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Old boys question start-ups

A number of the large established life companies aren't giving the start-up operations in New Zealand much hope of either survival or profitability.

Thursday, August 30th 2001, 7:52AM

by Philip Macalister

ASB Bank managing director Ralph Norris is quite dismissive of set up operations.

When asked what future they have he laughs and says: "Personally I think you'd have to be mad to establish an insurance company in this market."

The days where there were some obvious holes in the market have gone.

"People who think that there's some pot of gold out there will be sadly disappointed," he says.

"The assumptions that they are basing their assumptions on are flawed."

Norris says there is a massive shakeout happening in the insurance industry worldwide and at the end of the day its all coming down to scale.

That is you have to be big to survive.

AXA New Zealand chief executive Ross McEwan also questions the viability of start-up or small operations.

He says the market is constantly becoming more competitive and tougher. Margins are getting thinner and companies have to pay more for distribution. AXA for instance has just increased its commission rates by up to 33% to remain competitive.

McEwan says increasing commissions is not about buying distribution, rather it's what he calls: "A hygiene factor," something which has to be done to stay in the market.

"It makes us competitive," he says. "We don't want to lead the market in remuneration."

His argument against the viability of small and start up companies is based around what is happening in the market.

He says claims experience is deteriorating in key product areas such as income protection and trauma. This is been witnessed by AXA in Australia which took huge losses in its income protection business.

McEwan says there are limited amounts of money in health, hence AXA sold its health business last year to Tower Health.

Whole of life and endowment policies aren't sold much these days, so that leaves the commodity-type products such as term life and its derivatives.

Naomi Ballantyne, who heads most recent start-up Club Life, sees the picture differently.

She says because of all the rationalisation, where the big get bigger, holes are opening up for small niche players

The idea is that Club Life will be a Sovereign MkII.

Sovereign managed to be successful when it launched more than a decade ago because it was innovative and it didn't have the baggage of legacy systems. Consequently Sovereign forced the established players to become competitive.

Now though it is biggest player in New Zealand after acquiring Colonial and all its products, systems and services.

Ballantyne sees her former employer Sovereign becoming what it was set-up to compete against.

Norris acknowledges that Sovereign is now the biggest player in the market. However he reckons the market has changed from when the company set up.

The large life companies of the 21st century are no longer lumbersome and inefficient, therefore there aren't the opportunities that Sovereign exploited a decade ago.

Time will tell who is right.

You can read Philip's blog here: http://www.goodreturns.co.nz/blog/

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