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.
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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.