The New Zealand Institute for Economic Research has presented a report analysing the New Zealand life insurance market structure.

The number of people with life insurance has been static over the past three years and annual premium income growth has come only from the increasing cost of existing customers’ policies, it said.

“New business has not be sufficient to offset the loss of premium income from terminating policies since at least 2012.”

The estimated average premium for new business being written is 20% to 30% lower than that of existing policies.

NZIER said policy acquisition and maintenance costs were high for insurers, at more than 40% of annual premium income. The cost was split between commissions paid to salespeople and the company’s own costs.

Insurance company premium revenue averaged $1.948 billion over the past three years, with claims averaging $1.334 billion.

Companies spend an average $864 million a year on acquiring or maintaining policies, of which $441 million is paid in commissions.

The report said the lack of growth in the market and the scale of distribution costs gave insurers an incentive to look at changing their distribution models.

Insurers’ policy acquisition costs can be up to 100 percentage points higher for insurers using advisers than for those who do not.

“Strategies to lower distribution costs need to consider the efficiency of both the independent sales teams and company distribution channels.”

The report said a drop in commission of 50% could cut premiums by up to 16%. But it could not say how much of an effect that would have on customers’ willingness to take out insurance.

“We have not been able to identify any independent estimates of the price sensitivity of policy-holders to increases in premiums. This makes it difficult to answer the question of how much the scope of the market might expand if premium rates per cover were lowered due to reduction in the costs of distribution and how long those gains would persist in the face of annual adjustments in premium cost."

Asteron, OnePath and Fidelity Life had a heavier reliance on commission payments to acquire new policies and were paying slightly above market average levels of commission to maintain business, the report said. Sovereign was at about the middle of the market.

Partners Life was not included in the analysis because it was less than 3% of average premium revenue between 2012 and 2014 and because of its reliance on reinsurance.

“Policy acquisition and maintenance costs consumer a substantial part of premium revenue for all insurance companies but vary widely across companies and do not appear to be subject to economies of scale. For many companies less than half of policy acquisition and maintenance costs are commission payments, suggesting that strategies to lower distribution costs need to consider the efficiency of both the commission and company distribution channels," the report said.

"The difference between company levels and commission payments as a share of premiums and also the balance between commission to acquire and commission to maintain policies suggests opportunities to change commission structure."