Insurers demand accurate costings for the government’s proposed NZIIS

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Partners Life is calling on the government to apply the same rigour to the costing of its proposed income insurance scheme (NZIIS) as private insurers are required to provide.

Monday, October 24th 2022, 1:47PM 6 Comments

by Jenni McManus

As part of its submission to MBIE in opposition to the scheme, as proposed, Partners Life managing director Naomi Ballantyne says she is concerned about the way the levy has been calculated, and that it will probably need to increase early in the life of the scheme.

“This would have a significant negative impact on New Zealand residents, particularly low-income and vulnerable consumers,” she says.

Ballantyne’s view has been echoed by other insurers which, like Partners Life, have provided MBIE with detailed critiques on the NZIIS, with suggestions about how it might be made to work. MBIE did not consult with the insurance industry before releasing its proposals to the market for feedback.

AIA, the Financial Services Council (FSC) and the Financial Services Federation (FSF) have told the government they suspect its costings have been under-estimated. The strongest criticism came from FSF which says it cannot determine whether or not the scheme offers good value as the government has yet to reveal the target audience for NZIIS and how these consumers would benefit.

The proposed levy is 2.77% of pre-tax income, to be split between employees and employers

Ballantyne says she understands Treasury developed an economic model that threw up a range of possible costs, and 2.77% was the approximate midpoint of those estimates.

But that wasn’t good enough.

“Private insurers have teams of actuaries who calculate premiums based not only on economic factors but [also] on detailed data from reinsurers about the likelihood of illness and disability events for different categories of people,” she said in her submission.

“We are required to have a government-appointed actuary to oversee our actuarial processes and provide confidence that our premium calculations are sufficient to ensure the solvency of our businesses.

“We would expect the government to apply the same rigour to its calculations before it finalises this scheme so that New Zealanders have the opportunity to consider the realistic price of this scheme, rather than a midpoint estimate.”

The FSF says the levy will be most significant to those on lower incomes and, with the current cost of living, would be considered unaffordable.

“Although $12 a week in levies may seem like a miniscule amount to those on average public service salaries, this is most definitely not an insignificant amount to families reliant on a single income or part-time work, or with multiple children or adversities to face. Requiring this new levy in our current times also shows the disconnect our government has to the realities of society,” it said.

As the FSF sees it, high income earners will be the major beneficiaries of the NZIIS as the levy will not impact their living costs. And if they were to be made redundant or developed a health or disability issue, those with private income protection cover would be eligible to claim twice - under their private policy and also under NZIIS.

That’s because in its current form, the NZIIS does not enable those with private cover, or employers who offer income protection insurance as part of their employees’ remuneration packages, to opt out of the government scheme. So while these people would pay two premiums, they could also collect under both policies.

AIA says the MBIE consultation paper doesn’t provide enough information to enable it to accurately assess the costs of NZIIS or the financial implications of its “various design features”.

The insurer’s own high-level assessment, based in part on its actuarial experience, is that the estimated long-term costs of running the scheme and the cost of claims appear to have been under-estimated.

For example, AIA says the moral hazard risk associated with the “generous” redundancy provisions of the scheme are likely to lead to higher financial costs than might be assumed by analysing historic redundancy data.

And like most insurers, AIA says it is seeing a rise in mental health claims “which are typically more challenging to manage and consequently more expensive”. It expects claims under NZIIS would show a similar trend, resulting in higher costs, particularly as the scheme allows for multiple claims for the same illness.

The FSC, in its submissions, discusses the risk that employers might shift to alternative employment arrangements to avoid paying NZIIS levies. They could also remove current redundancy entitlements. Both would result in poor financial outcomes and a greater financial burden for employees such as fewer benefits, no access to lump sum entitlements, less job security, the introduction of disincentives to find a new job quickly and a complex claims process.

“Steps need to be taken to ensure that the benefits of NZIIS are realised by a sufficiently large portion of the population in order to justify spreading the cost across almost the entire working population,” the FSC says.

As an alternative to NZIIS, the  FSC and many insurers are proposing a public-private partnership with the government, whereby the government mandates the scheme but the industry runs it, in much the same way as KiwiSaver works.

Most of those submitting on the NZIIS also want income protection to be decoupled from redundancy. As the FSC puts it: “At present, there are few redundancy insurance policies available in the market, largely because they are considered expensive and are fraught with difficulty. Our members consider insurance a suboptimal solution to this problem.”

Tags: Partners Life

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