Reserve Bank Questions Risk Commission Levels


While The Reserve Bank has concluded New Zealand’s financial system remains sound, including its insurance sector, it has noted the level of risk commissions available to advisers.

In its latest Financial Stability Report, RBNZ said an ongoing driver of financial soundness is the conduct and culture of banks and insurance companies, on which the regulator, along with the FMA, will report on in the coming months.

Although it saw the insurance sector as profitable and adequately capitalised, it said there are challenges to efficiency and that market share remains concentrated.

Life insurance commissions are particularly high…

“Life insurance commissions are particularly high, which inevitably flows through into higher premiums,” the Bank said in a statement, adding it expects technology developments will be an important driver of competition in the future.

“High commission structures among life insurers, and the prospect of radical change in the sector underpinned by technological innovation, point to opportunities to improve efficiency,” the report stated.

The Bank stressed the importance for insurers to quickly adapt to technological developments, which could change their products and the methods used to price and offer them.

It said insurers will find they can assess and price risks in more sophisticated ways as more and better data becomes available to them:

“These developments could have a profound impact on the insurance sector.”

“These developments could have a profound impact on the insurance sector,” the report stated.

“They could enable more granular pricing: offering lower premiums to less risky customers, but potentially increasing the number of risks that are too expensive to insure.”

The Reserve Bank also indicated its concern on insurance companies’ relatively small capital buffers necessary to meet future events, which it stated it is discussing directly with insurers.