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Report slams life insurance conflicts of interest

The highly-contentious, MJW report into life insurance advisers’ remuneration is out. It has seven key recommendations including slashing commissions and banning overide payments to dealer groups. 

Monday, November 23rd 2015, 5:00AM 3 Comments

by Susan Edmunds

The Melville Jessup Weaver report, Review of Retail Life Insurance, has been released this morning by the Financial Services Council.

The report says life insurance in New Zealand is 10% to 15% more expensive than it should be because of advisers’ commissions. It claims conflicts of interest cause poor outcomes for consumers.

It says up to 50% of advisers’ policies are replacement business, while bank staff operate at a rate of 10%. 

The report also cites data showing an increase in lapse rates in adviser-sold policies’ third year, when commission clawbacks no longer apply.

“A high upfront commission paid on a successful sale incentivises a consultant to firstly make a sale (without which they might not get paid at all) and to sell as much as they can (as that increases their remuneration). So we can end up with inappropriate sales (mis-selling) and inappropriate levels of cover (too high),” the report says.

“A manifestation of this conflict of interest is that personal risk insurance cover is more expensive than it needs to be and can be compromised by inappropriate policy replacement – commonly referred to as 'policy churn'. Policy replacement occurs in some instances not because the customer needs a new policy but because it will generate a financial return for the consultant.”

Report author David Chamberlain (pictured) said better alignment between insurers, advisers and consumers was needed.

The report makes a number of key recommendations:

It wants to drop the registered financial adviser designation so advisers are only authorised financial advisers, or qualifying financial entity (QFE) advisers.

AFAs would have to be able to access products across the market. QFEs would need to make it clear they were pushing their provider’s products.

Chamberlain said there was no requirement that advisers sold policies from every insurer but they needed to be able to access them. “If they do research and decide they want to sell one, that’s fine as long as you have the ability to access others. “

  • Advisers would have to disclose their actual remuneration to their clients and tell them what their policies would cost without it. This would be part of a simplified disclosure process.
  • A new remuneration model would see advisers paid 50% commission upfront, instead of up to 200%, and 20% servicing commission, up from about 7.5%. 
  • The maximum upfront commission that could be paid is $3500.
  • If a client moved to a different adviser, they could take the trail commission with them.
  • No upfront commission would be payable if a policy was replaced within seven years unless the premiums increased.
  • Volume-based incentives would be banned, including overrides and soft commissions.

Chamberlain said while fee-for-service was the ultimate model, that was unlikely to work because insurance had to be sold rather than bought.

But he said the intention was to move from rewarding the sale to rewarding service.

Advisers were looking for every reason to move customers, he said, and the new model would encourage more co-operation.

“We don’t know what’s good or bad in many cases, it can be very hard to determine. We are trying to deal with the underlying cause, which we think is the high initial commissions. If we take out the underlying incentive it should slow the rate of replacement business. That should reduce costs to the industry and should benefit consumers and ultimately advisers because it would be a stronger industry.”

One insurer had told him the proposed model was too expensive, he said.

Other suggestions include an industry-wide replacement business process, FMA being the conduct regulator of the industry, a code of practice and allowing KiwiSaver members to use their accounts to buy insurance.

The system would be reviewed in 2020.

If its recommendations were adopted, the report said replacement business should be halved, true new business volumes would increase as advisers had to find new clients, insurer costs would drop and take premiums with them and consumer confidence should lift.

Cameron Gray, spokesman for the Commerce Minister Paul Goldsmith said he was due to release the options paper for the Financial Advisors Act and Financial Service Providers Act review soon.

"Given the likely high level of crossover between the options paper and the MJW report, it would not be appropriate for the minister to comment on the report while he is seeking public feedback on the FAA review."

FMA director of regulation Liam Mason said: “The FMA has already been focused on the issues within the MJW report specifically in the release of our Strategic Risk Outlook last year and our sales and advice report this week. The SRO highlighted our focus on sales and advice and conflicted conduct  - and in particular the risks associated with remuneration structures  - and the inherent conflicts of interest that sales commissions can create. We note the MJW report as an interesting addition to this debate. There is also the current ongoing review of the FAA which is considering these issues."

