Consumers complacent

PEOPLE AREN’T shopping around enough for their house, contents and car insurance – Chris Curtin, chief executive of AA Insurance is pretty clear with that message.

That may have something to do with falling value for money in some asset insurance categories like car and contents insurance.

Looking at the ‘‘value’’ of various types of insurance over the past five years, using publicly available statistics, seems to show the ratio of claims paid compared to premiums paid falling in many categories of cover.

Calling the claims to premiums ratio ‘‘value’’ may not be entirely fair, as for individual policyholders value in its true sense only crystalises when crisis strikes. But it may indicate trends in insurers’ pricing power, and arguably, the level of competition at play.

People who want to ensure they are not overpaying for their cover need to shop around.

‘‘If consumers took more control, were flexible and talked to more insurers before buying and renewing, there would be a knockon effect on competition and premiums,’’ says Curtin.

‘‘We understand that it takes time to shop around and do some careful analysis, but it can be time well spent. For example, AA Insurance’s research shows that for a typical late model vehicle you could maybe save around $400 a year on comprehensive car insurance by shopping around,’’ Curtin said.

‘‘Depending on your age, gender, where you live and the car you drive you could save half a year’s worth of premium.’’

‘‘At the moment consumers are not playing their full part in driving competition. At a time when insurance premiums are at their highest ever only about onein-eight people switch at renewal.’’

‘‘People just aren’t shopping around for the best offer each year. If they do shop around, it’s usually when their circumstances change, such as buying a new car, or moving to a new house, rather than when their policy renews.’’

So what are the trends in claims to premium ratios in the different categories of insurance, and where does competition appear fiercest?

Car insurance

Of all the types of insurance, this is the clearest example of declining value for policyholders. The industry measures the loss ratio as the ratio of claims to the net written premium (excluding GST, EQC levies and broker commission).

In 2009, it was $70.08 in every $100 of net premiums. Since then, it has been on a downward slide with the following years showing $64.17, $65.16, $63.52 and $64.88.

Those figures do not indicate much pricing pressure is at work.

The insurers argue the cost of claims has dropped as they have used their market power to hammer down on costs of things like accident repairs.

Just because an insurer pays less for crash repairs, does not mean the value of the cover has dropped to the policyholder, however.

If a car-owner had to pay for those repairs themselves, they’d still have to pay the non-insurer rate of the panel beater.

It appears lower crime, safer cars and better roading has played a part in lowering claims.

Credit insurance

The value of some kinds of insurance is dependent on the economic cycle. Credit insurance is one of those. It provides for the complete, or partial repayment of personal debt, like credit card and personal loan debt, in the case of its holder dying, being made redundant, incapacitated by an accident, or falling so sick they can’t work.

The total premiums paid by policyholders have remained fairly static over the past five years in the range of $58m-$64m a year.

Claims have jumped around significantly. In 2009, for example, when the unemployment rate was on the climb following the global financial crisis, claims on credit insurance policies totalled just under $15m.

As the unemployment rate started to come down, so did claims. In 2010 they were $11.837m. In 2011 and 2012 they were just under $10m, and in 2013 they were $10.35m. As a result, the ratio of claims paid has dropped.

Health insurance

This stands out as the best value insurance, in part because the dominant market player Southern Cross is a not-for-profit.

The premiums have risen rapidly in recent years, especially for older policyholders, thanks to a combination of higher costs of medical treatment, and an increasing number of claims.

It’s certainly provided value for the private medical fraternity, which depend on insurance claims to pay for their services, but in the last three years, the ratio of claims paid to premiums (exclusive of tax) gathered in by health insurers has fallen from 85 per cent in 2008/09 and 87 per cent in 2009/10 to 84.2 per cent, 80.1 per cent, and 79.8 per cent in the following years, figures from the Health Funds Association show.

Its chief executive Roger Styles says those ratios make health insurance the ‘‘best value’’ form of insurance on the market.

