Life insurance law change prompts profiteering warning

Some life insurers may use a looming premium hike to extract greater profits, warns one company.

Life insurers who hike premiums in line with pending tax changes may be tempted to use new rules as a way to drive profit in the face of shrinking margins, says the CEO of cut-price life insurer Pinnacle Life.

The cost of buying life insurance is expected to rise by up to 25 per cent for new policies on July 1 because of changes to the way it is taxed.

The Government passed a new regulation last year that removed a tax exemption being received by life insurers.

Previously life insurance policies contained a savings portion, but now most a term life policies, meaning the government felt they were undertaxed.

The industry has estimated this could push life insurance premiums up by 15 - 25 per cent in the next five years, because margins were too tight for the industry to absorb all the cost.

Some life insurers may also look at changing what they pay to intermediaries.

Pinnacle Life Insurance chief executive Noel Vaughan said it would be tempting for companies who were not making any money to "add another five per cent" onto any premium increase, in a bid to boost their bottom line.

Vaughan said he suspected anyone who put their prices up by more than 20 per cent would be attempting to increase their margins.

"It would be hard for them to convince me otherwise," he said.

Vaughan estimates the industry will be paying between 70 and 100 million dollars in tax in five years time as a result of the new regulation, but he said he would be surprised if the Government received any tax revenue from the increase during the first year.

The Investment Savings and Insurance Association chief executive Vance Arkinstall said the amount a company increased premiums by would depend on the way it was structured.

To say anyone who put their premiums up by more than 20 per cent would be making money out of it, was a "cheap shot" which he was unsure could be substantiated.

Pinnacle Life is a cut-price life insurer that markets itself as having the lowest life insurance premiums in New Zealand, because its online focus removed many overheads.

Vaughan said premiums would rise by about 10 per cent for new policies, but existing policies would have protected status for the next five years before being grandfathered in, he said.

AMP spokeswoman Veronica Ruddenklau said AMP lifted its life insurance premiums at the end of 2008 and was comfortable with its current pricing structure.

Ruddenklau would not say whether that effectively ruled the company out of further premium increases ahead of tax changes, however market talk suggests that would be unlikely.

"It's an expensive exercise to change premium rates so companies would only want to change relatively infrequently and when it's absolutely necessary," Arkinstall said.

Sovereign marketing and product general manager David Drillien said he expected the company would make an announcement this month around premium rates.

Asked whether Sovereign planned to lift their premiums by more than 20 per cent, Drillien said the company was "definitely not in that team" and would be taking a profit hit on the tax.

Independent consultant Murray Hilder said he expected life insurance companies to take a cautious and steady approach to tax changes.

"The thinking is that they will use the fact they have got a five year adjustment period to balance off the fact the new business is going to be taxed on a different basis," he said.

Hilder said life insurance companies were facing increased competition in the marketplace, and therefore would not do anything that would compromise their position.