sign uplog in
Want to go ad-free? Find out how, here.

Budget tax changes trigger hikes in life premiums

Budget tax changes trigger hikes in life premiums

By John Grant

Since 1990 New Zealand life companies have enjoyed a tax advantage. Effectively they were taxed at a lower rate, and they have claimed they passed much of this advantage on to clients in the form of lower pricing. Recent Budget changes have seen this benefit removed, and insurers are now increasing their pricing in response.

There are fifteen companies all competing for a relatively small market in New Zealand so the competitive pressures have been strong.

But there is evidence that the main beneficiaries of that advantage were brokers who enjoyed higher remuneration - substanially higher than their counterparts in Australia and other overseas markets. Brokerage rates have been as high as 230% of the annual premium. It was therefore interesting to see Sovereign, New Zealand's largest life insurer, announce that the cost of the higher tax on policies would be spread between brokers, the insurers, and their clients. You can see the Herald article on this here.

Sovereign's stated plan is to reduce brokerage from 230% to 200%, and increase the premium by 15% making customers pay more, and any balance would be absorbed by Sovereign.

When we do the calculations, the costs look like this.

A $1,000 annual premium currently pays brokerage of $2,300.

If this $1,000 premium increases by 15% to $1,150 and brokerage is paid at a lower rate of 200% then the brokerage is still $2,300.  I thought they said the broker was going to be paid less.

Other insurers like AIA have increased premiums by 13% and Pinnacle Life have increased their premiums by just 10%. It would seem that in Sovereign's case the calculations indicate that it is the consumer footing the bill (or at least the majority of it) for removing this tax advantage for life insurers.

The tax change is effective for new business from 1 July.

 

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.