Life insurers slammed
The Reserve Bank has stepped up its criticism of the life insurance industry, questioning whether policy holders are getting value for money and some insurers’ ability to pay out in crisis.
Life insurance is usually designed to ensure families can maintain their standards of living if a breadwinner dies.
It is often portrayed as a responsible investment, particularly for people on middle incomes.
But the Reserve Bank indicated policies were expensive and is voicing doubts that some insurers are sufficiently solvent to ‘‘cope in the event of a major crisis’’.
‘‘New Zealand life insurers are more profitable than their peers in many developed OECD countries,’’ analyst Jinny Leong said in an article published in a Reserve Bank bulletin.
That was reflected in insurers earning a 16.2 per cent return on equity, versus the OECD median of 12.9 per cent.
Insurers paid out 58 per cent of the premiums they received in claims, with sales commissions – including those paid to independent financial advisers – eating up 19 per cent of premiums, she said. Other costs appeared relatively high, perhaps due to a lack of scale, she said.
‘‘The [New Zealand] life insurance sector appears to be relatively inefficient,’’ Leong said.
Despite the high profits, low and declining solvency ratios raised ‘‘questions about insurers’ ability to comfortably meet the minimum requirements in the event of an adverse shock or a major loss event’’, she said.
‘‘Some life insurers have low solvency margins over the regulatory minimum.’’
Policy holders have about $8 billion tied up in life insurance but coverage is still relatively uncommon in New Zealand.
That might reflect the fact that people had decided to instead rely on ACC for some types of injury or that people were being ‘‘priced out of the market’’, Leong said.
It is not the Reserve Bank’s first criticism of the insurance sector which governor Adrian Orr has signalled will be a key priority this year, after it last year finalised new rules to improve the capital backing of the major banks.
A review in 2018 found ‘‘extensive weaknesses in life insurers’ systems and controls, with weak governance’’ and ‘‘a lack of focus on good customer outcomes’’.