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Experts criticise govt for haste and lack of input into proposed income insurance scheme

The insurance sector was shut out of the planning and design process for the government’s proposed $3.5 billion-a-year income insurance scheme (NZIIS).

Tuesday, May 3rd 2022, 8:17AM 8 Comments

by Jenni McManus

Richard Klipin, CEO of the Financial Services Council, and Katrina Shanks, CEO of Financial Advice New Zealand, say it’s disappointing their members were not consulted during the initial stages of the scheme and were offered no part in drafting the MBIE document that was subsequently offered to the public for consultation and feedback.

Klipin says insurers have been managing life and health insurance for New Zealanders for generations and have the skills, capability, depth and understanding on how a scheme like this could operate.
“Given this specialised knowledge, it is surprising and concerning that the sector was not consulted in the build and development of the proposal and was engaged only once the proposal was released to the wider public for feedback.”

Shanks says it’s a big policy change for New Zealand “and it needs the correct amount of time [for everyone] to be able to understand the implications and how it would be delivered”.
For example, if the government wanted to cushion for six months the economic shock for fulltime workers losing their jobs because of serious illness, disability or redundancy, it might consider what she calls “step changes” to welfare benefits rather than trying to introduce another taxpayer-funded insurance scheme.

Klipin says once the government’s proposal “is right”, another idea might be a public-private arrangement like KiwiSaver where the government sets the framework and then goes to the market to find providers. This approach needs to be investigated, debated and planned, he says.

“There’s a great opportunity here to think much more laterally and much more effectively about how you actually pool the capability and resources in New Zealand to solve a problem,” he says. “But let’s just make sure we’re all agreeing on what problem we need to solve.
“It is essential we get it right and give the proposal the time it deserves. We would ultimately like to see a scheme designed that would support the broader financial wellbeing and financial literacy of New Zealanders beyond the short-term provisions of the proposed NZIIS.”

If introduced as it stands, the government’s proposed scheme will provide insurance cover for employees who lose their jobs because of illness or injury or who are made redundant.
It will be compulsory for all workers and employers, regardless of whether they already have private income protection cover. At present, there are no opt-in or opt-out provisions for those who will effectively be paying twice for their insurance.
The government says the scheme will be funded by contributions from employers and employees through a levy of 2.77% of wages and salaries, half of which (1.39%) would be paid by each party.
Within MBIE, the scheme is being touted as the most significant policy change in the past 30-40 years. As proposed, it will be run by ACC, making it the biggest insurer in the country with an estimated 100,000 workers a year getting payouts. But many wonder whether ACC has the capability, skills, systems and processes to make it work.

Klipin says the FSC welcomes the discussion on income insurance. “Managing risk and insurance needs is important for all Kiwis. The covid pandemic has recently brought these issues into stark focus.
“The FSC is focused on helping Kiwis grow their financial confidence and wellbeing, and it is crucial that the proposed NZIIS is well-designed in order for it to play an effective and important role in this.”

Klipin says the FSC has been working with officials through the limited consultation period and has made a full submission but has several significant concerns about the process and timing

He is particularly critical of the speed at which the government wants to implement the scheme. The plan is to have legislation in the House before the end of this year and the scheme implemented in 2023. All this is happening, Klipin says, at a time when the financial services sector is facing an almost unprecedented volume of regulatory (or proposed) change.

“To say this is rushed would be an understatement,” he says, “and what we know is when you have rushed policy development, you have rushed thinking and you end up in a whole number of places that have serious unintended consequences.

“We are really concerned as a sector about the rush that this process has delivered. Not enough time has been taken to work with the sector that knows and understands this area best, because that’s our day-to-day bread and butter – things like claims and assessing people and getting them back to work and managing the complexities …. of people having ill health and accidents.”

By way of comparison, Klipin cites the chaos that has ensued from the ill-fated amendments to the Credit Control and Consumer Finance Act (CCCFA) which has seen hitherto acceptable borrowers locked out of the home mortgage market.

“When you rush policy development and you don’t know what your drivers are, you’re going to end up like the CCCFA, in places you didn’t intend and, in the end, New Zealanders deserve better.”

Klipin says the scheme has evolved significantly since it was first mooted.

“There’s been significant scope creep in the proposal. What started life as a redundancy-style piece has become a whole lot larger, particularly around health insurance, and as the scope creep has grown, so too has the complexity which is now massive. We have great concerns around that.”

These complexities haven’t been properly thought through by the designers of the scheme, Klipin says. One example is group insurance schemes.

