New tax rules on life policies may force 25% lift in premiums; commission cuts

By John Grant The Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill passed its third reading and is likely to create further changes for the NZ Life industry from July 2010, including the potential for a 25% increase in premiums because of the loss of a tax advantage. The changes may also force life insurers to slash commission for agents. Life companies are already having to get to grips with new adviser regulation, poor public perception and now a closure of a tax advantage that dates back to the start of time. This new law will lead to further reform in a rapidly changing industry. Effectively the life industry taxation was modelled on a time, many years ago, when companies were largely owned by the policyholders (mutual societies) and most policies sold were Whole of Life and Endowment. This is no longer the case. Today companies are generally owned by shareholders who naturally want a return on their investment, and policies have moved from investment participating to straight term life cover. The tax treatment today provides an advantage that has been seen as unfair and in need of change. The proposed bill will, effective 1 July 2010, change the way policies are taxed and therefore force companies to either lift premiums (by up to 25%) or find equivalent savings in operational costs. The proposed legislation includes a 5 year period of transition for existing policies. This means existing policy holders are unlikely to see any change, at least initially. At the end of the 5 year period, all existing policies will be treated the same as those that commence on or after 1 July 2010. The challenge for the industry will be to find ways to absorb the costs of additional taxation. Sovereign who has nearly 35% share of the life market also has one of the lowest expense ratios and has focussed on reducing costs of acquisition. This has been achieved by trying to remove the aggregators from the acquisition model. It is likely that other companies will also be forced to follow suit. According to one actuary we spoke to, the cost of acquiring a policy can be as high as 200% of the first year's premium. By international standards this is high and will need to be addressed. Whatever happens we are likely to see some significant change and from sources we have spoken to the focus seems to be on how the industry can find ways to absorb these changes and not have to pass them on to the premium payers. "”"”"”"” John Grant edits the insurance coverage on interest.co.nz