New Zealanders may be significantly underinsuring their financial resources, according to a study conducted by Swiss Re, which has estimated that the ‘mortality protection gap’ for New Zealand households will rise to over $750 billion within the next 10 years.
The study, which looked at attitudes and behaviours towards life insurance, estimated that the protection gap was sitting at $640 billion in 2020, but is projected to widen substantially over the next decade due to rising consumption, and also a rise in debt levels.
Swiss Re noted that almost two thirds of New Zealand households have a protection gap of some degree, which is defined as the difference between the amount needed to sustain living expenses in the event of the primary earner’s death, and the household’s existing resources and protection.
Swiss Re divisional client executive and head of life & health in New Zealand Kresh Wright said that there have been a number of factors driving this protection gap, with the most significant factors being a lack of savings and assets, and an increase in ‘young households.’
“The Swiss Re methodology for this study was quite straightforward, and it essentially defined the ‘protection gap’ as the amount that would be needed to replace your income and to pay your household debts, and it also took into account any resources you have available to cover those two things - whether that’s savings, property, any other assets, and of course existing life insurance,” Wright said.
“In New Zealand, there are two angles to what has perhaps contributed to the protection gap. From a purely quantitative perspective, the gap here is really driven by a lack of financial resources.”
“That essentially means a lack of savings, assets and insurance,” Wright explained.
“The other interesting thing that we saw was that there is a slightly higher concentration of younger households with high-earning primary earners, and that essentially means that these people are at the beginning of their working lifetime, and they haven’t yet had a chance to build up their wealth.”
“From the perspective of the consumer, there is also a bit of a perception gap - that is, how much they think they need versus how much they actually need,” Wright added.
“But on the positive side, New Zealanders are actually very aware of their financial risks, and they know that they need protection. But the problem is that they underestimate how much they need, and that perception gap is really key.”
When it comes to bridging this gap, Wright said that both insurers and advisers have a vital role to play. She said that the figures present a ‘great opportunity’ for insurers to simplify their life products, and also to educate customers on how various aspects of insurance work to protect them.
“Our projections off the back of our survey do expect the gap to grow if nothing is done, and that’s because the amount of debt and consumption is unfortunately high in New Zealand, and it’s expected to be high going into the future,” Wright said.
“Life expectancy continues to increase, income continues to grow, and the overall population continues to grow, and these are all contributing factors.”
“Historically, advisers have been really important in how insurance is sold in New Zealand,” she explained.
“We believe the biggest opportunity here is to educate New Zealanders around the benefits of insurance, and how that can help to bridge this gap.”
“It’s also on the insurers themselves - there are a lot of products out there that do the job, but are really quite complicated,” Wright said.
“For the average Kiwi, it’s quite a big task to sit down and understand what a policy is all about, what triggers a claim event, all the different conditions, etc. There’s a big opportunity for insurers to look at developing much simpler products, and also products that can be tailored and personalised to individuals as they go through their life journey. Their protection needs will change over their lifetime, so it’s important that their policy can change along with that.”
Commenting on the results of the study, head of life & health in Australia and New Zealand Leigh Watson said that the COVID-19 crisis is as good a time as any for insurers to start thinking about these issues, and about how they can ensure a higher overall level of coverage across the population.
“As an industry, we have a role to play in assisting households to understand their financial exposure and there is no better time to do this than in response to the unfolding global health crisis,” Watson said.
“We, as life insurers, have a unique opportunity to ensure that our insurance offerings and benefits are sustainably designed and priced, providing value for our consumers and adequately reflecting underlying risks from unexpected events.”
