Your life insurance company just spent millions on something you’ll never see—and you might pay for it. AM Best’s November 2025 report on New Zealand’s life insurance market reveals a warning signal for U.S. policyholders: regulatory compliance costs are crushing insurer profitability, and those expenses get passed down as premium hikes, product cuts, or both.
The numbers tell a stark story. Since January 2023, insurers absorbed substantial expenses implementing IFRS 17 accounting standards. Then came the Financial Markets (Conduct of Institutions) Amendment Act—the CoFI Act—effective March 31, 2025, requiring massive investments in governance systems, staff training, and consumer protection technology. Yi Ding, Associate Director at AM Best, cut to the reality: “Compliance and system investments linked to regulatory requirements continue to weigh on short-term profitability.”
Why should American policyholders care about New Zealand? Because U.S. insurers face identical regulatory pressures. IFRS 17 adoption hit globally. State insurance departments are tightening conduct rules. The playbook repeats: regulatory costs spike, margins shrink, consumers foot the bill.
Why Life Insurers Are Bleeding Money on Compliance
The regulatory squeeze hits from two directions simultaneously. First, IFRS 17—the international accounting standard for insurance contracts—forced insurers to overhaul entire financial reporting systems. We’re talking enterprise software replacements, actuarial model rebuilds, and armies of consultants billing $300–$500 per hour.
How much does this cost? Industry estimates put full IFRS 17 implementation at $50 million to $200 million for mid-sized to large insurers. AM Best doesn’t publish exact figures, but their report confirms insurers “absorbed substantial expenses” since the standard took effect in 2023. That’s billions across the industry.
Then came the CoFI Act. This New Zealand law mandates a “fair conduct principle”—insurers must treat policyholders ethically and transparently throughout the entire product lifecycle. Sounds reasonable until you calculate what “ethical treatment” costs to implement:
- Technology infrastructure upgrades to track customer interactions, flag potential unfair practices, and generate compliance reports across thousands of policies and touchpoints.
- Staff retraining programs covering new conduct standards, with ongoing monitoring systems to catch violations before regulators do.
- Governance restructuring including new compliance roles, internal audit teams, and board-level oversight committees dedicated solely to conduct risk management.
- Third-party audits and legal reviews to validate compliance systems meet regulatory standards—because getting it wrong means fines, reputational damage, and potential license suspension.
Small detail that matters: these aren’t one-time costs. Compliance is a permanent expense line. Technology needs updates. Staff needs refresher training. Audits happen annually. The meter never stops running.
Your Premium Impact: The 8-12% Math Nobody’s Explaining
Insurers don’t announce “compliance surcharges” on your bill. Instead, the costs get baked into premium rate filings, product pricing models, and underwriting guidelines. Here’s how the pass-through works in practice.
When an insurer’s operating expenses jump 5-7% due to regulatory compliance (conservative estimate based on AM Best’s findings), they need to recover that cost to maintain profitability targets. Since life insurance operates on thin margins—typically 3-8% profit margins for term life products—even modest expense increases force meaningful premium adjustments.
| Cost Component | Impact on Premiums |
|---|---|
| IFRS 17 Implementation | 3-5% increase over 3 years |
| Conduct Regulation Compliance | 2-4% increase ongoing |
| Technology System Upgrades | 2-3% amortized over 5 years |
| Competitive Margin Pressure | 1-2% additional to maintain position |
Total potential premium impact for new policies: 8-14% over a 3-5 year period, with the steepest increases hitting 2025-2027 as compliance costs fully materialize.
The New Zealand market shows what happens next. AM Best anticipates “muted premium growth” because high household debt and cost-of-living pressures limit what consumers can actually afford. Translation: insurers want to raise rates 10-12%, but market reality forces them to accept 4-6% instead. Profitability takes the hit.
That profitability squeeze creates a secondary consumer impact: product rationalization. Insurers quietly discontinue unprofitable product lines, tighten underwriting standards, or reduce agent commission structures (which means less personalized service for you). Yi Ding warned these trends “erode new business margins and further increase lapse risk.”
The Hidden Lapse Risk Crisis Your Insurer Won’t Mention
Lapse risk—when policyholders let coverage expire without replacement—hit elevated levels post-pandemic and hasn’t normalized. The AM Best report specifically calls out this concern, and the compliance cost connection isn’t coincidental.
