The report from the rating agency, says commissions have a continuing role driving distribution of life insurance products.
It highlights high upfront commissions of 170% to more than 200% of premiums followed by a trail commission of 7% to 10%. “While providing intermediaries with strong incentives to sell the products, this remuneration structure has created a number of ongoing financial challenges to the life insurers relatively reliant on the agent/adviser channel.”
AM Best said the adviser sector was holding a moderate level of excess capital.
“Despite a composite solvency ratio generally lower than other sector composites, excess capital is deemed adequate to support insurance and investment risks. For every $100 of net premiums, the agent/adviser sector held around $35-$40 of excess capital. AM Best believes this represents a comfortable margin for the insurance risks involved. For every $100 of non-linked investments, the agent/adviser sector held about $15 to $20 of excess capital above the minimum regulatory capital requirement, also representing a comfortable margin for the investment risks involved.”
The adviser sector reported an average return on net premium of about 24%, and a return on capital of 10%. AM Best said that was associated with a lower net premium leverage ratio resulting from more use of reinsurance.
Commission and other expenses amounted to as much as 100% of net premium revenue.
Net expense ratio was significantly higher than gross, because the agent/adviser sector generally ceded a large portion of gross premiums to the reinsurers, leaving a smaller premium base retained to spread expenditures.
The report notes that with such a high net expense ratio, an important implication is that ongoing profitability tends to rely significantly on persistency experience.
“The agent/adviser sector's future operating performance will continue to be influenced by insurance market risks that are generally common to all life insurers operating in New Zealand. Over a longer term, there is some uncertainty as to whether the expected volume and mix of future new business could remain unchanged.”
It assigned the sector a stable outlook.
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