Inside Money: Life without middlemen: not so cheap and easy

New Zealand-based direct life insurance specialist, Pinnacle Life, is looking to shore up its capital base by tapping new investors, according to credit ratings agency A M Best.

The news, buried in the A M Best rating announcement (Pinnacle scored a B for financial strength and bb+ for credit, both code for OK, but not great), is a result of the company's high dependence on its customers for capital. Almost 90 per cent of Pinnacle's net reported assets are based on life policy premiums - a little too high for A M Best's liking.

"This is a strain on its risk-adjusted capitalization as the value of net life policy assets depends on retaining inforce policies," the ratings agency says.

A M Best also marked Pinnacle down for its "high expense ratio", mostly due to advertising costs. Pinnacle, which eschews paying high commissions to insurance advisers, sells a large proportion of its products direct including via its award-winning online application system.

"Direct distribution expenses, such as advertising, have been considerable," A M Best notes. "Pinnacle's expense ratio exceeded 100% over the past five years."

Selling life insurance, either direct or through intermediaries, is clearly an expensive business.

On a more positive note, A M Best says Pinnacle's reinsurance arrangements (with Hanover Re), low lapse ratios and direct distribution nous do give the business credibility.

And Pinnacle's growth rates and customer retention have been impressive, with sales up 21 per cent per annum over the last five years while maintaining a lapse ratio "below the market average".

In fact, the direct life insurance market, as opposed to selling via advisers, is likely to surge over the next few years, according to recent research from actuarial firm Plan for Life (PFL).

The PFL report (while Australian-based it undoubtedly has resonance in New Zealand too) found the direct life business was growing pretty much at the same rate as Pinnacle recorded here.

"With the Direct business representing 25% of Life insurance sales in 2010-2011, continued rapid growth is expected, driven by demand-side changes and supply-side expansion," the PFL report found.

By 2021, the PFL study estimates, over "40% of new insurance business in Australia is expected to come from Direct... reaching a sum of more than $2 Billion."

If the PFL research proves right, Pinnacle could also see a slew of new competitors, including well-capitalised traditional insurers, entering a market it has nicely carved out for itself in New Zealand.

But as Brad Clarke, head of insurance strategy for Oliver Wyman (which conducted the study with PFL), points out, going direct isn't as easy as it looks.

"The reality is that Life insurance remains largely sold rather than bought and successful players are using sophisticated marketing techniques to reach their clients," Clarke says.

"Digital adoption and technology advances as well as scaled and remote forms have assisted and will continue to present opportunities.

"We expect many players however to continue to struggle to differentiate between what sounds like a great idea and one that will result in a sustainable business."