Premium rises all round despite IRD's tax tactics

'These companies are milking their existing customers to subsidise the pricing of new policies.'– Ed Saul

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Insurers are being accused of "milking" their existing customers to subsidise future growth in the run-up to increases in tax on insurance companies from July 1.

Ed Saul, from direct-to-the-public life insurer Pinnacle Life, said the tax increases were designed to exclude existing life insurance polices for a period of at least five years so premiums would not have to rise for people with policies in place before July 1.

But two insurers, Tower and Asteron, have chosen to spread the cost of higher taxes equally by including existing policyholders so that new customers after July 1 do not face drastically higher premiums.

They claim that not doing so could plunge the insurance industry into a "valley of death" where a sudden 15-20% rise in premiums on new policies would see demand for insurance plummet.

"In formulating the new regulation, the IRD has gone to extraordinary lengths to protect existing policyholders that have purchased a life insurance policy prior to the new tax regulation," Saul said.

"The way the IRD has done this is to `grandfather' these policies so that these existing policies are not subject to the new tax rules for a period of at least five years."

The insurance industry strongly supported this move, Saul said. But now some insurers, such as Tower and Asteron, were increasing premiums equally across new and existing policies.

"Tower has announced 7% across all policies and Asteron 7.5%. What justification can there be for this? In effect, these companies are milking their existing customers to subsidise the pricing of new policies," he said.

But Grant Hill, from Tower Health and Life, said huge increases on new policies would cause demand to crash.

"What would that do for demand on level terms? If you did that across the board? You would have a real problem with demand and exacerbate the underinsurance problem in New Zealand. The whole industry would enter a valley of death."

Tower Health and Life's chief executive, Steve Bloomert, said that if premiums on existing policies were not increased now, followed by other small rises in subsequent years, in five years' time there would be a huge leap in premiums and a wave of policy cancellations.

Though he would not name names, Bloomert said at least one company had chosen to absorb the new costs by raising premiums on other insurance such as trauma cover and disability protection, particularly for smokers, meaning those policyholders were "cross-subsidising" term life policyholders.

Asteron's Antony Vriens said spreading the costs of the tax rise across all policyholders was the fairest approach.

"Distributing the cost this way means the impact is minimised for both new and existing customers which is important to ensure the issue of underinsurance is not intensified."

Saul said many insurers were not being upfront about how much premiums would rise as a result of the tax changes.

"Our calculations suggest that insurers will need to increase life insurance premiums by around 20% on new policies sold from 1 July, 2010, onwards in order to neutralise the effect of the tax change on bottom-line profitability," he said.

Insurers were currently announcing increases in the range of 2.5% to 15% and "drip-feeding" the bad news.

"In our view, it is not sustainable to increase premiums by only this amount and we anticipate that these companies will increase prices again next year and possibly subsequent years until margins are restored."

- © Fairfax NZ News