Life insurers that distribute their policies primarily through independent financial advisers make up 43 per cent of the sector in NZ and are relatively less profitable due to high up-front commission rates and policy churn activity.
The vast majority of "new" life insurance policies sold in NZ are actually replacing existing policies, although the Financial Markets Authority, the industry's conduct regulator, and the industry disagree on the exact percentage. It could be anywhere between 87 per cent and 98 per cent of sales, depending on who you believe.
There can be valid reasons for replacing existing policies, such as changes in personal circumstances, but much of industry activity appears to be designed to boost advisers' income.
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.
It notes that the three largest life insurers account for 54 per cent of premiums while the five largest account for 72 per cent, making the NZ market close to the average in terms of market concentration in OECD countries, but mergers and acquisitions are likely to make the sector more concentrated.
The paper said pure bancassurers - those whose policies are distributed exclusively through banks - account for 13 per cent of the sector, are the most profitable and have the lowest expenses. That's because banks' existing distribution networks allow bancassurers to reach their customers more easily.
Life insurers that sell insurance directly to customers have the lowest profitability but that could be due to lack of scale – they account for just 4 per cent of the sector.
The NZ companies pay out 58 per cent of gross premium income in claims but, if savings products are excluded, that figure drops to 47 per cent, well below the OECD average of 79 per cent.
The paper notes that a relatively narrow range of life insurance products are available in NZ and that sales of savings products have largely ceased. Lump-sum insurance accounts for about 78 per cent of sales and disability income insurance for about another 16 per cent.
Expenses account for about 41 per cent of gross premiums in NZ with commissions accounting for 19 per cent and other expenses for 22 per cent, the highest expense ratio among OECD countries.
Characteristics such as high up-front commissions, churn and lack of scale "may indicate poor value for money for some potential and existing policyholders as high expenses have a detrimental impact on the affordability of premiums," the paper said.
"Some individuals may have been priced out of the life insurance market in NZ, contributing to under-insurance."
Life insurance penetration in NZ, the ratio of gross premiums to GDP, and gross premiums per capita are well below the OECD average and may reflect the low proportion of savings products available and reliance on ACC cover, the paper said.
It notes a recent survey commissioned by the Financial Services Council which found respondents cited three major reasons for being under-insured. Just under 40 per cent said they couldn't afford life insurance premiums, about 25 per cent said life insurance wasn't a priority and about 17 per cent said they didn't feel life insurance was value for money.
The paper said solvency ratios in NZ have declined from 151 per cent in March 2013 to 129 per cent in March 2019 and that raises "questions about insurers' ability to comfortably meet the minimum requirements in the event of an adverse shock or a major loss event."
Solvency ratios vary widely across the sector with some companies having low margins over minimum solvency levels.
"Furthermore, recent sharp falls in long-term interest rates are putting further pressure on some life insurers' solvency margins," the paper said.
"This highlights the potential need for more robust solvency standards to be incorporated within the supervisory framework."
The central bank is in the process of reviewing the Insurance (Prudential Supervision) Act 2010 and plans to release further information later this year.
"Alongside the forthcoming review of IPSA, the Reserve Bank will review solvency standards and consider the case for solvency buffers with the aim of improving resilience in the sector," it said.
