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Legislative and regulatory framework
The insurance industry provides general and life insurance to New Zealand individuals, households and businesses. Under the Insurance (Prudential
Supervision) Act 2010, all insurers must be licensed.
The legislation is currently being phased in, with all existing insurers having to be at least provisionally licensed, and fully licensed by 7 September 2013. Some sections of the old Life Insurance Act 1908 are still in force; they cover assignment of policies, interest payable on death claims, non-forfeiture provisions and the insurance of minors.
The Reserve Bank of New Zealand is the regulator of the insurance industry.
Savings and investment products sold by insurers are classed as securities and therefore need to comply with securities legislation. This is regulated by the Financial Markets Authority (FMA).
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Financial reporting, capital and taxation
Financial reporting requirements
Financial reporting requirements are set by the New Zealand External Reporting Board (XRB). Accounting and financial reporting requirements are defined through New Zealand GAAP, in particular through the NZ
equivalent to IFRS 4 (NZ IFRS 4). All insurers are
“issuers”, as defined by the Financial Reporting Act 1993, which means they have to be fully compliant with IFRS standards.
Appendix C of NZ IFRS 4 applies to life insurers and follows the Margin on Services methodology, whereby profit is released in line with the provision of service over the life of the insurance contract. It is largely consistent with AASB 1038 in Australia. The standard also applies to health insurance contracts sold by life insurers.
Appendix D of NZ IFRS 4 applies to non-life insurers.
It is largely consistent with AASB 1023 in Australia.
Premium revenue is earned in line with the pattern of risk, and claims are reserved for on the basis of a central estimate plus a risk margin, while acquisition expenses are deferred and amortised over the life of the contract.
New Zealand is likely to adopt the new insurance accounting standard once that is issued by the IASB.
Capital regime and requirements
There is a minimum capital requirement of $5m life and
$3m non-life. Insurers must maintain a solvency margin of at least zero at all times, and three-year forecasts must indicate that this will be maintained. The definition of
“solvency margin” is the margin of Actual Solvency Capital above Minimum Solvency Capital. The Minimum Solvency Capital requirement is made up of prescribed capital charges relating to various risks:
Insurance Risk
Catastrophe Risk (for life insurance this includes pandemic risk)
Credit, Property and Equity Risk
Foreign Exchange Risk
Interest Rate Risk
Asset Concentration Risk
Reinsurance Risk.
Taxation
New Zealand insurance companies are assessed under the Income Tax Act 2007 and the Goods and Services Tax Act 1985.
Non-life Life
Company tax is based on profits, but with upfront deductibility of acquisition costs
Special tax rules exist for the taxation of investment income
GST is charged on premiums but deductible on claims
Fire Service levy
Earthquake levy.
Company tax based on a two-tier system for shareholders and policyholders.
Shareholder tax is based on premiums less claims, with upfront deductibility of acquisition costs
Policyholder tax is based on an allocation of investment income attributable to policyholders, and claims received in the hands of policyholders are generally tax free
Special tax rules exist for the taxation of investment income.
The provision of life insurance contracts represents an exempt supply for GST purposes, provided the contract places sums at risk upon death or survival. GST will apply to non-life contracts sold by life insurers.
Products and the market
Products
The general insurance sector offers a full range of risk products to New Zealand households and businesses, including personal, commercial, marine, rural, travel, and professional indemnity lines.
Insurance for natural disasters is in part met by the state-owned Earthquake Commission (EQC). The EQC only covers domestic residences which hold private insurance;
it does not provide cover for businesses. The EQC is funded by levies on insurance premiums paid to private insurers. Any claims payout is limited to the first
$100,000 plus GST (goods and services tax) of any individual claim, with any amount above that covered by the insurance company holding the policy.
Comprehensive compulsory no-fault accident insurance is provided through the government agency, the Accident Compensation Corporation.
General insurance products are distributed by brokers and agents, banks, the internet, and direct.
