Why life insurers oppose the government’s proposed NZIIS

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Life insurers are strongly opposed to the government’s planned income protection scheme (NZIIS), suggesting it should instead consider a KiwiSaver-style public-private partnership with the insurance sector.

Sunday, October 16th 2022, 7:19PM 1 Comment

by Jenni McManus

In response to a consultation paper released mid-year by MBIE, insurers say they’re also opposed to the government’s attempt to bundle a form of redundancy cover into the scheme offering disability insurance. In their view, redundancy and disability cover are very different and redundancy must be uncoupled from the plan.

Several insurers are questioning the speed at which the government is trying to fast-track the legislation and implementation of NZIIS. And they say no consideration appears to have been given to the scheme’s effect on customers who already pay for private income protection insurance or employers who offer this cover as part of employees’ remuneration packages.

Because the scheme doesn’t offer opt-out provisions for those with private cover, Partners Life and Cigna say they fear customers will be tempted to cancel their current policies if forced to join the government’s scheme as they (wrongly) perceive the products to be similar.

Partners Life managing director Naomi Ballantyne says her firm’s view is that redundancy is not an insurance event. Redundancy - or, as Partners Life puts it, “displacement” - is a matter of employer choice and the government’s proposal will likely increase the risk of “fraudulent collusion” between employers and employees at the expense of the scheme and its contributors.

AIA also raises the moral-hazard risk of the redundancy provisions which will mean employers effectively transfer the costs of redundancy onto the taxpayer.

The answer, Ballantyne says, is to have compulsory redundancy clauses in employment agreements. This would be fairer to the majority of employers who are unlikely to make anyone redundant but, under the government’s plan, will nonetheless be forced to pay redundancy levies.

Overall, the NZIIS will not achieve its objectives unless significant changes are made, Ballantyne says. And she is urging the government and MBIE to consider involving the industry in a private-public partnership similar to the KiwiSaver model. The life insurance sector already has the experience and infrastructure to manage disability claims and should be involved not just in the design of a public scheme but also in its delivery.

An alternative might be for the government to outsource the administration of claims. This is an area that particularly concerns Ballantyne. Insurance industry experience suggests that without proactive case management, claimants quickly move from an expectation of returning to work to believing themselves to be beneficiaries and losing confidence and motivation, she says. They adjust to life on a benefit and once they reach this mindset, any attempt at rehabilitation or retraining is seen as an attempt to take back their ‘entitlement’.

One of the strongest submissions to the MBIE consultation paper came from the Financial Services Federation (FSF) whose 85 members are finance companies and leasing and credit-related insurance providers. The FSF said its members were “alarmed” at the lack of clarity and certainty in the government’s scheme, which was “not just or appropriate” in an environment when consumers and businesses were facing rising costs and “exponential regulatory change”.

The FSF says it appears MBIE and the government are trying to suggest that redundancy in New Zealand is more common than it actually is. “This is entirely false and, in fact, it has been observed that redundancies have been on a steady decline, with the employer’s ability to retain staff now becoming a more significant issue.”

The FSF says it’s disappointed that the scope of the consultation didn’t explore whether the scheme needed to be introduced at all or whether there were viable alternatives. Instead, MBIE and the government have simply assumed it will proceed and be introduced next year.

“On that basis, FSF queries whether democracy and principles of fair and representative legislation have been upheld during the consultation,” FSF said in its submission. “The lack of opportunity to negotiate and consider any alternatives to the scheme suggests this to be undemocratic policy and legislation creation.”

For those facing the loss of income through redundancy, the FSF says the KiwiSaver hardship withdrawal option is available. If the criteria for withdrawal are too narrow, the government should consider expanding them.

There is also the issue of whether the government, once it effectively becomes an insurer,  will require an insurance licence, making it subject to all the legislation and regulation other insurers must comply with, the FSF says. And there needs to be more clarity about who the scheme is targeting and who will cover - for example, will it be New Zealand citizens and residents only?

Most insurers agree that it would be valuable to have some sort of broad-based solution to redundancy and loss of income due to health conditions or disability. But NZIIS isn’t it - at least, not without significant modification and consideration of the impact the scheme will have on the insurance industry.

Cigna says the speed with which the government is moving is a problem, especially as the sector is also grappling with the implementation of COFI, the new Insurance Contracts Act, further changes to the Financial Markets Conduct Act in conjunction with the financial advisers’ regime, changes to the Insurance Prudential Supervision Act, the new solvency standard and mandatory climate-related financial disclosure.

Cigna says the scheme will also impact on the provision of financial advice.

Tags: NZIIS

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