New Zealand life insurers are more profitable than their peers in many developed OECD countries, with return on equity higher than the median and a low claim ratio, according to a paper by Jinny Leong and Adrian Allottm carried in the Reserve Bank of New Zealand Bulletin.
There is considerable variation in profitability within the life insurance sector. Pure bancassurers, who make up 13% of the sector, are the most profitable and have the lowest expenses.
The country’s life insurers also have high costs relative to their international peers due to high commission rates and relatively high operating expenses. These characteristics may indicate poor value for money for some potential and existing policyholders as high expenses can drive up premiums.
The high commission ratio reflects high upfront commission rates and some policy replacement activity, where policyholders replace an existing policy with a new one during the year. Additionally, high upfront commission rates and policy replacement activity may undermine public confidence in the sector.
Consequently, the level of insurance for personal risk may not cover actual financial vulnerability for some individuals in New Zealand, and some individuals may be priced out of the life insurance market altogether.
Insurers hold solvency capital to withstand a range of possible adverse events such as natural catastrophes, insurance losses, credit events and market movements.
The aggregate solvency ratio for the life insurance sector has declined in recent years and is low relative to other countries. Some life insurers operate with low solvency margins over the regulatory minimum, raising questions about their ability to comfortably meet the minimum requirements in the event of an adverse shock.
New Zealand life insurers make greater use of reinsurance than their international peers, partly due to differences in product mix. Life insurers primarily reinsure to reduce the volatility of profit and transfer risk to reinsurers. Recently, there has been a greater use of reinsurance as an alternative to holding solvency capital.
Alongside a forthcoming review of the Insurance (Prudential Supervision) Act 2010, the RBNZ will review solvency standards and consider the case for solvency buffers, with the aim of improving resilience in the sector.
The RBNZ and the Financial Markets Authority (FMA) conducted a thematic review of the conduct and culture of the life insurance sector in 2018, and found “extensive weaknesses in life insurers’ systems and controls, with weak governance and management of conduct risks across the sector and a lack of focus on good customer outcomes”.
The government recently announced a new financial conduct regime in response to the issues identified in the review, and gaps in existing regulation. The proposal aims to address conduct issues and promote fair treatment of customers in the sector.
Steps have also been taken to enhance the regulation of financial advice in New Zealand. For example, the Financial Services Legislation Amendment Act 2019 will be supported by new regulations and a revised code of conduct for advisers.
The RBNZ paper is based on data collected by the central bank since 2013 from the 28 largest insurance companies – out of 88 licensed companies – 10 of which are life insurers.