It has released an overview of the sector which highlights the relatively low levels of coverage in this country, high commission rates and low claims rates.

New Zealand insurers were more profitable than peers in many developed OECD countries, the Reserve Bank said.

Bancassurers were the most profitable with the lowest expenses while life insurers distributing via advisers, 43% of the market, were less profitable. Those selling direct were the least profitable.

They also had high costs, driven by high commission rates, soft commissions, policy replacement activity and a lack of scale.

“High expenses have a detrimental impact on premium affordability and value for money for policyholders. Some individuals may be priced out of the life insurance market altogether,” the report said.

“They also have high costs relative to their international peers due to high commission rates and relatively high operating expenses. These characteristics may indicate poor value for money for some potential and existing policyholders as high expenses can drive up premiums.

"Additionally, high upfront commission rates and policy replacement activity, where policyholders replace an existing policy with a new one during the year, may undermine public confidence in the sector. Consequently, the level of insurance for personal risk may not cover actual financial vulnerability for some individuals in New Zealand.”

The commission ratio of New Zealand life insurers was 19%.

It said the aggregate solvency ratio for the sector had declined over recent years and was low compared to other countries’ rates.

“Some life insurers have low solvency margins over the regulatory minimum, which raises questions about their ability to comfortably meet the minimum requirements in the event of an adverse shock or a major loss event.”

New Zealand life insurers make greater use of reinsurance than their international peers, partly due to differences in product mix. Life insurers primarily reinsure to reduce the volatility of profit and transfer risk to reinsurers. Recently, there has been a greater use of reinsurance as an alternative to holding solvency capital.

It said the range of products in New Zealand was “relatively narrow”.

Life insurance penetration (the ratio of gross premiums to GDP) and density (gross premiums per capita) in New Zealand were well below the OECD average, the report said.

"These metrics indicate that the New Zealand life insurance sector is relatively small and may be partly explained by the low proportion of savings products in New Zealand and New Zealanders’ reliance on the government (ACC cover) to mitigate some risks that would otherwise be in the purview of the life insurance."

The gross and net claim ratios for insurers were also low.

“This means that a relatively small proportion of premiums are paid out as claims. New Zealand’s life insurers’ gross claim ratio is 58% (or 47% if insurers that primarily offer savings products are excluded). This is well below the OECD average of 79%.

"A low claim ratio may imply that the life insurance sector as a whole is relatively inefficient in returning money to policyholders and can indicate that insurance products are unsuitable. The life insurance conduct and culture review found evidence of certain products that provide poor value for policyholders. Some of the indicators of poor value products included low claim ratios, high rates of claims being declined and limited coverage. A low claim ratio also supports life insurers’ profitability.

"However, it is important to note that the claim ratio is an imperfect measure of the performance of life insurers as it includes claims on both risk and savings products, as well as intertemporal effects. There is a narrower range of life insurance products currently available in New Zealand, compared to other countries, which partly explains the differences in claim ratios. The claim ratio depends on the size and maturity of life insurers’ savings business, where higher claim ratios are expected for more mature markets."

Financial Services Council chief executive Richard Klipin said the report highlighted areas, such as solvency and conduct and culture, that its members were already working through with regulators.

“Conduct, culture and ensuring great consumer outcomes is paramount and good progress has been made over the past months, but the industry still has a way to go to build the trust of stakeholders and to ensure we are serving New Zealanders in a fair and transparent way.

“With close to four million insurance contracts in New Zealand and over $1.5 billion in claims paid to Kiwis in 2019 alone, we take our responsibilities seriously and expect strong scrutiny as an industry. This and other research provides valuable insight to the industry and, working with regulators and government, we are committed to building a sector that has good customer outcomes at its centre."