MORE REACTION TO THE REPORT

What the MJW report recommended. Plus Minister's response

Partners, OnePath and Asteron have their say

Blog: Philip Macalister scores the report a D

What FSC members wanted

Advisers say not fair

DOWNLOAD Full report here

 

 

Tags: financial advisers FSC Life insurance MJW Report

« Report tore apart FSCA blunt instrument in the wrong hands: PAA »

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Comments from our readers

On 23 November 2015 at 7:02 am Jeff Goldsworthy said:
Now that this contentious report is "out in the pubic view" to be digested by all, I wish to reiterate every adviser should put their own submission to the Regulator to present their own perspective of the industry, their own business model and to present a rationale factual account of the misgivings and misrepresentations that are presented above, as I already have done. I believe the Regulator wants to hear from us all in order that they may make an informed assessment - come on guys.......
On 23 November 2015 at 8:49 am globug said:
I would be interested to know what MJW have used for their definition of 'churn'. We regularly come across new clients that have a little bit of insurance that the bank sold them plus a little bit of insurance that they purchased 10 years or so ago. As their life has changed significantly, and there has been no servicing or follow up from the banks, these existing insurances are often inappropriate for them.

When we do a full extensive insurance analysis for them, they can usually get far better and more appropriate and cost effective cover than their existing old cover. So, we tidy everything up for them. I presume that this full service and analysis ends up being counted as advisers have '50% churn' rates?

As compared to the banks, who often tell clients they won't get a mortgage unless they purchase that banks overpriced and underserviced insurance product, without a full needs analysis or any declaration of remuneration.

I am sure that a handful of people churn regularly, but my impression (from many years in the industry) is that most people are doing the right thing by the client.
On 23 November 2015 at 5:16 pm Ron Flood said:
If I was David Chamberlain I would be more worried about the 10% replacement business he has stated the banks are involved in.

At least the majority, if not all, of the business replaced by advisers ends up in a policy with far superior benefits than those offered by most banks.

Sure, some banks own companies that also use independant advisers to distribute their products. Often, these are usually 'watered down' versions to bring down costs to give the bank's client an unfair comparison.

An example is 11 Trauma conditions rather than the 42 available in their mainstream products, or 2 year maximum claim periods on the income protection cover.

Another example, a loan protection product with a 3 year suicide clause and a 6 month maximum income protection benefit period.

A client with a trauma cover and income protection benefit to age 65yrs with an adviser can certainly receive a cheaper premium with a 'watered down' version.

This is the sort of behaviour we find happining on a regular basis.

I can give examples of three banks whose products are 'not fit for purpose' and I can't yet fathom how they have not breached the applicable Acts.

1. A bank that will not pay out a life insurance benefit if the insured dies as a direct or indirect result of their involvement in "an illegal act" whether prosecuted or not.

2. A bank that limits income protection benefits to 2 years and sells the client an 'Any Occupation" total & permanent disablement cover with the advice that 'if you are off work for 2 years you will most likely be disabled for life.

3. A bank that sells Home Loan Insurance that will only pay out if you have your mortgage with them. If you transfer the mortgage to another bank the policy is immediately cancelled with no right of changing to another of their policies.

That same bank also reserves the right to cancel the policy at any time without having to give a reason.

The above situations are worrying and I would like to see the regulators investigate these banks and their policies.

In my recent submission to the MBIE issues paper I named these banks and ,surprise surprise, the names were redacted.

I understand that the issues paper only asked for feedback on the issues identified, however I would hope that the person who deleted the names has made a mental note to look into this at a later date.

It would have been nice to think that MJW would look deaper into the offerings of independant advisers compared to the 'crap' some banks sell.

I won't hold my breath as I have just discovered Mr Chamberlain is on the Board of one of the above offenders!!

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The maximum remuneration model for Australian life insurance advisers is to be set at what?

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