Moving from a commission structure for financial advisers to a user-pays model “…could significantly reduce access to insurance advice for customers”, says an independent report on New Zealand’s life insurance sector.
Authors of the Deloitte report also say changing the way advisers are remunerated has the potential to further exacerbate the underinsurance issue, “…particularly given that the adviser channel dominates the market”.
The firm’s 18-page New Zealand Life Insurance Sector report was commissioned by Partners Life to detail, analyse, and establish key trends in the country’s life insurance sector.
The professional services and accounting firm’s report says a key role that advisers play is to ensure their customers understand the value of life insurance and purchase the appropriate products for their needs, which, it says, fulfills the educational gap identified by the Reserve Bank of New Zealand’s (RBNZ) January 2020 Bulletin.
The report’s authors say: “There have been suggestions that commissions provide the wrong incentives and so, they should be banned. However, this assumes an appetite for consumers to pay directly for advice.
“A ban on commissions could significantly reduce access to insurance advice for customers and has the potential to further exacerbate the underinsurance issue in New Zealand.”
Among the report’s findings is that the life insurance market in New Zealand is unique, implying that the government and regulators should be cautious when comparing the local market with those seen offshore.
Deloitte points to the insurance penetration rate which is used by the authorities as an indicator of whether a population is adequately insured.
“It is calculated as the ratio of gross premiums to GDP and is used by the RBNZ as a measure for comparison of life insurance sectors across different countries,” it says.
“In the case of a unique market such as New Zealand, this measure is not readily comparable with other markets.”
There have been suggestions that commissions provide the wrong incentives and so, they should be banned…
The key reasons for this, says Deloitte, is because of the various State and private schemes that are in place to help protect people.
The report says: “With the availability of support through ACC, KiwiSaver and NZ Super, coupled with a strong public health care system, there is some complacency observed in New Zealand where there is the belief that support will be provided by the Government, resulting in a degree of underinsurance.”
Deloitte says that according to ACC’s 2019 Annual Report, paid weekly compensation benefits were approximately $1.3 billion for the year.
“Had this been insured by the life insurance industry, this would add close to $2 billion to the gross premium income based on a 60% claims ratio. This is set against insurance industry gross insurance premiums in 2019 of $2.7 billion,” says the report.
As for the RBNZ, its 2020 Bulletin report suggests several reasons for the level of underinsurance:
- High cost of insurance relative to the expected benefit
- Low discretionary household income to spend on insurance
- A lack of trust in insurance providers
- Misinformation or lack of information
- A reliance on the Government (primarily ACC)
Deloitte says the list highlights the need for advisers and the industry to educate New Zealanders on the importance of life insurance.
“While a number of these are not in the control of the life insurer, the Bulletin does suggest that improving premium affordability will assist in the levels of underinsurance.”
…a balance must be struck between providing stability and confidence in the sector without imposing a strain on the industry…
Deloitte also says there is a suggestion that the high cost of insurance, relative to the expected benefit, arises as a result of inefficiencies in the sector.
“In particular, high commission rates have been the recent target with the intention of reducing the cost of insurance and addressing the issue of underinsurance,” says the report.
The issue of the capital adequacy and solvency ratio of life insurers was also a focus of the Deloitte report.
It concludes that a balance must be struck between providing stability and confidence in the sector without imposing a strain on the industry through unnecessarily high capital requirements, discouraging investment in growth and innovation.
“With the upcoming review of the current Solvency Standard, considerations for new levels of capital, especially for life insurers, should be driven by actuarial findings and detailed study of the current market,” says Deloitte.