Reserve Bank calls for lower commissions

In a submission to the Ministry of Business, Innovation and Employment on its Financial Advisers Act review options paper, the RBNZ said commission was appropriate, provided the interests of the clients were considered and the structures did not threaten the viability of companies offering them.

But it said there had been anecdotal reference over a long period of time to the fact that New Zealand advisers were earning high commissions compared to other countries.

“High commission rates may result in higher premium rates as insurers pass on costs. This, in turn, lowers the proportion of the premium returned as claims and erodes the efficiency of the insurance sector in providing the general public with risk reduction services,” RBNZ said.

“Alternatively, insurers may choose to absorb the costs of high commission rates, reducing their profitability and eroding their solvency position. Under the RBNZ solvency standards, capital may effectively be required to be set aside against the risk that policies will terminate early and that commission costs already incurred will not be recovered. High commission rates increase the amount of such capital that life insurers must hold, decreasing their solvency margins and ratios, and making the insurance sector less sound than it otherwise may be."