Life insurance underwriting standards "relaxed"

A relaxation in underwriting standards will put pressure on profit margins in the life insurance industry, according to Fidelity Life chief executive Milton Jennings.

Monday, December 19th 2011, 11:08PM

by Niko Kloeten

Jennings made the comment in Fidelity Life's annual report, in which he said the life insurance and fund management company has had a "challenging" year and is expecting more of the same in 2012.

Fidelity Life, which last year was the subject of an aborted takeover bid by NZX-listed rival Tower, achieved a record group profit of $18.3 million in the 2011 financial year, up 8% on the previous year.

However, Jennings said the year had been "one of the most challenging we have had at Fidelity Life" due to a number of circumstances the company had to contend with.

"These include the necessity for price increases from taxation changes, pressure on advisers and staff to complete their Authorised Financial Adviser (AFA) qualifications, a takeover bid, increased competition and devastating earthquakes which have rattled the Christchurch community."

Although "environmental factors" had slowed its growth in new business towards the end of the year, the company "is now poised to regain market share with product and pricing enhancements," he said.

"Underwriting standards across the market appear to have become more relaxed, and product wordings have widened over the past year.  This will, in turn, put pressure on industry profit margins.

"While we respond to these changes we will not lose sight of the principle that prudent underwriting is key for any successful life insurance company."

Jennings said Fidelity Life was reluctant to increase premiums on policies, but the new tax regime for life insurers "means that we are faced with additional expenses on new business.  We have tried to share this burden through modest premium increases and cost reductions.

"This had an impact on people's ability to afford policies, particularly those affected by the Christchurch earthquake."

Despite these issues, and premium holidays given to Christchurch policyholders, total risk premium grew 7% during the year to $86.7 million.

The growth in Fidelity Life's life insurance book led to a marginal increase in acquisition commission expenses to $18.3 million.

However, maintenance commission costs increased by 22% to $8.3 million as a result of changes to the company's commission structure.

"The movement of costs towards maintenance reflects the Fidelity Life spread commission model, which rewards advisers in the medium term for the persistency of business written," chairman Ian Braddock said in his report.

Braddock said 2012 "will be equally as challenging as the past year. High levels of competition in the life insurance sector make it a testing environment in which to operate.

"New business generation for the first quarter of the new financial year is down on last year and we are working hard to reverse this trend."

Niko Kloeten can be contacted at

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