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Regulators: Life insurance needs to change

New Zealand’s financial sector regulators have slammed life insurers – and the way they deal with advisers - in their report into the sector’s conduct and culture.

Tuesday, January 29th 2019, 1:00PM 13 Comments

The Financial Markets Authority and Reserve Bank have completed their review of 16 life insurers. It follows a similar investigation into banks.

Financial Markets Authority chief executive Rob Everett said the report showed life insurers in a poor light.

They all needed to make substantial improvements to how they identified, managed, remediated and reported on conduct risks and issues.

How they dealt with advisers was a prime focus for the report.

Insurers were told to review their commissions structures and volume bonuses for advisers, including structures with high upfront commissions, to ensure they were incentivising intermediaries to "deliver good customer outcomes". "In our view high upfront commissions are not acceptable as they drive poor conduct and can result in poor customer outcomes," the report said.

The regulators said insurers should also change all soft commission structures to mitigate conflicts of interest and encourage advisers to improve customer outcomes, not just reward volumes sold.

All advisers should also be encouraged to disclose their commissions to clients, the report said.

“Life insurers have been complacent about considering conduct risk, too slow to make changes following previous FMA reviews and not sufficiently focused on developing a culture that balances the interests of shareholders with those of customers,” Everett said.

The regulators found extensive weaknesses in life insurers’ systems and controls, with weak governance and management of conduct risks across the sector and a lack of focus on good customer outcomes.

Reserve Bank Governor Adrian Orr said the industry needed to act urgently.

“Their services are vulnerable to misconduct and the escalation of issues that have been seen in other countries. Public trust in life insurers could be eroded unless boards and senior management transform their approach to conduct risk and achieve a customer‐ focused culture. Ultimately insurers need to take responsibility for whether customers are experiencing good outcomes from their products, regardless of how they are sold.”

The report found limited evidence of products being designed and sold with good customer outcomes in mind.

Insurers were found to be doing little or nothing to assess a product's ongoing suitability for customers.

There was a lack of insurer oversight of advisers and remediation of conduct issues was "very poor", the report said. Some insurers seemed to think they were not responsible for customer outcomes that were influenced by adviser conduct.

Some even regarded the adviser as the customer, the report said. That could lead to a situation that prioritised the needs and outcomes of advisers over the clients themselves. "It can also raise the question of whether products are designed for customers or to suit advisers' sales strategies. An advice-centric philosophy can also make it difficult to hold advisers to account for poor behaviour."

Advisers should also receive training on insurers' conduct expectations and all aspects of the products before they could sell them, and then be subject to ongoing training to maintain accreditation.

The regulators said some insurers thought the Financial Services Legislation Amendment Bill would fix issues of adviser conduct. "However our strongly held view is that increased regulation of third-party advisers would not discharge insurers' responsibility for customer outcomes."

"Some of the issues and themes are similar to those highlighted in the Australia Royal Commission, albeit on a smaller scale. The FMA and RBNZ are not confident that insurers themselves are aware of all the current issues. This creates a serious risk of further conduct issues arising."

By June 30, each insurer will have received individual feedback and would need to have reported back to the regulators.

They would need to provide an action plan for the regulators to review, including how they would address incentives based on sales volumes for staff and adviser commissions.

They would also have to do a detailed gap analysis against the final Australian Royal Commission report and all the findings relevant to insurance and sales, as well as a a systematic review of the existing life products and product-holder portfolios to identify risk.

If the regulators were not happy with the level of urgency being applied, they would take more action, they warned.

A small number of cases in which there were potential breaches of the law were now being investigated.


Tags: Commission FMA Life insurance Reserve Bank

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Comments from our readers

On 29 January 2019 at 2:59 pm AdviserMan said:
Just declaring upfront, I am an Adviser of 25 years + experience and these are my initial thoughts, having read 3 articles today on this report.

Interesting focus of the report if this article is accurate, as I have not seen the report.

There is a clear focus on commission, which seems to be the agenda here for both organisations, which in itself is a very complex issue for the Life industry, and debated, discussed on various mediums for a many years, if not decades.

What is done overseas, does not always transfer to NZ market conditions, as we have a unique environment here, with a low population base, approx 25% close to or above retirement Age and 25% below age 18, and a large portion of those of working age completely under-insured, or not insured at all .

We also have a shrinking population of Advisers working in the insurance industry.

Revenue, known as commission is what is paid to Advisers for procuring new business and maintaining existing business. From which they operate their business, pay expenses, tax and hopefully themselves.

