Surveying Pinnacle Life

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There is a certain irony about a new life insurance company starting up in the face of massive industry rationalisation. There is also some mystery about Pinnacle Life. Philip Macalister investigates.

Wednesday, September 2nd 1998, 12:00AM 1 Comment

by Philip Macalister

When Pinnacle Life's chief executive Noel Vaughan says "we've shaken a few cobwebs out of the industry and got a few people upset," he's not joking.
Vaughan admits the company has taken a "pasting" from various groups about its offer to replace existing term life policies with ones from Pinnacle Life on the same terms, but at a 20 per cent lower premium.
Particularly critical are advisers as they are being cut out of the loop, and Pinnacle is taking advantage of the work they have already done.
Vaughan says he established Pinnacle because "existing insurance companies charge policyholders too much."
The implication being that premiums are too high, and that there are fat margins in the term life market.
"I don't think margins are thin," Vaughan says.
The problem, he says, is the costs insurance companies impose on their products because of the way they operate. He reckons they have too much money tied up in real estate, they don't use technology "sensibly", and their distribution costs are too high.
While Vaughan has criticised the distribution costs of using agents and brokers, he is focusing his criticism on the companies not the agents and brokers.
"I don't think agents or brokers are the problem, it's the insurance companies themselves," he says.
While Vaughan promotes the line that premiums are too high it is hard to find anyone to back up such a claim. In fact, even before Pinnacle launched its business life offices complained margins on term life were fine, and it was a very competitive market.
With term life being a commodity-type product, prices have been under constant downward pressure.
One person who has kept an eye on this market is Strategy Financial Service director Graeme Lindsay, who regularly surveys term life policies, their functionality and their premiums.
"There have been some serious rate reductions" in the past four years, he says. One example he quotes shows premiums have fallen 38 percent since 1991.
He also says some companies are changing their premiums more than once a year.

Mystery
One of the ironies about Pinnacle is that it is currently running a major press and television advertising campaign, yet little is known about the company.
Indeed there is a degree of mystery around Pinnacle Life. For instance Vaughan will not disclose the name of company's reinsurer, saying it is a "trade secret".
His concern is that if his competitors find out who the reinsurer is, they will approach it to get the same deal.
However, some companies spoken to say if they found it was a reinsurer they were dealing with, they would no longer continue doing business with that firm.
A larger concern is that it is the reinsurer who will be responsible for Pinnacle's on-going viability, and its ability to met policyholders' future claims.
Any policyholder who decides to take up Pinnacle's offer is exposing themselves to a lot of unknown factors.
One thing Vaughan will say is that Pinnacle is not a marketing front for a reinsurer wanting to gain access to the New Zealand market.
Pinnacle's arrival though has strengthened the desire of a number of insurance companies to expand the claims paying rating legislation into the life policy market.
Currently, all companies offering fire and general insurance policies are required, by law, to have their claims paying ability rated by either Standards and Poors or AM Best.
The idea of this legislation is to protect the consumer. Expanding it to the life market makes sense and is in keeping with what these policies are all about.
Another curious twist is that contact details for the company are scarce. Neither the press release announcing Pinnacle's start-up, nor the cover sheet that came with it had any contact details, likewise none of that information is provided at the Pinnacle Life website.
A call to the advertised 0800 number goes through to a call centre based in Invercargill, not its Auckland office.
What is known is that Vaughan has about 30 years in the business. Early in his career he was with National Mutual, later he headed up NZI, and he was also the former Life Office Association chairman and president of the New Zealand Society of Actuaries. More recently he has been involved as a consultant in some litigation between Colonial and a former agent.

The offer
Pinnacle's offer to give consumers a better deal is an enticing proposition. While the premiums on the policy maybe cheap, the product itself is inflexible, and has low specifications. For instance;

• Pinnacle will accept any policy up to $500,000 cover
• There is no flexibility in payment options. All premiums have to be paid monthly, by direct debt on the 5th of each month
• No additional cover such as trauma, disability or income protection can be added onto the product
• There is no ability to increase cover
• Policyholders get no advice, or needs analysis.

Pinnacle's offer looks attractive on the surface, but the big question for policyholders contemplating a switch is, "will Pinnacle be around in 10 years time to pay a claim if required?"
This question is particularly poignant as some companies, such as BNZ Life, are in the process of removing the expiry age of 65, and extending the cover indefinitely.
Again this question can only be proved over a period of time and with some knowledge about who the reinsurer is. However, it is fair to report that Vaughan is anticipating being around for some time.
The company's aim is to grab 10 per cent of the term life market in five years, but it will be "substantially profitable" at lower levels.
While its 20 per cent premium discount seems generous it is not too hard to achieve once commissions, underwriting and administration costs are taken out of the equation.

Watching closely
Pinnacle Life's move will be watched closely as method of direct marketing risk products. Offshore experience has shown it not to be overly successful, and as one competitor says with direct marketing distribution costs shift from paying commissions to agents and brokers to significant expenditure on advertising, especially when it involves television and full page ads in metropolitan newspapers.
Colonial general manager David May says there is always a place for direct sales, however he doubts Pinnacle will get sufficient volumes of business to be viable.
Often when a young upstart business takes on the big players through discounting a price war erupts. It seems unlikely any of the large life companies are going to take Pinnacle head on.
BNZ Financial Services chief manager Terry Millet says it all comes down to value propositions at the end of the day.
He says BNZ sells its products with advice, by trained people who provide customers with a needs analysis.
"We would have no intention of playing against someone we think has an inferior offering."
When sales people distribute a product, there is no point competing against a similar product being priced on a direct marketing distribution campaign, he says.

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