Twenty years ago, health policies involved much more ‘‘dollar-swapping’’ with people making claims to cover prescription charges, said Styles.

These days, people generally have policies covering surgical, specialist and hospital cover, a trend driven by rising premiums.

That means fewer individual claims per policyholder, with the claims now being for the big ticket items like hip operations.

Over the years, Styles said, state waiting periods had lengthened, increasing the importance and value of medical insurance.

Life insurance

The first quarter of 2014 saw New Zealand pass a milestone. For the first time, people spent more than $1 billion on individual term life policy premiums, cover that pays out a lump sum in the event of the insured person’s death, or earlier, if they are diagnosed with a terminal illness.

It’s the most basic form of personal insurance, and is designed to pay a lump sum to clear debt, and establish a firm asset platform for a family who lose a breadwinner.

The payout rates for life insurance as a proportion of the premiums paid to insurers have not moved much in five years, according to a crunch of the Financial Services Council industry statistics.

There have been price rises thanks to a life insurance tax overhaul, which saw insurers pay more tax, and shareholders demand higher premiums be charged to policyholders.

But competition in the industry has kept price inflation down, according to Ed Saul at online insurer Pinnacle Life.

Five years ago, Pinnacle Life’s aggressive pricing showed around a 20 per cent discount to big name insurers. That’s narrowed to about 8 per cent, which Saul puts down to the competition Pinnacle Life has brought to the sector.

Income protection

Claims on income protection go up with the unemployment figures. That’s one of the cynical truisms often quoted in the insurance world.

When jobs are harder to get, injuries and illnesses linger for longer. High unemployment figures may be keeping claims high, but insurers have also had to fight to keep loss ratios down, in part thanks to the mental health claims, which have been a big driver behind rising costs.

Trauma cover

This is a kind of cover that pays out a lump sum when someone is diagnosed with any of a set list of critical illnesses, including heart attacks and strokes.

The lumps sums can be used by policyholders to pay for anything from replacing lost earnings, to buying equipment like a wheelchair, to paying for medical treatment.

The ratio of payouts in each of the past 21 quarters shows an average of $11 of claims paid per $100 of annual premiums (including GST) in place at the start of the quarter.

In three of the last four quarters, claims paid were below the 21-month average, but only just.

Funeral Cover

The funeral industry has seen a bit of a dearth of death in recent years, with people living longer.

The public’s mortality gain is funeral directors’ loss, but the competition to sell funeral insurance, which pays out an agreed sum to cover the insured’s final sendoff, seems to have driven good value.

Taking claims in the first quarter of each of the last five years, including 2014, annualising them, and comparing them to the combined annual premiums of funeral cover in place at the start of the quarter shows a clear trend of payouts rising as a proportion of annual premiums from just under $15 of claims paid per $100 to $21.30.

House and contents

This is the blurriest of the insurances to compare. The price has gone up dramatically, but much of that is the cost of earthquake cover.

Handily, the Insurance Council splits out the earthquake cover, leaving the non-earthquake house and contents cover people buy to protect them against the costs of things like fire and burglaries.

Claims paid per $100 of gross written premium for non-natural disaster cover – ie, the amount paid by policyholders – was $67.06 in the year to the end of September 2009.

In the following years it went down to $62.49, $61.56, $61.35, and $61.55.

The switch from total replacement cover to sum assured – effectively the industry putting the risk of getting the sum assured wrong onto the homeowners because it got it so wrong before the Christchurch earthquakes – makes the price ‘‘inflation’’ quite hard to read.

Each dollar of premium in 2009 was spent buying an open-ended form of cover, compared to a capped form of cover after sum assured was introduced last year.

But allowing for that shift, Statistics New Zealand, said from the end of the first quarter of 2009 to the end of the first quarter of 2014, the price of dwelling insurance rose 142.7 per cent. Contents insurance prices rose 33 per cent over that time.