National Insurance sees shake-out

Press, 23 November 1988, Page 47

National Insurance sees shake-out

The insurance industry is facing an inevitable shake-out with further rationalisation and possibly even a number of liquidations in the years ahead, according to an industry overview in the annual report of the National Insurance Company. The overview, written by the company’s managing director, Mr James Boonzaier, said that with more than 40 companies servicing 3.3 million people in New Zealand the ratio of companies to people is among the highest in the developed world. “It is perhaps too easy to become an insurance company in New Zealand — requiring little more than a $500,000 bond from a bank. “Elsewhere capital and registration requirements are generally very much more stringent and companies are subject to close financial scrutiny,” the report says. “Stricter solvency standards and the appointment of an insurance commissioner may well further the interests of the consumer and the insurance industry.” The report says that New Zealand is one of the few developed countries currently experiencing a recession. It says that growth in the highly cyclical general insurance market virtually ceased in the past year and that this combined with intensified competition and reducing investment returns depressed profitability to the lowest level in years. “Crime-related claims including arson, theft and burglary are rising

at a dramatic rate, and since these represent about a quarter of overall claims, the effect on the industry is serious.” The overview says the impact of the New Zealand Government’s decision to privatise the Earthquake and War Damage Commission will no doubt depend upon the nature and timing of implementation. “An increase in costs to the consumer does, however, appear to be inevitable.” The overview says the change in the New Zealand tax regime applying to life assurance and superannuation gives real cause for concern. “Placing financial institutions on an equal footing is certainly a sound long-term policy, and is being implemented in many Western countries. “However, the sudden introduction of full tax on superannuation investment returns and effective total withdrawal of premium incentives is a drastic measure. It must have a very detrimental effect on long-term savings in the country. “With the affordability of the national superannuation scheme in question and no clear alternative in sight, it is difficult to understand why a more gradual approach to removing tax incentives (such as that introduced in Australia) was not adopted.” The overview says National Insurance has an exceptionally strong balance sheet with which to remain

competitive and fund expansion. “Our management structure has the strength and flexibility to succeed in a changing environment and our innovative direct marketing of a broadening product range continues to produce excellent growth by contrast with the industry in New Zealand. For National this is a time of great opportunity.” The overview refers to a worldwide trend toward deregulation which it says has had major effects on profitability throughout the global insurance industry. It says that in future the technology to monitor profitability cycles will be crucial to survival since companies will no longer be able to rely on several years of profitability following a period of unprofitability. “Weather patterns appear to be changing throughout the world with temperatures and water levels rising and the number of natural disasters apparently on the increase.” The life insurance industry already beleaguered by intensified competition from banks and other financial institutions as a consequence of rapid deregulation must now deal with the huge threat of A.I.D.S. “Companies are wrestling with the twin issues of avoiding antiselection at the underwriting stage and reserving adequately for rapid increase in mortality while the size and nature of the risk is still unclear.”