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Is ‘underinsurance’ increasing?

Growth in insurance premiums in NZ is reported by the ISI as 8% for the year ended September 2007.

See this article reporting life insurance growth in the NZ Herald yesterday.

But what does this really mean? Is it a good result for the industry? Can we all relax now?Let’s think about this logically for a minute.

We know that most life insurance policies are such that premiums increase automatically each year to take account of advancing age. My estimations are that this would account for an increase of between 4% and 5%. We also know that many policies have a clause that automatically increases the cover each year to take into account inflation. In all probability, this would add a further 1%.

This means that if the industry did absolutely nothing… other than replace policies that lapse, we would in any event see a 5% to 6% increase in premiums collected.

So in real terms, the industry has only grown by around 2% or 3%... not good!

Now take into account that house prices have increased by probably more than 3% over the past year and that this is one of the significant drivers of the need for life insurance. Also take into account that around 20,000 young people came into the life insurance market with ‘new needs’ for life insurance last year (getting married, having children, buying homes, taking loans, etc) and we see that in all probability, life insurance coverage went backwards.

Put another way, ‘under-insurance’ in NZ increased in the year ending September 2007.

The question is ‘why?’

Maybe the launch of on-line life insurance this year will change things! Interested in your views...

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