Is it hard for consumers to shop around for insurance and compare what’s on offer?
Absolutely, industry expert Russell Hutchinson says.
Hutchinson runs insurance consultancy Chatswood Consulting and life and health insurance adviser comparison site Quotemonster.
On Quotemonster, insurance advisers have access to something like 40,000 insurance policy comparison points. The business aims to be able to pull quotes for more than 95% of all life and health insurance products being sold to New Zealanders, Hutchinson says.
Life and insurance providers send Quotemonster their pricing and policies, and give the firm a heads up when changes are coming.
But that’s for life and health insurance, and this site is targeted at insurance advisers.
Hutchinson says the general insurance industry hasn’t seen the same innovation or development of similar sites so consumers can compare cover for what is often our most valuable asset; our homes.
“If you go and have a look around the world, of course, there are comparison websites with fire and general insurance elsewhere. Some people are pointing to that and going, where is ours? That is a challenge.”
If you want to switch banks or shop around for a mortgage there are a plethora of places to eye up which banks offer what. If a consumer thinks they’re being ripped off for power, they can easily compare what is in the market.
KiwiSaver providers are mandated to disclose their fees and costs so consumers can work out which one they want to choose for retirement saving.
It is not so for general insurance.
A paper released by the Ministry of Business, Innovation and Employment (MBIE) in 2019 into the conduct of NZ financial institutions, said general insurers had actively discouraged the development of comparison websites, “suggesting that regulation might be required before a general insurance comparison website could be established”.
“Discussions with companies providing comparison websites for other parts of the financial sector have suggested that the fact there is a small number of general insurers, each with a significant share of the market, means that if any one general insurer does not wish to participate in a comparison website then the website cannot offer a meaningful comparison and is therefore not viable,” it said.
The MBIE paper said comparison websites can help at the point of purchase, but they can’t inform consumers about their ongoing experiences.
Comparison sites a market-led solution
That argument doesn’t wash with Simon Papa. Papa, director of commercial law firm Cygnus Law and former FMA staffer, says the paper concluded - without any substantive analysis - that comparison websites are not effective.
He says comparison sites are a key example of a market-led solution to address the “information asymmetry” consumers face.
Papa says at best in New Zealand, consumers have to go to maybe five different insurance websites and input information to get an insurance quote which is “pretty laborious”, but in other jurisdictions there's a legal requirement to disclose relevant information to allow comparisons, and comparison sites.
Consumer NZ investigative team leader Rebecca Styles agrees it isn't easy to compare insurance providers, and says there is a resulting lack of switching between insurance companies in New Zealand.
Styles says most people would have to go to each insurer and check and do their own online quotes do to any kind of comparison, although Consumer NZ does provide guides for its paying members.
"And for some markets there are limited providers. Even though IAG is a big insurer in NZ, it has several different brands and I think an everyday consumer would think they are insuring with different companies - but actually its just the same insurer with different brands across the market and the policies are fairly similar, or not much difference between them."
The big two
In general insurance, a big two has evolved from consolidation in the industry with banks shedding their own non-essential insurance services, and acquisitions like Lumley's sale to IAG, which was approved by the Commerce Commission in 2014 amidst warnings the tie-up would create a "massive market imbalance" that could be a tipping point.
Now the Aussie insurers IAG and Suncorp dominate with Tower a distant third wheel. Suncorp wanted to buy Tower, but was blocked from doing so by the Commerce Commission.
IAG now holds an estimated 47% of the NZ general insurance market. It has the NZI, AMI, State and Lumley brands and offers BNZ, Westpac and ASB car insurance policies.
Suncorp owns Vero, and most of AA Insurance, as well as offering insurance for ANZ customers.
Challenger brand Cove Insurance's founders, brothers Andy and Rob Coon, say it’s no secret many of the brands New Zealanders are familiar with are ultimately two large Australian companies.
The duo say they have heard of customers having a bad experience with one brand, then switching to another brand only to find they are still with the same company.
"A comparison site would help New Zealanders realise they can get a better deal by shopping around, and open their eyes to the fact there are more than just the large two Australian companies in the market that own many of the large insurance brands."
Quashed is the closest NZ has to a real comparison website that includes pricing, the Coons say.
"We’ve worked with them since before their launch, and Cove has provided them with direct access to all our pricing. From what we understand none of the large brands are as forthcoming with their pricing data, which is unfortunate for New Zealanders wanting to easily compare insurance, but understandable in the sense that the large brands have the most to lose if comparing becomes easier."
