Consumer New Zealand has published the results of a survey showing that public trust and confidence in the insurance industry is low (1). The specific conclusions from the study are:
Our latest survey research found:
Consumer trust in the insurance industry was low.
- Just 13% of consumers felt confident insurers could be trusted.
- Only 8% thought insurers always offered fair terms.
- Just 18% felt they fully understood their insurance policy.
- As many as one in four have had a problem with their insurer.
This is a problem for the industry as there is a limit on how much dis-satisfaction there can be before people opt out of paying for cover. In particular in a small country like New Zealand a loss of premium payers would undermine the risk pool and remove the efficiency of the insurance model. Why should we care? In Christchurch insurance (including EQC) saved the day, for all that there are legitimate criticisms of how the response was handled. The insurance response to the Earthquakes injected about $40 billion into the economy, rebuilding and modernising much of the Christchurch central city, allowing businesses to carry on, homeowners to rebuild and lessened the National impacts of the earthquakes (and the GFC in the process). If half of those people hadn't been insured it would have meant that there would be more damaged/destroyed buildings with lost amenity and value, and those that were insured would be drawing from less money to pay claims, as fewer people would have paid premiums,) and less claims handling resource, as if you have half the customers you normally pay half the claims. Insurance is a social good, so less of it is bad overall.
How has this situation come about? A number of things have led to this but its largely;
- the slow response to domestic Christchurch Earthquake damage (which was largely EQC fault) led to an information vacuum, into which moved some less than reputable commenters who found dubious parallels between the corrupt US medical insurance industry and the overwhelmed, but largely honest NZ general insurance industry. (google "deny, delay decline")
- prices have gone up, and up... and up! Some of this is normal market movement, however a lot of this is driven by overseas issues; the cost of reinsurance, capacity issues when overseas providers withdraw from the market (such as Einsvar, Allianz, AMP or some Lloyds syndicates). Sometimes this is driven by the insurer's appetite for risk; Einsvar took a bath after Christchurch, because they were overexposed to old un-reinforced church buildings. Often the decision to withdraw is driven by other issues, I know of a Lloyd's syndicate who withdrew their scheme from the NZ Professional Indemnity Market because the person who administered it had gone on maternity leave, and the whole scheme brought in less premiums than a single policy for a large London law firm. I also believe that a large amount is insurers and re-insurers increasing prices to re-coup their CES and Kaikoura losses, which came about in part due to lax underwriting and poor pricing practices on the part of the insurers.
- Insurance law in New Zealand is still largely based on 18th century contract law, 18th century morality, and 17th century mercantile practice, it uses phrases like "utmost good faith" but these words have a narrow technical meaning, and don't mean what most people believe they do. This means that a decision might be legally correct, might be necessary from a business point of view, but to the client it is unfair, as it's not what they understood had been agreed to happen.
- Insurance policies have become more complex, and harder to understand. Ironically this is because the policies themselves offer more and better cover than the policies written 25 or 30 years ago.
- 25 years ago most business was done face to face through branch offices, today it is mostly online or through a call centre. This means that staff have less time to deal with each customer and less incentive to deal with problems or explain issues accurately. It also means that staff turnover is (much) higher. Experienced staff are better at explaining complexity and educating others and themselves.
- The current business model also makes it harder for staff to understand the whole business. For instance in the State Insurance branch I started in, claims staff sat next to sales staff, and you'd deal with sales inquiries as a claims handler from time to time (and vice versa). It meant that you understood all sides of the business. Today it's very possible that sales and claims staff are in different buildings, cities, or even countries. My observation is that even senior staff don't understand other aspects of the business, and if they don't understand, what chance do the public have?
- New Zealand is a small isolated market dominated by two very large, Australian owned giants, IAG and Vero, which combined hold about 70% of the market. This means that a change in approach from either of these companies has an exaggerated market effect, and there is limited alternative capacity. So if Vero decides to increase prices and IAG follows, the other players simply don't have the capacity to offer a real alternative.
- The big players tell us that premiums must go up for external reasons which they have no control but, like the banking industry, continue to take $billions in profits each year.
- Since 2012 the dispute resolution schemes are competing for business, and as a result their decisions are less reliably independent, and are opaque.
- The Insurers have successfully lobbied in their own interest, and prevented any real change or development in many of the above issues as a result.
In 2011 IAG New Zealand's CEO, Jackie Johnson, told the New Zealand Insurance Law Conference that the industries response to the Christchurch Earthquakes would "change the way New Zealand sees insurance". What needs to change for this to come true? The Industry needs to accept that change is necessary and drive that in a fair manner. It would also be helpful if there was transparency about the issues, rather than blaming (for instance) Brokers, who the ICNZ blamed for increasing rates in the Wellington property insurance market. The industry insures risk, but it's (Australian) shareholders don't seem to have any exposure to these risks, and in fact profit from it. Some candour would go a long way.