High commission structures continue to present a challenge to efficiency in the life insurance sector, the Reserve Bank of New Zealand has noted in its Financial Stability Report released at the end of November.
In the report, the Reserve Bank commented on the life insurance sector’s reliance on the adviser sales channel, noting the life sector has been slower to adapt to changes in the market.
“The sector appears to have been slow to adapt to new technologies and changing consumer preferences towards online product distribution…,” it stated in the report.
“Instead it has relied largely on the traditional adviser sales channel, where life insurers pay high commissions to advisers,” it added, noting the high levels of commissions in the New Zealand market when compared to other countries.
Although the regulator acknowledged the important role of insurance advisers in helping buyers select insurance products that meet their needs, it is concerned that high levels of commission and other incentives that life insurers pay to advisers can create conduct risk.
…high levels of commission and other incentives that life insurers pay to advisers can create conduct risk.
It noted the potential for incentives to encourage churn, which in turn can compromise the efficiency of the sector, “…because policyholders may not be matched with the best policies, and ultimately end up funding high commissions through high premiums”.
It previously raised concerns on efficiency earlier this year (see: Reserve Bank Questions Risk Commission Levels…).
Reserve Bank Governor, Adrian Orr, also noted in a statement that although the insurance sector as a whole is meeting its minimum capital requirements, capital strength has declined and a number of insurers are operating with small buffers.
“The insurance industry must ensure it has sufficient capital to maintain solvency in all business conditions,” he said. “Our ongoing review of conduct and culture in the insurance sector with the Financial Markets Authority will illuminate the industry’s risk management capability.”
The conduct and culture of life insurers is set to be released in January 2019 (see: FMA Life Insurer Report Due January…).