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Competition dents insurance profits

By Rob Hosking

Friday 28th November 2003

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The first risk evaluation of the New Zealand insurance market has painted an alarming picture of an industry in the grips of a margin squeeze.

Australian-based Harvest Partners carried out the survey of 12 New Zealand insurance companies and the resulting report says some hard decisions will have to be made.

There has been too much price competition in the industry, Harvest partner Peter Ramjan says.

The report says "the writing is on the wall" for profitability in the disability income and trauma group of products.

There are signs the industry has already begun adjusting premiums in this area.

More than two-thirds of the 12 companies have lifted their risk product premiums over the past year.

A clearer indication of the trend comes in the difference between the average premium of existing business and the average premium of new business.

In 1999 the gap was only about $100: by last year it had grown to about $400.

The survey interviewed not only senior executives in the 12 companies but also managers in the claims, actuarial, product and underwriting areas.

A large number confirmed they are not meeting their profit criteria ­ 64% in the case of disability income, 32% in trauma insurance.

Broken down by segment, the senior executives tended to be more optimistic than other staff.

That disparity is a cause for concern, Investment savings and Insurance Association chief executive Vance Arkinstall says.

"It does rather highlight a difference in expectations between the shop floor and senior management."

The actuaries were the most pessimistic ­ 45% expected a decrease in profitability.

Again, disability income is the most problematic problem areas.

Managers were asked not only about their own firm but also how they viewed prospects for their main competitors, and the whole industry.

Overall, managers tended to believe their main competitors are performing better than the industry as a whole.

"Hard decisions need to be made ... for profitability to be restored in disability income and trauma in particular."

"For some companies the response to these challenges is a matter of survival," the report concludes.

The main causes for lack of profitability are too low a price, the high cost of distribution, and too wide definitions.

Nearly 40% of the firms have changed definitions over the past year, and Mr Ramjan says that more will have to do so.

Tellingly, most senior managers believe there will be a major market rationalisation over the next five years, with the majority of those surveyed saying there will be only six to 10 firms operating in New Zealand by 2008.

The study comes just as the government is undertaking a review of the whole insurance law area.

The Life Insurance Act was passed in 1908 and the industry has been agitating for some years to have it reviewed as it is so outdated ­ "an embarrassment" is how the ISI describes the law.

For example, it was written time when most insurance companies were mutual societies, whereas few now are.

The review, being carried out by the Law Commission, was initially focused on life insurance law but the terms of reference were broadened to consider "implications for the regulation of other insurers and insurance products."

Specifically on the area of life insurance, the government's briefing papers say New Zealand is dominated by Australian insurers.

Australia has a system of prudential supervision which New Zealand does not share but that is "not necessarily a problem," according to one briefing note to Commerce Minister Lianne Dalziel.

"A key concern ... in regulating insurance in New Zealand is that it should co-ordinate well with overseas regulation, filling any gaps but not creating dual regulation that would increase compliance costs but give no real benefit for consumers."

The ISI has argued that the industry should not be subject to special legislation but should be subject to the provisions of the Companies Act relating to directors' responsibilities and reporting.

A further concern arising from the extensive Australian ownership of the industry is similar to that recently flagged in the banking sector: in the event of collapse Australian policyholders would have an advantage over New Zealand policyholders.

Even if the New Zealand operation is a separate company, the parent firm could have arranged matters so the subsidiary has more than its fair share of liabilities and less than its fair share of assets.

"This is very easy to do," a report to Ms Dalziel concludes.

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