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Life insurance industry hides behind the old weasel clause

Driving into work last week I was surprised to hear the chief executive of the ISI (that’s the Investment, Savings and Insurance Association) announce on behalf of the insurance industry a 20 to 25% increase in the price of risk life insurance products due to the change in the tax act.

Having the ISI act as the messenger is real convenient for the insurance companies and banks – they don’t have to fess-up to policy holders about their intended price hikes. Who would want that sort of bad publicity! Better to have the Chief Executive (Vance Arkinstall) of the ISI announce the price hikes – who cares about the ISI brand anyway?

Well many thanks Vance… but please don’t speak for Pinnacle Life.

Pinnacle has no intention of increasing its prices 20 to 25%. We suggest that a 20 to 25% increase in prices is more about an opportunity to restore the flagging profitability of life insurance companies than offsetting new taxes.

The change in the tax act was inevitable and has been on the cards for a number of years now. We blogged about the new tax act as far back as January 2008… see our blog here.

Banks and Life Insurers alike have used the peculiarity of the Life Insurance Tax Act to reduce their tax burden.With the tax law as it currently stands, it is nigh on impossible for life insurers to make a taxable profit on life insurance. In fact, the more policies you sell the greater the tax credit generated. And we don’t have to look very far back to see how reluctant Banks are to pay their fair share of the tax burden (hint BNZ v IRD)… clearly the insurance tax law has needed an update for quite some time.

The cost of ‘tax’ is already built into insurance premiums; as are admin costs and commissions. How many Life Insurance companies can put their hands up to show any meaningful reduction in admin or selling costs for life insurance, even though we have experienced a huge technology wave in past 20 years? And how many life insurance companies can put their hands up and show how they’ve invested their tax credits back into R&D, or have given the consumer a rebate? I bet none. They took the credits and got fat… now they invoke the weasel clause “if for any reason there is a change in NZ law which affects how we determine the premium, we have the right to increase our prices”. And as long as we have this protective measure, what incentive is there to gain cost efficiencies and plan for the expected?

Nah, price hikes are just a matter of recouping losses and standing behind the cloak of the ISI.

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