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Deloitte: Tricky to compare NZ insurance to other markets

A new report by Deloitte has raised questions about suggestions New Zealand insurers are offering high commissions and paying few claims by global standards.

Thursday, September 3rd 2020, 5:00AM 8 Comments

The issues paper, which Deloitte said was expanding on observations made in a January bulletin from the Reserve Bank, was commissioned by Partners Life.

That bulletin, an overview of the life insurance sector in New Zealand, said local insurers were more profitable than their international peers, with high costs, high commission rates and more use of reinsurance.

But the Deloitte report said there were challenges in comparing insurance markets in different countries.

The paper was put together by a team including actuarial, insurance and economics specialists across the New Zealand and Australia Deloitte firms.

“Our intention is that the paper will encourage further discussion amongst the life insurance community, particularly in light of the upcoming review of the Solvency Standard,” says Lee-Ann du Toit, Deloitte New Zealand actuarial and insurance services partner.

“The New Zealand life insurance industry is unique for a variety of reasons when compared to its overseas counterparts. For instance, existing alongside ACC, KiwiSaver and NZ Super, our life insurance offerings have been shaped by the needs of a local population that is already confident in an existing level of support from government.

“It is, therefore, difficult to use high-level metrics as a means of comparison, as these may be distorted by the different characteristics between jurisdictions.”

One of the things that made New Zealand’s commission payments seem high was that countries had different methods of distribution.

“A significant portion of life insurance in Australia is distributed through mandated default insurance under group schemes attached to superannuation,” the report said.

“The dominance of adviser distribution and a much smaller proportion of group schemes in New Zealand therefore naturally leads to a higher commission ratio in whole-of-sector comparisons. The distribution channel can distort the commission ratio which can lead to incorrect conclusions around relative efficiency.

“There have been suggestions in New Zealand that commission provides the wrong incentives and therefore should be banned. However, this assumes an appetite for consumers to pay directly for advice and opens the potential for many experienced advisers to leave the market.”

Banning commission could significantly reduce access to insurance, the report said.

Only about 7% of New Zealand insurance was sold directly and 29% as bancassurance.

Those products were simpler and insured lower sums than products sold through the adviser channel.

Advisers were responsible for the sale of about two-thirds of new policies.

The insurer's commission covered costs such as finding the consumers who needed insurance advice, fact-finding, a needs analysis, providing advice, selecting a provider, making the application and helping through the underwriting process – as well as ongoing advice.

“It is difficult to draw the conclusion that high commission ratios indicate a less efficient insurance sector without considering the dominant distribution channel of the local market driven by the local customer.

“For example, a relevant comparison is with the Australian life insurance sector, which exhibits a product mix most consistent with that observed in New Zealand. However, a significant portion of life insurance in Australia is distributed through mandated default insurance under group schemes attached to superannuation (where there is no commission payable).

“The dominance of adviser distribution and a much smaller proportion of group schemes in New Zealand therefore naturally lead to a higher commission ratio in whole-of-sector comparisons.”

Comparing claims ratios was also problematic, because life insurance markets dominated by risk-only products tended to have lower claims ratios than those with savings products.

“The RBNZ Bulletin notes that New Zealand life insurers’ aggregate gross claims ratio is 58%, compared to the OECD average of 79%. It should be noted that in New Zealand, the traditional books of business are in run-off and have been closed to new business for a number of years.

“These traditional products are structured such that they include both a savings and insurance component, principally with a level premium, with the intention of ‘repaying’ any accumulated savings back to the policyholder in the future reflected as surrender or maturity payments.

“Over time, this savings component will increase in value relative to the annual premium. Given this, the gross claims ratio is likely to continually increase over time ... In the European market, these types of products account for approximately 70% of gross written premium, so one would expect that the gross claims ratio would be higher than in New Zealand, which primarily sells yearly renewable term (YRT) products.”

The report's authors said what was a “low” claims ratio was a matter of opinion.

“Life insurers need a margin in premiums to cover the risk associated with the uncertainty in the timing and size of claims. A gross loss ratio of close to 100% would not be reasonable based on the products in the New Zealand market as it indicates a life insurer is not sustainable. In the long run, an unprofitable insurer is worse for New Zealand than one that makes an appropriate risk-adjusted return.”

New Zealand's market was small, which would drive up expenses. “As a result, even if fixed costs were consistent across other countries, the number of policies supporting these costs is significantly less. That is, there is a lack of scale in New Zealand that exists in overseas markets.”

In May, the Reserve Bank took another swipe at insurers in its Financial Stability Report, pointing to solvency concerns. It had already suggested a higher solvency standard, requiring them to hold more capital.

The report urged caution there, too.

“The local capital framework, the interplay with local accounting standards and the capital strategy of local insurers all play a part in shaping a metric such as the Solvency Ratio. As a result, an unadjusted Solvency Ratio cannot be applied as an indicator of relative financial stability to overseas insurers.