Premium increases driven by regulatory costs hit consumers already stretched thin financially. When your term life premium jumps from $85 to $95 monthly—seemingly modest $10 increase—that’s $120 annually. Multiply across auto, home, and health insurance rate hikes, and suddenly consumers face $500-$800 in total annual insurance cost increases.
The dropout pattern is predictable:
- Insurer files rate increase to recover compliance costs.
- Regulator approves 60-80% of requested increase.
- Renewal notices hit with higher premiums.
- Price-sensitive customers (usually those who need coverage most) lapse policies rather than pay more.
- Insurer’s risk pool skews toward older, less healthy policyholders who can’t get coverage elsewhere.
- Claims costs per policy rise, forcing another rate increase cycle.
This death spiral isn’t theoretical. State insurance regulators across the U.S. are tracking similar lapse patterns in multiple insurance lines, with life insurance particularly vulnerable because coverage feels optional until you need it.
Competitive Pressure: The Race to the Bottom Nobody Wins
AM Best’s report highlights a troubling market dynamic: “Competitive pressures continue to encourage product optimization and incentives that may erode new business margins.” Decode the insurance-speak, and here’s what’s actually happening.
Insurers can’t fully pass compliance costs to consumers without losing market share to competitors offering lower prices. So they compete through:
- Heavy discounting on new business acquisition—first-year rates below actuarial cost, gambling on customer retention to recover losses later.
- Complex incentive structures that look attractive upfront but contain gotchas in year 3-5 when rates reset to full pricing.
- Product “optimization”—stripping features, narrowing coverage, adding exclusions—to cut costs without raising headline premiums.
- Digital-only distribution eliminating agent commissions but also eliminating personalized underwriting that might save you money through proper risk assessment.
Yi Ding’s warning about margin erosion signals danger ahead. When insurers sacrifice profitability for market share, three bad outcomes follow: deteriorating financial strength (potential insolvency risk), reduced customer service quality (understaffed claims departments), and sudden dramatic rate corrections when losses become unsustainable.
You’ve seen this movie before. Remember when low-cost health insurers flooded ACA exchanges with artificially low premiums in 2014-2016? Many went bankrupt by 2017-2018 when claims exceeded projections, leaving policyholders scrambling for replacement coverage mid-year.
What the CoFI Act Reveals About Coming U.S. Regulations
New Zealand’s CoFI Act isn’t exotic foreign policy—it’s a preview of regulatory direction in the U.S. The Financial Markets Authority essentially codified what U.S. state regulators are pushing through conduct guidelines, market conduct exams, and unfair trade practice rules.
The core CoFI principle: insurers must treat customers fairly throughout the entire product lifecycle. That means:
- Product design must consider customer outcomes, not just profitability.
- Sales processes must avoid deceptive practices, high-pressure tactics, or misleading comparisons.
- Policy administration requires clear communication, accessible service, and proactive issue resolution.
- Claims handling must be timely, transparent, and fair—no denials based on technicalities when coverage intent is clear.
Several U.S. states already enforce similar standards through different mechanisms. California’s insurance code contains extensive unfair practices provisions. New York’s DFS conducts aggressive market conduct examinations. The NAIC (National Association of Insurance Commissioners) developed model laws on suitability standards for life insurance sales.
The regulatory trajectory is clear: more oversight, stricter conduct standards, higher compliance costs. The CoFI Act shows what comprehensive conduct regulation looks like when fully implemented. U.S. insurers watching New Zealand are stress-testing their own systems now, anticipating similar requirements within 3-5 years.
Should You Change Life Insurance Strategies Before 2026?
The compliance cost tsunami creates specific windows of opportunity and risk for consumers. Understanding the timing matters for your wallet.
If you’re shopping for new coverage: Lock in rates before mid-2026. Insurers typically file rate increases 6-12 months before implementation. The March 31, 2025 CoFI implementation date means compliance costs hit financial statements through 2025, with premium adjustments likely filing in Q4 2025 for Q2 2026 effective dates. Buying now avoids that increase.
If you have existing coverage: Don’t assume rate stability. Even whole life policies with “guaranteed” premiums can see dividend reductions or policy loan rate increases when insurer profitability suffers. Review your annual statements for changes in projected values or dividend scales.