There are a few highly wealthy Advisers making big incomes, they also produce large volumes of work, no different to any other industry, where a product is sold.

The average Adviser income is below $100k, and correct me please, I believe it is close to $85k? About the same average as an IT Consultant or a Chartered Accountant.

Remove that, or substantially reduce that, and the industry becomes very much unattractive to any business person, especially a younger person trying to establish themselves.

The NZ public want fairness and transparency, and yes commissions can be made more transparent, no issue with that.
In terms of fairness, a 12% difference in end retail price, will not make any difference to a client buying insurance, as the premiums will increase by 12% over a few years, or with medical sometimes annually, depending on the insurer, the market costs etc.

The premiums across insurers also ranges from cheaper to higher premium, and there are reasons for that, not just profit based.

Stating that upfront commissions lead to poor customer outcomes and poor Adviser conduct, is stretching the truth so far, it will snap.

Advisers can choose for every product and client, what level of commission and how they want it structured from all upfront to just a trail commission, or even 0.

That is a commercial decision that Adviser will make based on what they need for their business, and a judgement call on the client to remain with the insurer.

Adviser conduct, is not created by a range of commission options, it is simply how that person chooses to behave.

If an Adviser conducts themselves poorly, there is adequate regulation and commercial law to protect the customer, and the industry acts quickly to deal with any one rogue person, often well prior to the Regulator becoming involved.

There is no mention in the article of Claims, and how commission levels are stopping claims being paid?

Over $1 Billion per year, and rising last time I looked.

No I suspect there was no issue here.

But hang on people, isn't insurance for the purpose of paying a claim, so that customers receive the help at a time of crisis ?

So we are doing a fantastic job of looking after those who take out insurance, I believe the complaints to the Insurance Ombudsman, are very low for Life insurance products, and most claims were for people putting in claims for events that were not actually insurable, so even then not really an issue?

So where is this big problem?

Is it the perception from outside of NZ looking in, thinking we must have the same problems, and need a big stick now?

We have one of the best Life insurance industries in the world here in NZ, and now we want to reduce it to the level of the the rest of the world?

Really, how is that going to help more people become insured, or remain insured.
On 29 January 2019 at 3:09 pm Dirty Harry said:
"In our view high upfront commissions are not acceptable as they drive poor conduct and can result in poor customer outcomes," ...

True. All those engaging in poor conduct receive high upfront commissions.
Also true: All those engaging in poor conduct receive oxygen on the inhalation of a breath.

In my view the continued use of oxygen is not acceptable as it enables those who particpate in poor conduct to continue to do so, which can result in more poor customer outcomes.

The regulators should restrict the air supply to advisers, to mitigate conflicts of interest and encourage advisers to improve customer outcomes, not just reward those who are able to breathe.
On 29 January 2019 at 4:22 pm Ron Flood said:
Welcome to the next generation of 'tied advisers'. In case the FMA is unaware of what a tied adviser is, it is someone who can only sell the products of one company. In exchange for this, the adviser receives financial support such as office rent, staff costs, IT costs etc.

This will result in client's not receiving the best products available, as the adviser will have a limited selection to choose from.

As long as the product is 'fit for purpose' the adviser will satisfy any consumer law requirements.

With a drastic reduction in upfront commissions we will see a barrier to entering the industry by new participants. The only way a new adviser could survive would be in a salaried postion as a tied adviser.

We could even see the situation of experienced advisers canvasing the insurance companies for a 'signing on fee'. In return they would contract to place a certain level of new business each year.

None of the above situations will be 'customer focused' and will not improve 'consumer outcomes'.

Welcome to the FMA's New World.
On 29 January 2019 at 5:09 pm Tash said:
It is worse than that Ron. Insurers were also criticised for not ensuring the products sold were suitable for the client and remain suitable if their circumstances changed. How are insurers who deal with advisers meant to do that? Only way is to put a compliance person in your buisness to tell you how to do it! Do these people understand the industry they are regulating?
On 29 January 2019 at 5:24 pm Brian W Brown said:
This is great as all those clients who wanted cover but i couldnt get because the underwriters were too picky will in a few months time be welcomed with open arms. After all what else are they going to be doing if no cover is being written. Text book underwriting is now out the window ye ha.
On 29 January 2019 at 6:01 pm Mr Slater said:
I’ve read the report and whilst there is a focus on commission it’s more critical of insurers seeing advisers as their customers and not the client and other things like poor complaint processes. The criticism of commission is more about up front large amounts and the influence this has on the provision of advice.
On 29 January 2019 at 8:04 pm RichardM said:
Apart from sloppy wording (overseas trips are an incentive not a commission), and puzzling statements (limited evidence of products being designed and sold with good customer outcomes in mind - really?), one of the major issues that neither the RB or the FMA appears to understand is that the major banks 'sell' disability insurance which is demonstrably inferior to main insurers products, as well as being often more expensive, without providing a SOA, or informing the client that there are better products available elsewhere. Indeed, one bank was quoted to me as saying they weren't required to do this!

