed by the additional compliance costs and related expenses being incurred by product providers.
What is significant is the response from the Australian product providers to regulated (reduced) commissions.
There has been no downward adjustment in retail premiums.
Despite claims from one life company CEO that premiums would 'stabilise', premiums in Aus have increased due to adverse claims experience in Group SalCon products. As I stated earlier, funding upfront commissions via reinsurance finance support adds a few bps to the net risk rate.
Premiums to the consumer are more likely to be impacted by claims experience.
I note the point re the communication, Rohan, but as a Financial Adviser with your own FAP license, you have the unique ability to select most appropriate product solutions to advise your client on - others appear not have this luxury.
Companies will still have to provide competitive products with benefits and coverage to suit your clients' circumstances. And it's still your call which products and which providers meet your clients' needs in your professional judgement.
Nom Reps attaching to VIOs will not have this discretion and it would pay independent financial advisers and their preferred product providers to fund a campaign to bring this to the public's attention - frequently.
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high expense ratios
higher prices
small market
narrow product range
Seems to the same could be said of conditions in the energy sector, building supplies, auto parts, clothing, footwear...
* = citation required, but not provided.
** citation provided: ASIC Report 413 2014. A highly controversial, targeted and narrow report focussed on a small number of known churners (7 licensees), and the catalyst for the infamous "Trowbridge reprt" which lead to LIF.