Insurer braces for tax increases

Sovereign chief executive Charles Anderson. Photo / Herald on Sunday

The country's largest life insurer says it plans to mitigate impending tax increases by shaving as much as 15 per cent from the commissions received by advisers.

The changes, which will come into force on July 1, are expected to reduce profits in the insurance industry by millions of dollars per year, with Sovereign taking a hit of about $5 million.

The Government passed regulation last year that removed a tax exemption being received by life insurers.

Previously life insurance policies contained a savings portion, but now most are term life policies, meaning the government felt they were undertaxed.

About one-third of the total cost of the tax increase will be passed onto customers and the remaining two-thirds will be absorbed by the company and by reducing adviser commissions.

Sovereign chief executive Charles Anderson said premiums for new policies will rise by 15 per cent from July 1, while existing policies will be taxed under the old rules for up to five years before the increase was felt.

Had the load not been shared, customers would have been in line for a 30 per cent hike in their premiums, he said.

The commission received by advisers would reduce by about 15 per cent across all policies.

For a customer with $300,000 in life cover, the changes would mean they will be paying an extra $3 per month.

Anderson said while the changes were inevitable, Sovereign was better placed than most to absorb the cost.

The challenge for all life insurance providers was to ensure that no one group was unfairly disadvantaged, he said.

"We want to take a leadership position to achieve some balance. The New Zealand market is underinsured and it would be really inappropriate to have passed the full potential burden of this onto customers," he said.

Anderson said Sovereign had planned the increases in a way which would be affordable for customers.

While consumers would face slightly higher premiums in the future, most existing customers would be protected from the immediate impact by the transitional provisions, he said.

The impact on advisers would be modest, he said.

The Investment Savings and Insurance Association chief executive Vance Arkinstall earlier said the amount a company increased premiums by would depend on the way it was structured.

Pinnacle Life said it would increase premiums by 10 per cent for new policies from July 1.

AMP said the company lifted its life insurance premiums at the end of 2008 and was comfortable with its current pricing structure.