Industry lobbyist, Insurance Council of New Zealand chief executive Tim Grafton, says consumers can compare prices.
"There is something I think they call the internet," he says.
"If you go online, or [have] telephones to use, you can actually ring up four or five insurers and give them your circumstances and they will be able to provide a quote for your house insurance or your motor insurance. There is nothing challenging, or difficult, about that for the vast majority of consumers."
Why doesn't the insurance industry have comparison sites? The big issue the industry spokesperson sees with them is consumers being channeled towards insurance policies based just on price, rather than getting a product fit for their needs.
"The challenge with comparison websites is being able to provide the insured with sufficient information for them to make a good choice."
Grafton says the experience overseas has shown comparison sites' algorithms had quickly developed to change prices so consumers are driven towards the cheapest form of insurance.
Hutchinson says these are strong arguments against comparison sites (and says, of course, he would recommend tapping the services of an insurance adviser), but insists customers aren't obsessed with price and nothing else.
He says consumers have experience in shopping around for travel or airlines, for example, and weighing up what they need, and what they want to pay, whether it's a last minute trip jumping on a deal or a long-term well-planned trip.
Hutchinson says it's tricky with insurance because so many New Zealanders are sticky consumers. A mistake once made, can last for a while.
"If you make a mistake with booking a hotel in Sydney, and you get there and it's cheap and horrible it doesn't matter, it's only a weekend. But usually with insurance, I'm gonna hold it for years, or a decade."
Is New Zealand’s insurance industry competitive?
Juicy bank profits have been under intense scrutiny throughout the pandemic, and it had been hinted by Commerce Minister Duncan Webb that a banking market study would be the next deep dive the Commerce Commission does after displeasure with bank profits at the Australian-owned big four, ANZ, BNZ, Westpac and ASB.
New Zealand’s insurance industry is also profitable, and concentrated.
Accounting firm KPMG’s 2022 insurance update found overall profit increased by 8% across the general insurance market from $2.061 billion in 2020/21 to $2.217 billion in 2021/22.
It pointed to a healthy 9% increase in gross written premiums and net earned premiums, which also increased 9%, from $4.833 billion in 2020/21 to $5.252 billion in 2021/22.
For the half-year ended December 2022, IAG reported net profit after tax of A$468 million, up from A$173m in the same period in 2021, a 170% increase. In New Zealand, growth in gross written premiums was 9.1%.
For the same period, Suncorp reported net profit after tax rose more than 44% to A$560 million across its Australian and NZ operations. It highlighted its New Zealand returns, reporting New Zealand gross written premiums rose 12.2% to $1.2 billion “benefitting from price momentum”.
Suncorp’s profit in New Zealand rose by 8.3% over the six months to December 31 to $91 million.
Consumer NZ’s annual insurance survey released in 2022 found premiums to insure a house in Auckland had increased by 15%, by 14% in Dunedin and by 17% in Hamilton, compared to 2021.
Consumer Price Index data showed the cost of house and contents insurance has increased by 150% over the past 10 years.
It says behind those increases is a change in the Toka Tū Ake Earthquake Commission (EQC) levy which aims to smooth out the financial burden for high-risk seismic areas, with EQC now covering the first $300,000 worth of damage caused by earthquakes, tsunamis, volcanic eruptions, hydrothermal activity and natural landslips.
As a result, Treasury is now monitoring premium prices to track how much private insurers are charging in premiums now the Government has doubled how much EQC will pay towards natural disaster cover.
It's measuring premiums by funding a consulting firm, Finity Consulting, to collect data including collecting online quotes for insurance premiums for a set of 2,000 sample properties.
Its first report, completed in December 2022 and released through an Official Information Act request, found high seismic risk areas were seeing decreases in gross premiums (premiums including the EQC levy) and low seismic risk areas were seeing increases in gross premiums, as expected.
Finity found premiums rose by 17% in some regions and decreased by as much as 10% in others. It said premiums in high-risk areas hadn’t dropped as much as it expected and said that was down to inflation, reinsurance cost increases and “higher natural peril costs”.
Grafton points out the first Finity update found the largest single contributor to insurance prices at that time was the increase in the EQC cap. He says the EQC levy is now $552 including GST.
And then there is fire to pay. A levy which covers 95% of Fire and Emergency New Zealand's costs goes onto house insurance policies and is rising to cover a new employment deal for firefighters, which is capped for homeowners at close to $150, Grafton says.
