TOP
Gen Re regularly conducts experience studies for the New Zealand life insurance industry. During 2021 and 2022 we have been working on a study into the experience of Disability Income (DI) products sold through the retail channels (mostly through financial advisers but including bank sales for some insurers).
Our study investigated two important aspects of the DI claims experience:
We gathered data from seven New Zealand insurers covering almost the entire industry. The data covers the period 2013 to 2019.
DI products sold in New Zealand provide payments that replace a portion of the policyholder’s income if they are disabled and unable to work due to a sickness or accident. Partial benefits are paid to claimants who can return to work in only a part-time capacity. In most cases, benefits can continue until age 65 if the policyholder does not recover and may be indexed in line with price inflation.
Benefits can be provided on an Agreed Value or Indemnity basis and products typically include a range of optional or built-in ancillary benefits such as rehabilitation services, home modifications, vocational assistance, and insurance premium waivers.
As private insurance, New Zealand DI products sit alongside the benefits from the national Accident Compensation Corporation (ACC) which provides no-fault accident cover for all New Zealanders. Some New Zealand DI products offset any ACC benefits from the insurance benefits, but others (typically sold as Mortgage Protection) do not.
The New Zealand life insurance industry has close associations with its Australian counterpart. Many of the insurers and reinsurers operate in both territories, and the two industries share many common features in terms of product design, market dynamics and distribution. As a result, comparisons are often drawn between the two and assumptions are made about what experience from one country says about expectations in the other.
Leading up to the study, Australian DI products had come under close attention from the local prudential regulator after years of poor financial outcomes. In 2020 this led to an unprecedented regulatory intervention, the primary outcome of which was tighter controls around product designs sold from October 2021, with certain features (such as Agreed Value) banned and tighter limits put on maximum benefit amounts and disability definitions.
Given the similarities between New Zealand and Australian DI, concerns have been raised that the New Zealand products may suffer similar problems to their Australian counterparts. The industry has therefore looked forward to the results of the study to see whether there is evidence to support or refute this hypothesis.
The study has resulted in several important insights about the experience of New Zealand DI products that we have been able to share with the industry. We discuss a few of these below.
In many of the insights, the New Zealand experience has been benchmarked against Australia’s standard table, ADI 2014-18. We do this because there is no equivalent New Zealand table. The benchmarking allows a level of standardisation in the results to allow robust comparisons of New Zealand experience over time and between different cohorts. Differences between time periods and cohorts are therefore more interesting than the absolute values.
It should be noted that our insights are at an industry level. Looking at each of the insurers separately sometimes reveals quite different outcomes and it can be the case that one or two individual insurers have a material impact on how the industry is performing. That said, the intent has been to highlight only insights that are not explained solely by one insurer.
The study is intended to answer the question of what is happening with New Zealand’s DI experience, it does not attempt to supply the reasons for it.
One common question for New Zealand DI is the interaction with the ACC and how this impacts on claims resulting from accidents.
In Figure 1 we see that the frequency of accident claims has almost doubled over the investigation period.
Figure 2 shows that the increase is even more marked when looking only at policyholders with white collar occupations, where accident claims have seen roughly a fourfold increase from 2013 to 2019.
One aspect of the Australian regulatory intervention was the banning of Agreed Value policies in favour of Indemnity benefits linked to earnings at the time of claim. This leads to the question of whether the increase in accident claims in New Zealand has been driven by Agreed Value policies.
Figure 3 shows that while Agreed Value accident claims have increased, Indemnity claims have increased at roughly the same rate. A third type of policy common in New Zealand is Mortgage cover which, unlike the others, typically does not offset ACC benefits. Although the numbers are smaller, the study suggests that the level of accident claims is growing more slowly for mortgage policies.
We also asked how the significant increase in accident claims varies between new policies (less than two years old) and older policies. Figure 4 shows that while there has been an increase for both groups, it has been more significant in policies that are less than two years old.
In contrast to accident claims, the rate of sickness claims has not materially changed over the study period, as seen in Figure 5.
As a result of the increase in accident claims and stability of sickness claims, by the end of the study period accident claims had overtaken sickness to make up the majority of all new New Zealand DI claims.
Given the long potential duration of New Zealand DI benefits, the rate at which claimants recover and return to work has a significant impact on the overall cost of claims. We investigated the experience of claim terminations, including for claims that commenced before the study period, but which were still in receipt of benefits at the start of that period.
Figure 6 shows that termination rates were quite stable. Sometimes termination rates improve when the number of claims increases, as the additional claims can be less serious on average than was the case previously. However, no such improvement was observed for accident claims, despite the sharp increase in claim numbers. Terminations for sickness claims were equally stable.
For the first time, we investigated termination rates for sickness claims with different underlying causes. Measured over the study period, as expected, we saw that different causes had different termination rates. Compared to baseline “other” sickness claims, musculoskeletal claims were 5% more likely to terminate in any given month, while cancer and cardiovascular claims were 10% less likely.
The most difficult sickness claims to recover from were mental illness (30% less likely) and nervous disorders (50% less likely), but both saw improvements over the course of the study. Of all the sickness causes, only cardiovascular saw a deterioration in termination rates over the study period, with cancer, musculoskeletal and others stable.
Given the frequent comparisons between New Zealand and Australian DI business, we compared the experience of the two. Since the baseline table used for the study is derived from Australian experience in roughly the same period (2014 to 2018), we were able to make this comparison by looking for areas where the New Zealand experience differed materially from the table.
Figures 7 and 8 show New Zealand claims incidence against the Australian table, first by policyholder age and second by policy duration. Incidence is shown separately for accident and sickness claims, as well as in aggregate.
Figure 7 shows that the incidence of sickness claims is materially lower in New Zealand than in Australia at all ages. Accident claims are about the same for policyholders aged 30 to 50 and lower in New Zealand at younger and older ages.
Figure 8 shows that the lower level of claims in New Zealand is more pronounced for policies that have been held for longer.
We also see differences in termination rates, as shown in Figure 9. For both accident and sickness claims, the rate of terminations in New Zealand is similar to Australia’s for the first year or so of the claim, but is significantly better beyond that.
There has been speculation about the experience of New Zealand DI products, especially given the poor performance of comparable products in Australia.
The study shows that New Zealand has its own issues, especially with the steep increase in the number of accident claims. However, there is no evidence that termination rates or the incidence of sickness claims are deteriorating as they have in Australia. For the most difficult causes of claim (mental health and nervous disorders), claim termination rates are improving.
Overall, experience is materially better than over the same period in Australia, with the comparatively low level of sickness claims and higher levels of terminations for longer claim duration claims being particularly noticeable.
