Incentives for the right behaviour, and more daily news

Victoria University’s Economics of Disasters and Climate Change Chair Ilan Noy made a few suggestions when addressing Insurance Council members. To begin Noy pointed out that insurers could incentivize more clients to take out policies by introducing products that offer a greater scope of cover.

“Victoria University of Wellington’s Economics of Disasters and Climate Change Chair Ilan Noy said that, at the moment, insurance doesn’t realistically incentivise risk reduction as much as it needs to. He says part of this needs to happen through lobbying the government to make certain changes, but also potentially providing new products with an increased scope of cover.”

A common issue faced by clients during the lockdown was confusion over their cover limits. To minimize confusion, Noy encouraged insurers to either introduce new products or adjust current risk limits.

“Noy says insurance can also incentivise customers to directly reduce their own risk, and its other crucial role is improving and speeding up recovery from an event. He says a major problem during the COVID-19 pandemic has been confusion over limits of cover, and this may need to be remedied with new products or adjusted risk limits.” Click here to read more

The question of directly incentivising behaviour that reduces risk is always vexed. There are two main levers for providing feedback on risks that are controversial: the first is the willingness to offer cover or not, the second is the price for cover. These are strong, market-based, mechanisms which are employed all the time. A I know of a couple who first took proper control of their adult onset diabetes when they were deferred for cover by an insurer - it suddenly became real for them. I also know that insurers are routinely criticised for not offering cover to people they deem uninsurable as this is seen as 'unfair'. I also know that when insurers charge more for certain risks - for example, housing in coastal districts and earthquake zones - they are again criticsed heavily for a lack of 'fairness'. In a country where we have made desperately slow progress on climate change this price signal should be celebrated. 

The link between product design and incentives also reminded us to link to the question of IP pricing and product design - see below. 

Price is an incentive. In many activities, it is time to pay attention to it.

In other news:

Fidelity Life: two roles in the design team are being advertised  

FMA: Head of Banking/Insurance role being advertised

FMA: FMA publishes derivatives issuer Sector Risk Assessment

Should we be warning consumers about IP prices?


But are they just little lies?

Stuff has this great article by Nile Bijoux about people being willing to lie to their insurer. Those are general insurers, but it seems a stretch to believe that the same people happy to lie on their car insurance application would suddenly become gravely honest when filling in a life application. Perhaps people don't really think of lying to their insurer as a big deal - so many do it. This is borne out in other markets too - in the UK it is estimated that it adds the equivalent of about $60 a year to every insurance policy. If that margin were applied to the 2.5 million life, trauma, IP, and TPD, policies in New Zealand it would mean about $150 million in fraud costs each year. 


Advisers minimise chances of poor claim outcomes

Tower CEO Richard Harding detailed that research showed confidence in the industry is at an all-time low. Harding revealed that although general insurers often claim 99.9 per cent of claims are paid, instead approximately one in five claims were withdrawn by policyholders. Although there are many reasons a policyholder could withdraw a claim, including pressure from the insurer, fear, dishonesty and non-disclosure, having an adviser reduces chances of withdrawals. Clients with advisers are better informed and make fewer pointless claims. In effect, his comments were a big endorsement of having an adviser involved. By implication, however, they raise questions about direct insurance. Click here to read more


APRA on general insurance: call for more expenditure on mitigation and resilience

The AFR reports that APRA is so concerned about the crisis in insurance coverage in northern parts of Australia that it wants a new approach to the market: 

"All levels of government must act to save swathes of northern Australia from becoming uninsurable as a result of a climate change-related increase in natural disasters, the prudential regulator has warned. The Australian Prudential Regulation Authority said action should include a major shift of emphasis from disaster recovery to disaster resiliance and mitigation, pointing out the vast majority of disaster funding goes to "clean-up and recovery", with only 3 per cent on prevention and mitigation."

The piece by James Fernyhough is well worth a read, and not just for general insurers. It is also indicative of a wider interest by regulators in spotting medium to longer term issues and creating impetus for solutions where competitive pressure makes it hard for individual participants to act. That sounds a lot like some of the problems the New Zealand life insurance industry is grappling with. 


ANZIIF Award finalists announced

The finalists for the ANZIIF New Zealand Insurance Industry Awards have been announced. The awards are being held on the 27th of November at the Cordis Hotel in Auckland. 

The finalists for the 2019 New Zealand Insurance Industry Awards are:

  • Life Insurance Company of the Year - Asteron Life and Fidelity Life
  • Innovation of the Year - AA Insurance, Cove, Cover-More Travel Insurance, and Initio
  • Service Provider to the Insurance Industry - CoreLogic NZ, IVAA Jewellery Claims Management, JB Hi-Fi, Smith & Smith, and Verisk
  • Large Broking Company of the Year - Insurance Advisernet New Zealand and Rothbury Insurance Brokers
  • Underwriting Agency of the Year - Delta Insurance and Underwriting Agencies New Zealand 
  • Direct General Insurance Company of the Year - AA Insurance, FMG, and Tower Insurance
  • Professional Services Firm of the Year - Crawford and Company NZ, DLA Piper, Duncan Cotterill, Finity Consulting, RMS, Sedgwick New Zealand, and Wotton + Kearney
  • Excellence in Workplace Diversity and Inclusion - DLA Piper, IAG NZ, Suncorp New Zealand, and Zurich New Zealand 

General insurance: Tower set to reduce disclosure obligations

Tower is set to minimise disclosure obligations placed on customers according this piece by Susan Edmunds in Stuff.co.nz. Richard Harding, Chief Executive, has said that Tower has decided to remove the wider duty of disclosure from its sales and claims processes before the end of 2019. Crossley Gates, insurance law specialist, has stated that Tower's move was likely to be required within the insurance industry. Click here to read more.

 


General Insurance: RBNZ looks long-term and asks insurers about climate risks

The RBNZ has revealed plans to talk with insurers about climate risks. That is a good idea. Commencing a conversation about climate risks may enable pricing signals to more smoothly contribute to changes in policy necessary to avert climate change, and manage its effects. Dealing with this in a planned way helps avoid consumers and companies getting shocked: like suddenly having flood coverage removed for properties in low-lying areas.


Contrasting Royal Commission fall-out

In Australia ASIC has called for general insurance commissions to be banned. I think this is likely to have unintended consequences. It might well kill off sales of general insurance at car-yards and over the phone, where most of the problems have been discovered. But it may also damage the business model of third-party general insurance advisers that have been the only real advocates for consumers, and quality, in a market dominated by just a couple of large companies. 

Meanwhile, back in New Zealand, the New Zealand Herald wondered whether the backlash against banks might damage the offer of services to New Zealanders. In a piece which brought the first hint of balance from mainstream media to the debate about about conduct regulation. Link.

My worry is that a financial services sector where the only advice you could get is fee-only, would leave the mass market without access to the ability to compare and consider higher quality alternatives without having to find a couple of thousand dollars. 


The value of the price signal

Grant Robertson appears to be worried that insurers are sending price signals about earthquake zones and flood risks, but I think he has that all wrong: properly pricing these risks encourages development in other places, reduces the cost to taxpayers in emergencies, and also helps people make better choices to mitigate climate change. Prices in general, and insurance in particular have a role to play in changing behaviour. In truth, I think this government knows that - otherwise they wouldn't tax cigarettes and petrol so much.