"If you buy house insurance, pretty much the thick end of the first $1,000 has nothing to do with insurance."
He says the industry is going through the largest amount of regulatory change and costs that the sector has ever known.
"So certainly this has added significantly to insurance costs. No doubt about that."
Grafton says the industry has said for many years that Fire and Emergency New Zealand funding should come from direct taxation, and he questions whether capital requirements, "pretty much the highest standard set globally", could be looked at too.
Market study Y/N?
The Treasury reporting provides a first, tantalising glimpse into how general insurance premiums can change over time. But the data is limited.
Correspondence between EQC and Treasury staffers discussing the premium price monitoring, released after an Official Information Act request, show repeated mentions that a comprehensive understanding of insurance pricing would need a market study.
A Treasury staffer said in a 2021 email about the price monitoring project that it should perhaps note "that the only way to get a really clear sense of the competitiveness of insurance pricing will be to conduct a market study, which provides the ComCom powers of inquiry (i.e. they can require testimony and documents)".
Grafton says he'd like to see evidence that New Zealand's doesn't have a competitive insurance industry, and he absolutely rejects the need for a market study.
He says there aren't barriers to halt new players competing in the market.
"We have had, for instance, one of the largest, rapidly-growing direct insurers providing house insurance, Hollard, come to the market about four or five years ago. It came in successfully, and has built up a strong base of business through the distribution by the Ando company."
Grafton says there's a lot of choice of providers in New Zealand, however, there are regulatory requirements new insurers have to meet including capitalisation and prudential requirements demanded by the Reserve Bank to make sure they can withstand shocks.
Insurers have had a torrid start to 2023, with Auckland and Northland flooding in late January and then Cyclone Gabrielle resulting in a $2.5 billion and counting insurance bill.
IAG said in its half-year result its margins would be 10% rather than 14% or 15% for the 2023 full-year, largely due to the expected higher natural perils costs from the Auckland flood event.
It was still confident that its 2023 full-year result would be strong, forecasting gross written premium growth of about 10%, "an increase from the previous guidance of mid to high-single digit growth".
Climate change changing the game
Insurance academic Michael Naylor says the rugged start to the year highlights why tracking insurance premiums from the past is a futile activity.
He says climate change has changed the insurance game, and we should just forget what we paid before. It's irrelevant.
We do basically have a duopoly, Naylor says, with Tower's survival "amazing".
But, he says the Government has effectively now put a ban on the big two from snapping up local rivals, turning down more recent mergers including Tower and Suncorp.
That is an encouragement for new entrants, he says. But would they come in? Not likely, Naylor says. Look at the risk here, he says, and the size of the market.
Roll on COFI
One of the other legislative changes the industry is watching is the introduction of the Financial Markets (Conduct of Institutions) Amendment Act 2022 (the CoFI Act), which comes into force in 2025.
Brought in after conduct and culture reviews found banks and insurers weren't ensuring consumers were treated fairly, the CoFI Act "expands the [Financial Markets Authority's'] mandate as a conduct regulator to include financial institutions, and confers new responsibilities in terms of licensing, monitoring and enforcement".
Papa says the FMA has already signalled it will look at KiwiSaver "through the lens of value for money", and it would likely do the same with insurance, and that included looking at pricing for premiums.
Grafton says it's important that consumers are charged fair value for the products that they buy, and the industry is highly supportive.
"As I said, we're just paying out in the order of $2.5 billion to $3 billion for these two extreme weather events that occurred a few weeks ago. And if that's not good value for money, and reflecting the premiums that have been collected, I don't know what it is."
21 Comments
There are certainly some insurances that may not be worth it to everyone. I self-insurance my contents for example, but insure the property. Many young people are sold life insurance that they don't need. I also recommend selecting a higher excess. It reduces the premium and also means you avoid having to deal with the insurance company for minor losses (this can be extremely painful).
The government needs to regulate so that there is:
a) standardisation of the base insurance contract.
b) standardisation of all add-ons. Insurers can choose which add-ons they offer.
c) open insurance. With standardised contracts and add-ons consumers can easily change insurers.
Then and only then will we have competition.
As a consumer the current situation is an absolute mess. How can any consumer be expected to read through all the fine print of each and every contract to make an informed decision???
