Market movements: what changes the size of the market for insurance?

The market for insurance is affected by three main factors: 

  • The size of the eligible population 
  • Their need for insurance
  • Their ability to pay for it

Rob Dowler, our preferred compliance consultant for large projects, suggested that I expand on the role that immigration plays in the growth in our market and whether that places constraints on whether people can buy insurance. 

Some additional information about how the size of the eligible population changes can help to put this into the right context. Showing data from 2018 to illustrate how a more 'normal' year works, accepting that 2020 is far from normal and there has been a sharp rise in both long-term departures and long-term arrivals, and a sharp decline in short-term departures and arrivals.

New working age residents added about 44,000 people, plus there were about 62,000 children who reached working age. This addition of just over 100,000 was somewhat off-set by 44,000 people who reached retirement age and about 8,000 people who died during working life. These movements exclude those people on student or short-term working visas. Although a number of students eventually become permanent residents, they are only counted when they achieve that status. 

We have tended to assume that demand for insurance is constant on a per person basis. Of course, it isn't. Usually debt increases the demand for cover, but not all debt is equal. Household debt is usually insured, consumer credit debt often isn't - so as home ownership rates have dropped due to the high cost of housing, there has been some hit to demand. But this is a very small reduction in demand compared to the size of the underinsurance gap - which we estimate to be about a million people who are in-work. 

The ability to pay for cover receives only modest attention, usually as we consider the cost of cover relative to age. It will receive additional attention as the economic crisis associated with the COVID-19 pandemic plays out in New Zealand. Unemployment is forecast to rise from a little over 4% to about 10% under even the best case scenario. We can expect to see a reduction in average household income for the current quarter and very slow real wage increases in the next couple of years. Limiting the ability of New Zealander's to pay for cover will cause an increase in lapse rates. The interaction of the high cost of housing and lower wage growth will constrain a proportion of budgets. 

 


AMP sale gets the green light, and more daily news

After spending the past 18 months reviewing the sale proposal, the Reserve Bank announced that they have approved the sale of AMP Life to Resolution Life. Customers with existing policies with AMP Life will be unaffected by the transaction.

“The Reserve Bank has approved the proposed sale of AMP Life to Resolution Life, in a revised arrangement that is subject to a number of conditions imposed to protect policyholders.

The Reserve Bank has been reviewing the proposed transaction and consulting with the parties involved over the past 18 months to ensure the deal met our requirements, Deputy Governor and General Manager for Financial Stability Geoff Bascand says.”

For the sale to go ahead a Trust was established. This is to ensure objectives are met, industry dynamics are positive and that there is insolvency protection. Additionally, the Trust is set to ensure localisation. Capital and assets will be held in New Zealand and Resolution Life New Zealand (RLNZ) will be established.

“A bespoke trust model has been established that ensures supervisory objectives are better met, future industry dynamics are generally more positive, and there is additional protection in the event of insolvency - one of the key risk considerations that we have been seeking to mitigate,” Mr Bascand says.

The Trust is required to hold capital and assets in New Zealand that help provide long-term security for policyholder benefits or investments, where relevant. The Trust will be under the management and scrutiny of relevant officers in New Zealand, who have appropriate influence and authority in respect of the New Zealand operations, for the purpose of securing equity across all policyholders.

In addition, the model will see the establishment of a new, locally incorporated insurer Resolution Life New Zealand (RLNZ). The RLNZ board will have a majority of New Zealand resident, independent directors. RLNZ will act as Trustee to the Trust and will effectively manage the assets held in the Trust.”

In other news:

Kepa: Four Adviser Resource Centre Services were available to Kepa Members for free July – September

FSC Connect webinar - Customers, complaints and claims - what have we learnt from COVID-19?

FSC webinar: Compliance with Financial Advisers Act between now and March 31 2020

FSC webinar: Preparing contracts with authorised bodies, advisers, contractors and other staff or suppliers


Cancer diagnosis concerns

About a five minute read, this article covering concerns about catching up on delayed cancer diagnosis caused by the lock-down is well worth the read. I expect that we will not know the full impact (or which of the views in the article is more correct) for some time - possibly years. It is worth considering that the options were grim - without a strong response to COVID-19 then many people with cancer, who are immune compromised, would have died from COVID-19. The choice made may well have been the best possible choice, which still doesn't make it any easier for people concerned about the impact on their cancer prognosis of a delayed diagnosis. 


Lack of market maturity insulates insurers in the COVID-19 crisis

The the market for insurance has grown significantly in recent years. Chatswood defines the market as people with both the money, need, and health sufficient to buy insurance coverage. A rough proxy for this is the number of people in work between the ages of 16 and 65. Analysing the 2018 to 2019 year we found that when allowing for people entering and leaving the market the number of eligible people had grown by over 50,000 (up 1.4%) and GDP per capita had grown by 1.3%. This reflects the situation applicable for most of the last five years – a net increase in eligible people of around 50,000 per year. Giving us a number of about 2.6m people employed in June last year. That will take a big hit this year, but we also estimate that there are about a million people who have no cover, and probably about another million (based on Massey University research and other industry sources) who have less cover than they need. That presents us with a big cushion: as the size of the unmet opportunity is large compared to the size of the expected unemployment and income hit to come in the year. In effect, underinsurance, an industry weakness, dilutes the effect of the economic impact on the sector, provided we are prepared to see it as an opportunity, not as a fixed and immovable problem. 