One the major recommendations of one counsel on the Australian Commission was that product sales ie insurance, should be separated from the banks banking operations.

If the majority of a bank's insurance sales are from its own direct sales channel, how many bank clients have policies which in the FMA's words have not been 'sold' with good outcomes or suitability as the yardstick?

The FMA appears not to be aware of this, or it is and is choosing to ignore it.

Lord Nelson had a similar problem but a better outcome.
On 29 January 2019 at 9:30 pm JPHale said:
Thanks for the typing team agree with your comments.

It really does read as misguided lack of understanding. Yes, there are things that could be improved, at the same time, there is much of what we have that is very good.

We are facing change, regardless of the instigator.

Ron, we've had plenty of discussions about exactly what you have laid out. It works well for the banks to continue to line their pockets and there are questions that need posing to regulators, like overseas, where it has been found many of them subsequently went to work after their time as regulators. So who is driving what here?

Though reading between the lines this is also a well-timed and potentially well-orchestrated table thumping media frenzy to proceed the FSLAB legislation announcement.

If the Government follows its quite well-established pattern, this is political points scoring without any more teeth than what we already know about.

Time will tell. In the meantime, I have clients that still need my help, because no-one else is helping them when they need it, especially at this time of night.
On 30 January 2019 at 9:40 am RS said:
This is a 38 page report that smacks of having been prepared rather quickly, by a small handful of authors, with a lack of specificity about the "problems" it purposrts to have uncovered.

All they will acheive with this is a further gutting of active advisers in the sector, the public will be pushed further to the famously shoddy advice model provided by the banks, and will lead to even fewer people insured in an already underinsured country.

All because about 150 people a year were getting a free trip somwhere paid by an insurer.
On 30 January 2019 at 10:01 am Roderick said:
An analogy. Some Mechanics got a job in the Plumbers Association to write the rules for Electricians!!!
On 30 January 2019 at 4:17 pm Observer said:
It is interesting that most of the report addresses behaviour by insurers - not the behaviour of advisers. Yet the advisers are the ones being put to the sword.

Please let's not have hasty ill-thought out legislation.
On 31 January 2019 at 9:58 am Tash said:
Observer makes a good point about 'ill- thought out legislation'.

As far as I can tell, this damning report was drafted (not sure by whom) after 'interviews' with insurance company staff mainly. A couple of thoughts:
1. Were the interviewers suitable experts in all matters of insurance and running insurance companies and legally skilled in examination so that they could fairly and objectively put fair questions to employees and extract the 'truth'? I doubt it.
2. Were the employees 'interviewed' under oath and warned to stick to the facts and avoid supposition, suspicion, hearsay and mischief making? I doubt it.
3. Was any actual evidence gathered?
4. Were any of the allegations able to be causally linked to any insurer conduct by actual evidence?
5. No insurer was given an opportunity to correct, dispell or defend themselves as I understand it, in fact none of them have been reported back to yet on their individual 'report'.
6. Clearly the FMA thinks insurers and advisers are one and the same - wrong!
7. Where is the actual evidence of commission causing poor client outcomes. Give us a real example of an investigation that proves this. Yes there may be evidence of 'churn' but this is our issue as advisers.

I am sorry but this all seems very amateurish and not very professional at all. The laws of natural justice, (audi alteram partem and nemo judex in re sua) demand an impartial judge and an opportunity to be heard, a basic right denied to the insurers and a complete failure to respect basic rights. At least the Australians had the sense to do it properly, via a royal commission with all its necessary checks and balances.

I am very sad about how this has taken place. No doubt some misconduct and mistakes and errors have occurred, but the misconduct of one should not be attributed to all, as has happenned.

Arrogance and ignorance are a terrible combination and I hope the Government does a more balanced, objective examination.
On 31 January 2019 at 4:35 pm JPHale said:
Hear hear Tash! Absolutely!

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