The media have taken a keen interest in the company tax changes that are about to be introduced for life insurance in NZ. See Herald and Good Returns stories this week. We did comment on this topic once before (see blog post here) but clearly, with all the renewed interest, we thought it worthwhile to comment again.
What’s it all about?
In 1990, New Zealand enacted new tax rules for life insurance products resulting in life insurance companies today being taxed at a lower rate compared with other companies. The proposed tax changes are ostensibly to ‘remedy’ this situation and bring insurance companies onto an equal footing with all other businesses from a tax perspective.
Who's benefited all this time from the low tax rate for life insurance?
Well, you'd think it's been the insurance companies winning all the way to the bank, so to speak. But… no. With the competition that exists in the NZ insurance industry (at least 15 insurers in the market chasing less than 2mil tax payers), the price of life insurance has been shaved so that no insurer is making any extra profit from the tax advantage. In effect, the tax advantage has already been passed through to consumers by way of lower premiums.
What impact will the tax changes have on insurance companies?
There are mixed views on this. Sovereign said this week that premiums would need to increase by 30% to neutralise the impact of the tax changes. We have every right to disagree, of course. Pinnacle Life’s view is that the increase shouldn't need to exceed 20% to neutralise the impact of the tax change. Noel Vaughan (managing partner of Pinnacle Life) said as much in this Herald article last week. He even intimated that anything more than 20% would be profiteering!
So… what’s likely to happen for consumers after the tax change takes effect on 1 July 2010?
We’re not sure. But NZ insurance companies are now starting to announce what they’ll do.
- Sovereign Insurance’s going with 15%
- Pinnacle Life has advised a 10% increase.
We’ll wait and see what the rest have to say.