If you’re considering policy changes: Replacement analysis just got more complex. The old “replace if you save 20%+” rule doesn’t account for future compliance-driven rate increases. Your current policy might look expensive today but could be cheaper than new coverage in 18 months when new business rates reset higher.
One counterintuitive strategy: consider overfunding permanent policies now if your budget allows. When insurers cut dividend rates or increase policy charges due to profitability pressure, having higher cash value provides a buffer against those changes impacting your death benefit.
Frequently Asked Questions
How much will life insurance premiums increase due to regulatory compliance costs?
Industry analysis suggests 8-12% cumulative premium increases over 3-5 years for new policies, driven by IFRS 17 implementation costs (3-5%), ongoing conduct regulation compliance (2-4%), and technology system requirements (2-3%). The exact impact varies by insurer size, existing technology infrastructure, and product complexity. Term life insurance typically sees smaller increases than complex permanent products requiring more regulatory oversight.
What is the CoFI Act and will similar regulations come to the U.S.?
The Financial Markets (Conduct of Institutions) Amendment Act 2022 (CoFI Act), effective March 31, 2025 in New Zealand, requires insurers to operate under a fair conduct principle ensuring ethical and transparent treatment of policyholders throughout the product lifecycle. U.S. states already enforce similar standards through market conduct examinations, unfair trade practice laws, and suitability requirements. While a federal CoFI-style law is unlikely due to state-based insurance regulation, expect continued tightening of conduct oversight through state regulatory actions and NAIC model law adoptions over the next 3-5 years.
Why does IFRS 17 matter to me as a life insurance customer?
IFRS 17 is an international accounting standard for insurance contracts that forces insurers to completely overhaul financial reporting systems—costs estimated at $50-200 million per mid-to-large insurer. These compliance expenses directly impact your premiums as insurers recover implementation costs through rate increases. Additionally, IFRS 17 changes how insurers recognize revenue and measure profitability, potentially affecting product design, dividend payouts on participating policies, and insurer appetite for certain coverage types that become less profitable under the new accounting treatment.
What’s causing elevated lapse risk in life insurance post-pandemic?
Lapse risk—when policyholders let coverage expire—remains elevated due to a combination of factors: high household debt limiting discretionary spending, cost-of-living pressures forcing budget cuts, premium increases driven by regulatory compliance costs, and changed consumer priorities post-pandemic. AM Best specifically warns these trends “erode new business margins and further increase lapse risk.” When combined with competitive pricing pressure, insurers face a profitability squeeze: they can’t raise rates enough to cover costs without triggering policy lapses, creating a cycle of margin compression and increased risk pool concentration among less healthy policyholders.
Should I lock in life insurance rates now or wait until 2026?
Lock in coverage before mid-2026. The March 31, 2025 CoFI implementation and ongoing IFRS 17 compliance costs will flow through to premium rate increases typically filed 6-12 months before effective dates. Expect rate filing activity in Q4 2025 for Q2 2026 implementation. Buying now avoids the 8-12% cumulative increases projected over the next 3-5 years. Even if you don’t need coverage urgently, consider securing a policy at current rates if your health and finances qualify you—rates rarely decrease, and regulatory compliance costs create a structural upward premium pressure that won’t reverse.
Bottom Line: Regulatory Costs Are Your Problem Now
The stable outlook AM Best assigned New Zealand’s life insurance segment isn’t reassuring when you read the fine print. Insurers maintain adequate capital and technical capacity to meet policyholder obligations. But profitability pressure from regulatory compliance costs, competitive market dynamics, and elevated lapse risk creates a perfect storm of consumer impact.
Your premiums will rise. Products will get more complex or less comprehensive. Policy service might deteriorate as insurers cut costs to offset compliance expenses. These aren’t predictions—they’re mathematical certainties when you understand the economics.
The smart move: review your coverage now. Lock in rates before the 2026 increase wave hits. Understand what you’re buying and what protections matter most to your family. Don’t assume your current coverage will remain affordable or that replacement options will be better in 18 months.
Regulatory compliance protects consumers from bad actors and improves market conduct. Those benefits are real. But somebody pays for fairness and transparency. In insurance, that somebody is always you.