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Industry ready for regulators' insurance report

A Financial Markets Authority and Reserve Bank report into life insurers’ conduct is due at the end of this month – and insurers are bracing for a tougher line than was taken with banks.

Thursday, January 17th 2019, 12:02PM 6 Comments

Prompted by the Royal Commission of Inquiry in Australia, New Zealand’s regulators undertook a study last year, looking at banks and life insurers’ behaviour.

The bank report found issues to address but no systemic problems.

But Reserve Bank governor Adrian Orr has said that life insurers should expect a tougher verdict.

He said with the release of the bank’s latest Financial Stability report in November that the industry would be foolish to be surprised by that.

That report highlighted life insurers' commission rates, showing Kiwi insurance companies paying commissions to advisers of about 20% of gross revenue were at a level almost double their nearest counterpart, Mexico, at just under 13%.

The United States was at about 5% of revenue and Australia just over 10%.

Financial Services Council Richard Klipin, whose organisation represents life insurers, said it was ready to engage constructively and positively with the FMA and Reserve Bank's review.

"While we do not want to pre-empt the report or speculate on specific recommendations, we expect it will provide a valuable chance to better understand how the industry is meeting the needs of its customers.

"The FMA and RBNZ have been clear over the past few months that there will be a number of issues for the industry to consider and address. Conduct, culture and ensuring great consumer outcomes is paramount and we saw some important first steps by the industry last year with the adoption of the FSC code of conduct across our membership, and tackling soft commissions head-on by stopping overseas incentive conferences. We expect that the report will highlight a numbers of areas where further action is required."

Industry commentator Russell Hutchinson said he expected to see the report address commission alongside other issues.

"I think that they will question the extent to which insurers ensure the suitability of their products for customers, whether they buy direct or through advisers – and there is a complex question of what constitutes ‘good conduct’ and how much that might reach up to over even overlap with ‘advice’.

"Wider questions about value will be asked – given the criticism of sales of products with low claims rates in Australia. We don’t have very many of those products, but some lower-value products may be questioned."

Klipin said the regulators had been thorough and should be commended for their process.

"We look forward to receiving the report and responding constructively and with appropriate urgency to its recommendations."

Tags: FMA FSC insurance Life insurance Reserve Bank

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Comments from our readers

On 18 January 2019 at 11:07 am Backstage said:
Im not exactly certain why there should be any interest in the 20% of gross revenue unless they have solvency issues? If advertising direct to the public worked to assist Kiwis to ensure they obtained an insurance portfolio that was best for for the client,what ratio would be an acceptable advertising expense? Just referring to other countries ratios makes no sense and is not really an argument unless there is some real problem or major issue with what insurers wish to spend.
On 19 January 2019 at 4:17 pm JPHale said:
Well said Backstage.

A commission is but one part of the whole business. My added point there is where's the commentary around sales vs sales and service in the other markets and that impact on the commission rates?

I know our present remuneration model has no service component in the contracts, however, it is an expectation of our present legislation.

In other markets that commission can be quite low with the insurer then managing much of the servicing burden, and yes, we see that here too with some adviser attitudes...
On 21 January 2019 at 9:14 am Tash said:
The banks don't pay commission but their products can be as expensive! Premiums about the same but often far less generous benefits!
Seems like the regulators are hell bent on taking us 30 years backwards to tied/employed agents - no best choice for clients, no sense at all.
On 21 January 2019 at 11:15 am dcwhyte said:
Good points Backstage. All expenses impact solvency so why pick on this particular item?

Also comparing us to other territories is nonsensical. Mexico? Different environment, different politics, different economy, different history, different products etc - pretty much different everything.

The percentage of revenue spent on acquiring and retaining new business by an intermediary-supporting life office equates to the acquisition cost incurred by direct/bank distributors on advertising. Why would one form of acquisition cost be more or less favourable than another?

Smacks of regulatory "me-to"ism!

Perhaps if our regulators are keen to join their overseas colleagues in this aspect, they will also take note of Justice Hayne's recommendations in Australia around individual licensing and removing the ability to conceal sales behind the cloak of advice?
On 28 January 2019 at 11:51 am seandnz said:
What a farce really. I thought regulation was about a standard of advice, professionalism and best practise.

Setting a standard for the industry is necessary, but what does that have to do with commission? If anything, advisers are going to have more costs for education, systems, additional memberships, longer processes and more paperwork.

Commission should be reviewed but not down.

No business in their right mind would add more operational costs and cut their revenue at the same time, that's just stupid business.

Office bound bureaucratic straight out of Uni theorists who have never had to build a business don't have a clue about what it takes to run an advisory business, what about Estate Agents? What about product targets for bank employees, what about bank manager perks, and the list goes on.

Regulation is just a business within an industry to keep politicians employed.
On 29 January 2019 at 1:47 pm perryb said:
So insurance/mortgage commissions are too much. Compared to what, lets compare to the real estate commissions. For a $300k loan I may get paid up to $2100, remember the claw back for up to and over two years.

Real estate get paid $12500 plus GST, no clawbacks, how do you compare when a mortgage loan can be a lot of work. Insurance is never enough at claim time, the many claims I have had in the past two-three years I wish I could have convinced clients to take more cover, and many times those I have convinced to take the likes of trauma cover were so thankful that I had offered/convinced them of it.

I doubt very much if many people are over insured, and if they feel that it is easy enough to change, reduce.

I dont get where FMA is coming from, talk about a witch hunt. Yes some advisors make very good money, but as in all industries they are the top 10-20%. One of the answers was correct in saying bank insurance is usually no cheaper with way less benefits, so its not commissions that are the problem, go figure.

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