Inside Money: Funny arrangements not good for health

There's some funny arrangements with insurance brokers, says Australian firm NIB, new owner of Tower's medical insurance business. Photo / Thinkstock

New Zealand's moribund medical insurance sector received a fresh blood transfusion last week with the news that Australian firm NIB had bought Tower Health for $102 million.

After inking the deal NIB managing director, Mark Fitzgibbon, mused on ways the new owner might inject a dose of vitality into the flagging Tower business.

Firstly, Fitzgibbon said it would take on dominant rival Southern Cross in the employer group business, promising to launch an aggressive pricing campaign.

He also said NIB would try to rationalise costs in the Tower business, in particular by revising some mysterious-sounding "funny arrangements" the firm has with insurance brokers.

Funny arrangements?

The obvious implication here is that NIB will be cutting commissions it pays to, at least some, third-party insurance brokerage firms.

That's a brave move really as insurance firms - especially those like Tower that don't have huge in-house distribution - have traditionally relied on competitive commission deals to sell their products.

Tower/NIB probably stands to lose market share among third-party brokers if the 'funny' deals get substantially rearranged. Perhaps a larger share of the group business will make up for any losses in the broker-distributed market.

Alternatively, NIB maybe sees better opportunities in going after health insurance consumers directly rather than relying on fickle third-party distributors.

Fitzgibbon almost said as much on Radio New Zealand, noting that as direct makes up only about 7 per cent of the medical insurance market here, there was huge potential for growth.

According to independent insurance consultant, Russell Hutchinson, "an online and direct future channel" might work well for NIB in tandem with rationalised third-party arrangements.

"That may give some other local sellers of health cover pause for thought," Hutchinson says on his blog.

And, as the latest statistics show, the industry itself appears to have paused with the number of lives covered by health insurance stagnant at around 1.35 million for the six months ending in September 30. That comes after three years of steady decline in health insurance numbers from a peak of almost 1.4 million lives covered in September 2009.

Does this mean health is in recovery? You may need to seek a second opinion.