Fitch Ratings says growth of the New Zealand life insurance industry is likely to be hampered in the short term while insurers address the issues raised by regulators about their conduct.
The ratings agency is responding to a report published earlier this week by the Financial Markets Authority and the Reserve Bank which slammed the life insurance industry for being vulnerable to misconduct, ignoring whether its products are suitable for customers and too slow to make changes.
“Regulators concluded … that life insurers were not doing enough to achieve good outcomes for customers and highlighted weaknesses in the approach of insurers to identifying, managing and remediating conduct risks and issues,” Fitch says.
“We expect implementation of the regulators’ recommendations to address these issues to improve insurers’ business profiles over the longer term,” it says.
“Fitch believes insurers may revisit pricing and design of certain life products, which could inhibit premium growth, at least initially. Regulators have identified the presence of certain life products that are of poor value to consumers as the products have extremely low loss ratios and high rates of claims being declined.”
The regulators’ report says there are about four million life insurance policies in force with annual premiums totalling $2.57 billion but that upfront commissions on new policies range from 170-210 percent of the first year’s premiums.
It shows commissions to salespeople in New Zealand amount to about 25 percent of total premiums paid each year, far higher than in other countries – Mexico and Hungary are the next highest at about 15 percent with Australia at about 12 percent and the United States about 9 percent.
“Regulators called for changes to incentive structures and removal of incentives linked to sales measures, which create risks of sales being prioritised over customer outcomes,” Fitch says.
“We believe changes to distribution channels could temporarily curb premium growth but may ensure sustainability of earnings over the longer term,” it says.
And implementing the recommendations would strengthen insurers’ competitive positioning and business risk profiles over the longer term, as well as improve the reputation of the industry.