KO. Your comment highlights the reason comparison sites for general insurance are of limited value and worse, would drive a race to the bottom trend to more restricted cover. As someone whose lifes work has been in general insurance and finance, it is still complex work making evaluations of which insurer offering provides best value for money. And that's with a detailed understanding of policy wordings and hands on experience in multiple disasters including the ChCh EQ sequence, where I saw the way supposedly insignificant variations in policy wordings delivered dramatically different outcomes for claimants. Then there is the intangible but critically important aspect of insurer culture when settling larger claims. The average punter has no reliable way of establishing this. Standardised 'base' wordings have an appeal but would ossify the product development process.
Noting MM's comment.
for house insurance , not necessarily contents, a) is a must. Other addons can be left to the insurer as a differentiator between them. I've spent quite a bit of painful time reading T and Cs and a standardised contract for the most part is the way to go. Most people probably do not read their contract. Witness the orchardist who put in a claim for either storm damage or flooding, can't recall which and his claim was rejected and now in dispute. Wind damage not covered. I am with the same insurer and realise that agricultural polices will be different from residential but still put in an email to the insurer re cyclone, typhoons, hurricane and tornado damage. Received a non answer so dived into the policy and found what is covered and that is storm damage. Re-phrased the email to ask weather cyclone etc damage is classified as a storm. A week later no answer yet. Will get onto them again
I am not sure I understand the logic here. Climate change will destroy large parts of the private insurance industry. As premiums mount to be unaffordable and insurance is withdrawn on properties too much at risk the actual market available for the insurers contracts - leaving people either uninsured or the state to step in (and the insurers with a shrinking market) - thus in California in the last few years nearly 400,000 households have lost insurance due to wildfire risk (they have had to fall back on expensive state runs schemes). The big insurance companies are not being altruistic in being outspoken about climate change - they are getting increasingly desperate as they see that their long term survival is in peril. One of these days a category 5 is going to take out Miami and bang will go the re-insurance market too.
KOW. Suggest you are being a bit pessimistic in predicting insurers are becoming desperate and will be wiped out by CC. Since ChCh insurers and reinsurers have become a lot more competent in calculating maximum probable NZ event losses and in limiting their exposures accordingly, with risk based underwriting where each individual address is rated and underwritten on its specific individual characteristics having been a thing for a decade or so now. Property values, insurability and bank lending eligibility are adjusting to follow suit. The retreat is already well underway as they move high risk properties off their books or if obliged to stay, impose punitive terms, but this quiet run for the exits is not obvious to the average punter. In various high natural hazard environments such as your California example, Japan, some Oz flood zones etc, being able to secure only partial cover is common. People accept it as a reality of life. As NZrs in those zones will increasingly be forced to.
The big question the Commerce Commission must answer is why are there no other major banking and insurance players in NZ if NZ's banking and insurance markets are dominated by Australian companies?
Could it be because any new entrant knows the Australian companies will start a bitter price war to protect their very lucrative patch?
Youi tried it and fell flat on its face. Scale is everything in insurance and it takes a very long time to achieve that. It's theoretically possible if you had the support of a friendly reinsurer with infinite patience but NZ is these days not exactly a fun place for these guys to play. IAG and Suncorp have massive buying leverage with reinsurers, without that any aspiring competitor would be reduced to cherry picking the best risks and until they were big enough and limiting the proportion of any one risk which they underwrite. The CC may fulminate about the vice grip of NZ's duopoly insurer reality and our resulting low competition market but being the smart people they are will be well aware there is little they can do about it.
Its unfortunate one can't cherry pick residential house insurance risk. I'd be willing to go forgo flood and fire but not volcanic eruption (natural hazard). Not available. Wind no. The odd tornado although they do not occur that frequently or in a great area I would not be willing to omit from insurance. Requires deft wording and run of the mill ins. companies too much in the messy basket for them.
There is competition.
Once a year I seek quotes from all the companies.
I dont favour the IAG companies.
For about the last 5 years AMP has been best for house and contents and tower with a $1000 excess forte cars. But one day this will change.
Have had no claims for 20 or 30 years but high excesses make it sort of affordable
The reason the General Insurance comparison function has been 'slow to innovate' is all to do with the boring business of underwriting. Actuaries in Life Insurance can very easily sift mountains of data for risks (people) with similar profiles - if you know someone's age, medical history, sex, income, and a few other important key measures, you can predict pretty accurately calculate average life expectancy, likelyhood of a major disease, etc, thence the correct band/amount to charge them for their risk.
With General Insurance on the other hand risks are more diverse and much harder to compare apples to apples - e.g. try finding two houses with the same characteristics in NZ with our geography. As for businesses - try and describe the risk of the average one (its also much easier for owners to fudge their own data).
See the problem?
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