Age and population standardised mortality data for 2020 compared to 2019

Following the article by Farah Hancock we had our new data specialist Ed Foster take a look at mortality data. They standardised the mortality rate per capita and also for age and gender demographics. By those calculations New Zealand experienced 116 fewer deaths than would be expected. Within the context of a year in which we would normally see about 30,000 deaths, this is a very small number. But what it show is a continuing absence of excess mortality seen in other markets.

Cause of death is not officially released until 6 months after the event, but we do know for sure that there have been fewer road and work related deaths - this may go some way in explaining the gap. Also, we know that rates of 'flu and 'flu-like illnesses have dropped due to the recent lock-down - and these cause some deaths too, and that number will be much lower. There is still plenty of bad news to wash through the economic system, and hit people's lives: as headlines about redundancies show. There are also the consequences of deferred treatment to examine. We shall be reporting on this in more detail in each of the next two or three quarterly life and health sector reports, as there is still more to be learned. 

We are happy to share data tables if you would like to take a look. 


How to participate in the select committee proceedings on COFI

There have been a number of changes made to the way select committees are conducted. The changes are as follows. To comply with Alert Level 2 restrictions, public attendance of committee hearings will not be permitted. Those that wish to make submissions will need to do so via video or telephone. This applies to witnesses as well. If a member of the public wishes to be physically present, they must first seek approval from the Speaker of the House. Hearings that would have been normally been opened to the public can be views on the Parliament website and committee Facebook pages. Those that attend the select committees will need to practice social distancing. Some committees meetings can be held remotely.

Select committees Open to the public:

10 June 2020

9:00am - 11:00am: Inquiry into the operation of the COVID-19 Public Health Response Act 2020

11:20am - 11:50am: 2020/21 Estimates for Vote Pike River Re-entry

1:00pm - 5:00pm: Financial Markets (Conduct of Institutions) Amendment Bill

9:00am -TBC: Local Government (Rating Whenua Māori) Bill

Click here to find out more

Watching committee meetings: 

Open for submission:

Inquiry into the operation of the COVID-19 Public Health Response Act 2020

Overseas Investment Amendment Bill (No 3)

Select-committee-c19.E0SPFA


CoFI submissions available online

Submissions on the Financial Markets (Conduct of Institutions) Amendment Bill have been released on the Parliamentary website. Available via weblink at https://www.parliament.nz/en/pb/bills-and-laws/bills-proposed-laws/document/BILL_93443/tab/submissionsandadvice?Criteria.PageNumber=1

The release of the submissions was highlighted for us in the Investment News e-mail received recently, with the specific COFI story available at https://investmentnews.co.nz/investment-news/amp-finds-cofi-hard-to-swallow-industry-calls-for-sweeteners/

Noting that there are 53 submissions, I am, of course, glad to see the quote from one of our preferred compliance consultants (Rob Dowler) who had their submission selected and included in the Investment News article.

I encourage readers to consider the article. In particular the central question of having different principles for each participant, and the limited range of initial participants. Contrast that with the suggestions for a single set of requirements for fair treatment, and extending these to a wider range of companies. 

As submissions are supported by the exploration at Select Committee hearing next week it will be interesting to hear if the definitions of incentives may come in for some discussion. Regular readers will know that we consider the definition to be too vague for distributors to have long-term confidence in the approach to remuneration - discouraging investment and delaying a shift to more spread commission models preferred in Australia.

 


DAILY NEWS: Increased interest in digital insurance and more

Consumer behaviour is often fluid. Trends, word of mouth as well as personal experiences play a part in changing decision-making processes and purchasing habits. Similar to other purchasing behaviours, the way people are choosing to purchase insurance is changing. There is an upward trend of people relying on their own research and not seeking advice from financial advisers. Similarly, there is an increased interest in digital insurance providers.  

"Consumers of all ages are adopting a “millennial mindset,” according to Capgemini and Efma’s World Insurance Report 2020. This means that consumers are increasingly trusting their own research to source and purchase insurance products themselves. Customers of all ages are also increasingly turning to digital channels in the face of the COVID-19 pandemic, the report found.

 

“Digital adoption is no longer a function of age; for those with access to the web and social media, researching and directly procuring insurance online has become mainstream across all generations,” Capgemini said.

 

To remain relevant, insurers must shape their existing products to meet evolving customer needs and preferences, the report said."

Furthermore, it is reported that:

“The COVID-19 lockdown will further fuel this trend as consumers are forced to use digital channels for day-to-day transactions, irrespective of age or tech know-how,” Capgemini said. 

In other news:

Advisers haven't done enough to digitise their offering - expert

Air pollution dropped dramatically during lockdown

FSC webinar: Introducing the financial resilience index

FSC webinar: A global response to COVID-19

FSC: Spotlight on Insurance


Advice Logic

It was great fun to be a guest of Partners Life at their online mini-conference. Kris Ballantyne, GM Marketing and Product, and Tim von Dadelszen, GM Digital and Innovation to talk about advice logic: the science behind giving advice, why process is important, and evidence-based concepts for setting sums insured. Partners Life has published the session, which you can view here: 

https://player.vimeo.com/video/415385322 

Advicelogic image 2020-05-09 173550

Working on the content for this session included talking with advisers who are passionate about giving good advice in a way that has rigour and a basis that can stand scrutiny. I particularly appreciate the input and challenges from Royden Shotter, Anand Srinivasan, and Jeremy Bernstein, although there are many more that routinely contribute to the subject.