Deloitte’s Insurance Services team has published a paper on the New Zealand life insurance sector, designed to promote further discussion within the industry.
This paper was commissioned by Partners Life following the release of an RBNZ Bulletin on the life insurance industry. It was prepared by a team of Deloitte professionals in New Zealand and Australia comprising of actuarial and insurance specialists, as well as economists. The team conducted independent research to present a comprehensive picture of the New Zealand industry’s unique challenges and opportunities.
The RBNZ Bulletin commented on the profitability of New Zealand’s life insurers, the value for money of life insurance, and insurers’ ability to meet minimum capital requirements. The purpose of Deloitte’s report is to explore whether these observations are indicative of underlying issues within the life insurance industry or, rather, a result of the economic and social environment and the capital framework in New Zealand. In particular, the report focuses on life insurance profitability and capital requirements, given the upcoming review of the Solvency Standard.
The life insurance industry in New Zealand includes several features that differentiate it from other countries. As a result, it can be very difficult to compare sector efficiency, profitability and capital adequacy with other countries based only on high level metrics.
With that in mind, key insights from the report include:
- Markets which are dominated by risk-only products, such as New Zealand, tend to exhibit lower claim ratios when compared with markets where insurers sell a significant amount of savings type products, such as Europe.
- The size of the New Zealand market is small relative to other countries. As a result, there is a lack of scale in New Zealand that exists overseas with regard to operating expenses.
- Comparisons of commission levels across markets need to take account of the difference in distribution models. A significant portion of life insurance in Australia, for example, is distributed through mandated default insurance under group schemes attached to Superannuation. Compare that to New Zealand, where adviser distribution is more dominant.
- It is important to consider the trade-offs involved in using reinsurance as an alternative to holding solvency capital.
- With high public awareness of support through ACC, KiwiSaver and NZ Super, the perception that support will be provided by the Government may lead to complacency and a degree of underinsurance.
Our paper also notes that a focus on customers (policyholders) is key to future profitability and reputational success. To achieve a sustainable life insurance industry which has the end consumer’s interests as its primary concern, insurers and regulators need to consider all factors from a solvency, sustainability and suitability of coverage perspective.
An appropriate solvency standard is key to ensuring a sustainable life insurance industry for New Zealanders. Above all else, it’s important to strike a balance 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.