The issues paper, which Deloitte said was expanding on observations made in a January bulletin from the Reserve Bank, was commissioned by Partners Life.

That bulletin, an overview of the life insurance sector in New Zealand, said local insurers were more profitable than their international peers, with high costs, high commission rates and more use of reinsurance.

But the Deloitte report said there were challenges in comparing insurance markets in different countries.

The paper was put together by a team including actuarial, insurance and economics specialists across the New Zealand and Australia Deloitte firms.

“Our intention is that the paper will encourage further discussion amongst the life insurance community, particularly in light of the upcoming review of the Solvency Standard,” says Lee-Ann du Toit, Deloitte New Zealand actuarial and insurance services partner.

“The New Zealand life insurance industry is unique for a variety of reasons when compared to its overseas counterparts. For instance, existing alongside ACC, KiwiSaver and NZ Super, our life insurance offerings have been shaped by the needs of a local population that is already confident in an existing level of support from government.

“It is, therefore, difficult to use high-level metrics as a means of comparison, as these may be distorted by the different characteristics between jurisdictions.”

One of the things that made New Zealand’s commission payments seem high was that countries had different methods of distribution.

“A significant portion of life insurance in Australia is distributed through mandated default insurance under group schemes attached to superannuation,” the report said.

“The dominance of adviser distribution and a much smaller proportion of group schemes in New Zealand therefore naturally leads to a higher commission ratio in whole-of-sector comparisons. The distribution channel can distort the commission ratio which can lead to incorrect conclusions around relative efficiency.

“There have been suggestions in New Zealand that commission provides the wrong incentives and therefore should be banned. However, this assumes an appetite for consumers to pay directly for advice and opens the potential for many experienced advisers to leave the market.”

Banning commission could significantly reduce access to insurance, the report said.

Only about 7% of New Zealand insurance was sold directly and 29% as bancassurance.

Those products were simpler and insured lower sums than products sold through the adviser channel.

Advisers were responsible for the sale of about two-thirds of new policies.

The insurer's commission covered costs such as finding the consumers who needed insurance advice, fact-finding, a needs analysis, providing advice, selecting a provider, making the application and helping through the underwriting process – as well as ongoing advice.

“It is difficult to draw the conclusion that high commission ratios indicate a less efficient insurance sector without considering the dominant distribution channel of the local market driven by the local customer.

“For example, a relevant comparison is with the Australian life insurance sector, which exhibits a product mix most consistent with that observed in New Zealand. However, a significant portion of life insurance in Australia is distributed through mandated default insurance under group schemes attached to superannuation (where there is no commission payable).

“The dominance of adviser distribution and a much smaller proportion of group schemes in New Zealand therefore naturally lead to a higher commission ratio in whole-of-sector comparisons.”

Comparing claims ratios was also problematic, because life insurance markets dominated by risk-only products tended to have lower claims ratios than those with savings products.

“The RBNZ Bulletin notes that New Zealand life insurers’ aggregate gross claims ratio is 58%, compared to the OECD average of 79%. It should be noted that in New Zealand, the traditional books of business are in run-off and have been closed to new business for a number of years.

“These traditional products are structured such that they include both a savings and insurance component, principally with a level premium, with the intention of ‘repaying’ any accumulated savings back to the policyholder in the future reflected as surrender or maturity payments.

“Over time, this savings component will increase in value relative to the annual premium. Given this, the gross claims ratio is likely to continually increase over time ... In the European market, these types of products account for approximately 70% of gross written premium, so one would expect that the gross claims ratio would be higher than in New Zealand, which primarily sells yearly renewable term (YRT) products.”

The report's authors said what was a “low” claims ratio was a matter of opinion.

“Life insurers need a margin in premiums to cover the risk associated with the uncertainty in the timing and size of claims. A gross loss ratio of close to 100% would not be reasonable based on the products in the New Zealand market as it indicates a life insurer is not sustainable. In the long run, an unprofitable insurer is worse for New Zealand than one that makes an appropriate risk-adjusted return.”

New Zealand's market was small, which would drive up expenses. “As a result, even if fixed costs were consistent across other countries, the number of policies supporting these costs is significantly less. That is, there is a lack of scale in New Zealand that exists in overseas markets.”

In May, the Reserve Bank took another swipe at insurers in its Financial Stability Report, pointing to solvency concerns. It had already suggested a higher solvency standard, requiring them to hold more capital.

The report urged caution there, too.

“The local capital framework, the interplay with local accounting standards and the capital strategy of local insurers all play a part in shaping a metric such as the Solvency Ratio. As a result, an unadjusted Solvency Ratio cannot be applied as an indicator of relative financial stability to overseas insurers.

“With the upcoming review of the current Solvency Standard, considerations for new levels of capital, especially for life insurers, should be driven by actuarial findings and detailed study of the current market. In particular, given the current Solvency Standard for Life [Insurance Business] is calibrated to the same probability of sufficiency as the new banking requirements, the implication may be that current levels are already sufficient for a stable financial services sector. Or, is there an argument that the life insurance industry needs to be more robust than the banking sector?

“A view on the adequacy of current levels needs to be taken, not based on comparisons with overseas markets but based on the needs of the New Zealand market.

“A balance must be struck between providing stability and confidence in the sector without imposing a strain on the industry through unnecessarily high capital requirements, discouraging investment in growth and innovation.

“The use of additional reinsurance could support this balance. Although reinsurance does result in a reduction in capital requirements, the merits of transferring a greater proportion of risk to a global partner (rather than additional capital holdings) needs to be considered.

“The key is identifying the best mix of capital holdings and reinsurance for a more diversified approach to risk management, allowing New Zealand companies to take advantage of the size and scale of global reinsurers whilst easing the capital strain locally, to potentially free up capital for further investment into the local market.”