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The Insurance Industry Has Problems But It Is Not "Dying"

The New Zealand Herald has a piece titled "New Zealand's Life Insurance Industry is Dying" written by Tamsyn Parker. I am sorry, but I have to disagree.

While it is true that there are some significant problems, some of them are well described by the NZIER report to which Parker refers, the industry cannot be said to be 'dying.' 

The NZIER report is based on FSC data and overall is a solid description of some facts about the industry. It has not been able to lift the proportion of people insured. Most of the growth in the industry stems from a combination of rate-for-age increases and inflation indexing. Costs appear to be high and do not reduce much with scale. These are all true.

Some aspects of the report are difficult to interpret without understanding some oddities of the insurance industry. When NZIER points out that the value of net new business is much lower than the loss of existing business they describe a phenomenon which will nearly always be true of a market dominated by products with rate-for-age pricing. The method of reviewing the FSC stats identifies administration, marketing, and commission costs together as what remains after deducting claims costs. In most places in the report they carefully label this basket of costs, but the casual reader falls easily into the trap of reading 'distribution' costs as the same as 'commission' when only about half of those costs are commission, and that is only an estimate. The comparison of commission to total in-force premium is a simplification which has the effect of making an insurer with little new business look very efficient, and one with little in-force, as very inefficient.

Some parts of the industry appear to be in great health. Bancassurance has been growing rapidly, now accounting for about a third of all new sales. Direct insurance likewise, albeit off a low base. Group insurance looks flat. The number of people with private medical insurance (not part of the NZIER review, but definitely part of the wider sector) has been falling for some time - and has been grateful to just flatten out. Take a longer view and the growth has been, even in aggregate, quite remarkable:

Comparing premiums with GDP, excluding group insurance:

Item  March 2006   March 2016   Change 
 Premium in-force at the end of period $000 $1,241,445  $2,309,463  +86% 
 GDP (nominal) $million $41,286  $65,074  +57%  

Comparing products with population

 Item March 2006  March 2016  Change 
Products in-force at end of period     3,086,123      3,740,936      +21% 
Population (mean in period to June 2015) 4,160,600  4,554,700  +9.4% 

Which means that the number of policies or benefits has risen. NZIER rightly points out that there is no easy way to understand how many policies relate to actual people. It could be that many of the same people have added a benefit while many people remain uninsured. We know that is a problem from other research (such as the Massey University paper prepared for the FSC a few years ago). Look a little closer and you can see that the product mix is changing as well. The growth rate for life cover alone was a lot closer to population growth, but number of living benefits (income protection and trauma) more or less doubled over the decade. In that context the insurance industry has fewer problems than, say, dairy farming, and no one thinks that is 'dying'.

The industry has problems, but quite specific problems, definitely not a general malaise in which it is dying. Costs are too high. Grappling with a combination of 'no advice' sales, underwriting complexity, and increasing demands for the professionalization of advice from the regulator, there is plenty of work to be done.

Goodreturns has some commentary by Susan Edmunds in this Goodreturns article.

Links for reference data:

FSC Statistics 2016

ISI Statistics 2006

RBNZ Statistics 2016

Statistics NZ Historical population estimates tables.

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