The life insurance sector provides term life, trauma, TPD, and disability income cover to both individuals and groups. In addition, some life insurers continue to hold large portfolios of traditional endowment and whole-of-life business which have been closed to new business.
Some life insurers also offer superannuation, retirement and investment-style products. Some also have
significant funds management businesses, including Kiwisaver (a work-based voluntary retirement savings initiative implemented by the government). New Zealand has a very small annuity market. Distribution of life products is still dominated by the brokers and aligned adviser channels. Bancassurance is continuing to grow, while the direct and online markets are in their infancy.
Overall, the insurance industry is in the mature stage of the life-cycle.
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Drivers
Performance trends are being driven by the factors affecting the general economy in New Zealand and continued economic pressure is expected.
Non-Life insurance Life insurance Claim settlement issues arising from the 2010 and 2011
Christchurch earthquakes. Property insurers have incurred substantial claims costs and the volume and complexity of evaluating claims has meant they are not being settled as quickly as the industry would like. This was a significant issue in 2011 but has had less impact in 2012 as most of the claims have been reserved already, with only the most significantly affected areas still outstanding.
General insurers have seen a strong growth in premiums in the current year, but are contending with higher reinsurance costs as a result of the earthquakes.
Historically New Zealanders have insured their homes on full replacement cost, but it is speculated that many insurers will move to a sum-insured model in the future.
This will represent a fundamental change which general insurers will need to effectively communicate to
policyholders.
Vero, State, AMI and NZI will follow AA Insurance to switch their house insurance policies to ‘sum insured’
from replacement value as a result of the Christchurch earthquakes in a big change for the industry. The move will shift the onus to understanding the cost of rebuilding from insurer to homeowner requiring homeowners to have a clear understanding of likely rebuild costs on the purchase or renewal of their policies. This change is being driven by reinsurers who want to have a clearer view of their natural disaster risk and the need to keep house insurance affordable.
(Sunday Star-Times, 9 December 2012).
The life insurance market is struggling to increase premium revenue growth. In the current economic climate, households are focusing on reducing personal debt has led to a struggle for the life insurance sector.
Limited growth is coupled with increasing competition.
Recent Financial Services Council research9 has discovered that:
New Zealanders appear to place greater value on protecting their assets than on protecting their lives, household income and their family’s future
More than 95% of homes and cars are insured, but only 57% of New Zealanders insure their lives and barely 20% have income protection insurance
60% of New Zealanders were characterised as finding personal insurance “all too hard”
Jargon used by the insurance industry and the
complexity of the products on offer often make it hard to understand exactly what is being delivered and what is value for money.
Potential barriers to entry
Must be licensed by Reserve Bank of New Zealand and meet ongoing licensing requirements
Must maintain a solvency margin at all times
Minimum capital requirement of $5m life, $3m non-life
Directors and key management must meet “fit and proper” requirements.
9 Financial Services Council Annual Review 2012
Key developments and future outlook
Key issues
Christchurch earthquakes: the affordability of insurance is a key industry issue on the back of large increases in premium costs in virtually all sectors over the last 18 months (premiums increased to offset the increase in reinsurance costs following the Christchurch events).
According to the Insurance Council, the Christchurch earthquakes have created a permanent shift in the insurance market; for example:
It is now more difficult to insure older buildings for replacement. The cost of insurance has risen dramatically and is likely to continue increasing.
Significant levels of under-insurance were exposed, particularly in the commercial sector. The main reason for this was outdated property valuations.
There is a growing concern that increases, for example to the earthquake levy, will see affordability issues arise and a potential reduction in the levels of insurance.
Funding of the Fire Service: the industry has asked the Government to reduce the cost on households by ending the Fire Service levy on insurance premiums. The Government is reviewing funding of the Fire Service and a number of recommendations have been released earlier this year. Whilst there is still a degree of consultation and review to take place initial indications are that the levy will continue to be collected through insurance premium.
Further consultation is expected over the course of 2013.10