“There is a whole world of group insurance plans out there where employers have tailored really effective programs for their staff. Again, employers and employees are going to have to pay again. So, what’s the future of those?”

At the micro level, a big concern for the private insurance sector is cover for mental health issues. Because it is not specifically excluded, mental illness will presumably be covered by the government’s scheme, even pre-existing and chronic conditions but at an enormous cost to taxpayers.

Naomi Ballantyne, founder and managing director of Partners Life, says there will be unintended consequences for the life insurance industry if the scheme is implemented as planned. For her, affordability and understanding the need for the government’s plan are the two big issues. “If you fix those two problems, we would like to be part of the solution,” she says.

The insurance industry is “very united” in its view, “but if it’s already a done deal, we have to figure out how to work with this and work around it.”

She says there’s a huge risk the government has got its pricing wrong. That could push up the cost of all insurance products “and I think that’s not necessarily been understood”.

The other part of the government’s proposal is payments to workers who’re made redundant or, as the government puts it, “displaced”.

Most of those spoken to by Good Returns wanted to see this uncoupled from the income insurance proposals and costed separately. Some, like the Auckland District Law Society, want to see it scrapped altogether because of the high potential for abuse.

“Redundancy [cover] is a product that hasn’t been very successful in the past,” Shank. “The government should be exploring the reasons for this.” Few, if any, private insurers offer redundancy insurance.

Tags: insurance

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Comments from our readers

On 3 May 2022 at 11:55 am Matron said:
As a general rule of thumb comprehensive private cover for full sickness and injury (no redundancy) is approximately 5% of a person's gross income.

The proposed 2.77% levy for what is effectively a rather large compulsory group scheme with automatic acceptance seems a tiny bit optimistic.

@richardklipin is quite right. Given the private insurance market is already extremely competitive and income cover is under huge pricing pressure, it is difficult to see on what basis MBIE thinks that ACC could ever hope to be successful.

At the very least the actuarial assumptions MBIE used demand real scrutiny.

MBIE: "What's an actuary?"
On 3 May 2022 at 12:58 pm Amused said:
This Government wants their new insurance scheme introduced and as usual they use their hatchet men at MBIE to get what they want. Shades of the changes made to the CCCFA all over again.

As far as the public consultation process goes we all know it's obligatory to offer this nowadays but MBIE and the Government won't take any notice to the feedback they receive. If you’re not going to engage with the industry itself why would you listen to what the public have to say?

On 4 May 2022 at 7:46 am Backstage said:
I totally agree with Katrina, Richard and Naomi. This is something that fi the government is going to seriously propose then it needs to be slowed down and thought through properly.

Anything other than done in conjunction with insurers (similar to KiwiSaver as Richard mentioned) would be an expensive disaster.

This as the govt' would need to develop capability and be sure on pricing.

Also, employers would not just pay the levy, they are expected to pay every employee 4 weeks redundancy to start if an employee is made redundant.

This is a variation of an hallucination Geoffrey Palmer once had. Is it another attempt at vote catching?
On 4 May 2022 at 9:46 am Bikedude said:
Well said Matron. MBIE have now a proven track record of getting it quite wrong , all on their own, as they are far too bright to need to consult with people who do the activity for a living. Did we really expect anything else from the brilliant minds that bought us the CCCFA?
On 4 May 2022 at 1:47 pm Tash said:
If the proposed levy does not differ for age, the younger will be subsidising the older (or everyone will not be paying enough)
On 4 May 2022 at 5:06 pm Amused said:
Yes well said Matron and Bikedude. I was reading online recently that builders are currently pleading with MBIE for it to engage with their industry around the Ministry's wildly optimistic cost projections for energy efficient homes under the proposed new building code. MBIE's attitude to all New Zealand industries and businesses around New Zealand is that it knows best!

On 4 May 2022 at 7:03 pm Dirty Harry said:
but the proposed scheme is in no way "comprehensive" cover for sickness...

not when the benefits stop after 7 months. No way it could be compared to private cover. For what it is it is WAAAAY to expensive.

You know how when you rent a car at the airport, and the included insurance has a really really high excess, and you can pay a little more per day to buy out the excess? That's what this scheme does.

It's a really really expensive, compulsory, replacement for the 6-month stand down your income policy will now need to have.
On 6 May 2022 at 12:03 pm Majella said:
I deal with a lot of small business owners, many in the trades, who have been through immense frustration dealing with ACC, which is relatively simple to administer compared to what is proposed in this scheme.

The idea that ACC could handle this is ludicrous.

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