“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. In particular, given the current Solvency Standard for Life [Insurance Business] is calibrated to the same probability of sufficiency as the new banking requirements, the implication may be that current levels are already sufficient for a stable financial services sector. Or, is there an argument that the life insurance industry needs to be more robust than the banking sector?

“A view on the adequacy of current levels needs to be taken, not based on comparisons with overseas markets but based on the needs of the New Zealand market.

“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.

“The use of additional reinsurance could support this balance. Although reinsurance does result in a reduction in capital requirements, the merits of transferring a greater proportion of risk to a global partner (rather than additional capital holdings) needs to be considered.

“The key is identifying the best mix of capital holdings and reinsurance for a more diversified approach to risk management, allowing New Zealand companies to take advantage of the size and scale of global reinsurers whilst easing the capital strain locally, to potentially free up capital for further investment into the local market.”

Tags: Deloitte insurance Life insurance Reserve Bank

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Comments from our readers

On 3 September 2020 at 9:13 am Matron said:
Finally some well articulated sense and maybe a glimmer of hope for the industry.
On 3 September 2020 at 2:12 pm Brian Klee said:
My opinion too, #Matron. Well done to Deloitte and Lee-Ann du Toit for a very well balanced report covering all the necessary variables that represents our market in NZ.
On 5 September 2020 at 1:38 pm LeeduToit said:
Thank you for the positive feedback. We truly hope this paper can support wider industry discussion to ensure an optimal Life Insurance Sector for New Zealanders. Lee-Ann
On 8 September 2020 at 9:52 am dcwhyte said:
There are a few commentators who have been making similar points to MBIE, FMA, and the Minister for the past few years. The chart published in the FMA's Strategic Risk Outlook 2019 document showing NZ as being the highest commission paying territory was, to say the least, disingenuous. Commission is a business acquisition cost - as is the huge advertising spend by banks, as is the cost of maintaining tied agencies in Mexico, Hungary, and many of the other countries cited - lower commission but higher acquistion costs - and, incidentaly old-stlye whole of life and endowment products prevailing. Also the point about market scale is signficant. Back in the day, AIA NZ ran a 15% GOE ratio with less than $70m inforce after 8 years of serious growth; Nan Shan Life, AIA's Taiwan operation, ran a 3% GOE after 50 + years being in business and inforce of $1bn+ - as the report states, absorbing expenses is easier when inforce premiums are higher in older/bigger markets. Let's hope some notice is taken of this report in Government quarters.
On 8 September 2020 at 10:02 am w k said:
dave, a frog can only see so much in a well, hence the one size fits all approach.

if only we only have people with international experience and exposure like your good self on board.
On 8 September 2020 at 5:10 pm All hat no cattle said:
Further to the Laird's points, above;
re FMA's Strategic Risk Outlook (see page 27 here) https://www.fma.govt.nz/assets/Reports/2019-Strategic-Risk-Outlook.pdf

I noted the "graph" (an insult to Mathematics) used, includes Denmark, which banned insurance commissions in 2006. It includes Latvia, Slovenia and Luxembourg, but does not include the United Kingdom, South Africa, France, and Argentina.

Why?

What about India? And Greece?

Why not throw in The Netherlands (which banned commissions in 2013!)?

It would be an interesting exercise to see an analysis of expense ratios across all these countries too.
On 9 September 2020 at 10:27 am dcwhyte said:
@All hat no cattle

Exactly - the GOE ratio for these other jurisdictions will be no different from NZ - depending on the scale and maturity of the various countries' life insurance industries.

In a recent exchange with a UK colleague, it appears commission rates average around 140% - the difference in the net risk reinsurance rate loading between 140% and 200% has a negligible impact on the ultimate retail rate.

Add in the point made in the Deloitte's report about market scale, and the ability to absorb fixed expenses in older and larger jurisdictions, then the NZ industry looks comparable if not better than many others.

Mainstream products have been driven by independent financial adivsers towards clients' needs and not exclusively to those of the life companies' shareholders as is still the case in many of the countries cited in the FMA report.

Many of these territories still have armies of product floggers foisting useless and expensive whole of life and endowment products on their unsuspecting populations.

Hence my statements that the graph is disingenuous and that the Deloitte's report deserves more oxygen.
On 9 September 2020 at 5:42 pm All hat no cattle said:
if you are interested in some decent, empirical evidence on the actual effect of a commission ban, yes there is plenty of anecdotal stuff out of Australia recently, but this 4-years-later review from the Netherlands is a good read, this link is not paywalled

https://www.researchgate.net/publication/327933069_A_commission_ban_for_financial_advice_Lessons_learned_from_The_Netherlands/link/5bae14ba45851574f7ec45b2/download


TLDR
Commissions were banned on home loans and life insurance in the Netherlands, 2013. This is a review from 2017.
Within 4 years rates and prices had returned to, or exceeded the pre-ban levels. Insurance sales collapsed, access to advice became the preserve of super-high net worth families, inequity grew, direct sales of simple and in-branch products became the norm.

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