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FMA gets its wish: Insurance sales incentives to be banned

Cabinet has agreed to rid the insurance industry of sales incentives that are driving behaviour that is "not in the best interest of consumers".

Tuesday, January 29th 2019, 3:00PM 19 Comments

In a release, Commerce and Consumer Affairs Minister Kris Faafoi said the Government would fast-track consumer protection measures in the financial sector.

It follows the Reserve Bank and Financial Markets Authority report into life insurance conduct and culture.

”There are gaps in the regulation of the sector that are exposing consumers and we are going to address them.  We need a regime where banks and insurers are focused on good outcomes for the consumer and are not conflicted by sales rewards," Faafoi said.

“The report has found New Zealand life insurance industry has a culture that prioritises sales over customer interests and customers deserve better. Cabinet today agreed we are going to get rid of sales incentives in the insurance industry that are driving behaviour that is not in the best interest of consumers.

“Incentives such as overseas trips and loaded upfront commissions can cause a conflict for the salesperson. We have also heard about insurance policies being sold to people who are ineligible for cover, premiums continuing to be charged for a policy that’s no longer in effect, and policyholders not being effectively notified of increases in premiums.

“This, with the findings from the earlier report on banking conduct and culture, mean that we have to take action. We plan to release a consultation paper on the changes by May and introduce legislation later this year,."

He said a comparison of life insurance commissions worldwide showed New Zealanders paying a high rate of commissions – more than 20% of the cost of the premium.

In comparison, consumers in many European countries paid less than 10%, and in Australia just over 10%. Annual premiums paid by consumers for life insurance total $2.57 billion, with 4 million life insurance policies in New Zealand.

Finance Minister Grant Robertson said, while the industry had started to address issues raised in the reports, it was clear that the Government needs to act on regulation and conduct of financial institutions, including banks.

“We want to see clearer duties on banks and insurers to consider a customer’s interests and outcomes, and to treat customers fairly, an appropriately resourced regulator to monitor the conduct of banks and insurance companies, with strong penalties for breaching duties, changes applied to both banking and insurance, since the issues identified in both are similar. There are also overlaps between the sectors, with banks often selling insurance products, a strong response to internal sales incentives and soft commissions.

“Because the issues identified with insurance and banking are similar, we will consider changes that apply across both sectors.

“Also, while this report focuses on life insurers, it’s possible the vulnerabilities it identifies may exist across the broader insurance industry.

“We will consult with the public and industry on these changes, but we are going to move as quickly as possible on this because New Zealanders need to have confidence their rights and interests are being protected."

Faafoi said the consultation on these measures would run alongside work already under way to update insurance contract law.

“Current contract law is based on legislation that was written more than 100 years ago – and there are a number of improvements that need to be made. These include better disclosure protections for consumers, to address situations where insurers can completely avoid a policy when a policy holder does not disclose something – even if it was an unintentional non-disclosure or one unrelated to the claim a policy holder is making.

“It is an ambitious timeframe but my intent is to have both pieces of legislation in Parliament by mid-2020, because it is time to ensure consumers get protection that is clearly needed.”

The FMA is supplying individual feedback to the 16 life insurers reviewed, with a response and action plan on how they will address their issues due back to the FMA by June 2019.

Tags: FMA Kris Faafoi RBNZ

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Comments from our readers

On 29 January 2019 at 4:08 pm Iantt said:
Unfortunately life insurance sales need dedicated, persuasive agents - hardly anyone buys life insurance on their own volition. Sales therefore have to be incentivised so that the agent is motivated and can earn a decent living with all the other costs associated inproviding the service. And yet the government believes people are underinsured, so how is this muddling in commercial affairs going to assist with that? Are they next going to ban the incentives for selling building materials, cars, air conditioners, lawn mowers, packaged travel, and on and on that we all know exists. It seems only when "money" (banking/insurance) is involved, that people get their knickers in a twist. All these other things I mention are just "commodities," yet that is all money is too. Why are people so upset.
On 29 January 2019 at 6:48 pm RWAW said:
It would be interesting to know how the premiums compare between Australia and NZ. No mention of this in the beat up.
On 29 January 2019 at 6:53 pm I was wondering said:
Good points lantt. I have no problem with the abolition of soft commissions, these were created by the insurers, not advisers. I do have a problem with the FMA changing what I get paid for doing my work though.
I suspect that a lot of the issues in the report can be sheeted home to some of the Insurers and Banks themselves. I have no control over these and wouldn't sell their rubbish anyway. There is now sufficient legislation and regulation in place to police the behaviour of advisers. I thought that was what all of the recent changes were for? If the FMA does cut my income severely then I'll be gone, and I'm sure a lot of other advisers will leave too. I have no intention of becoming a tied agent, nor being told what I can earn. There is still a lot of water to go under this bridge once the initial furore dies down, so let's see what happens.
On 30 January 2019 at 1:04 am seandnz said:
So if commission adds to 20% of the premium where does the other 80% go? Stop beating up hard working advisers, is the other option for clients to pay 20% and then fees to advisers instead?

Commissions are a great way to provide a way to pay the adviser for the work they do and the effort they have to do to get there such as ongoing training, computer systems, software leases, offices, support staff, downtime, advertising, courses, professional indemnity insurance, etc. If all that is only 20% of the premium then that is very cost effective funding.

Do you think the consumer is going to pay for the advisers time? some may, most won't so they will end up with the wrong insurance or no insurance and they is really going to backfire on the industry.

Stop beating up advisers and their livelihood and focus on quality and education.
On 30 January 2019 at 9:04 am blah blah said:
I agree with soft dollars going and should have been removed years ago. As a country we’re under insured and new legalisation may drive other out of the business... insurance is sold not brought . Rubbish products exist but not in my portfolio. A point that Faafoi seems to be not taking into any consideration is his new legislation will push advisers bottom line up .. We have not holiday pay no sick leave we all have mortgages and on going expenses . This new regime is not got to make any want to be adviser race into the business. So it’s all well and good to sit in your ivory tower in Wellington and legislate . But it doesn’t get rid of dodgy traders
On 30 January 2019 at 9:33 am Guri said:
a lot of businesses run on around a 17% cost for their businesses, so if our commissions are reduced to 20% how are we supposed to survive ???
On 30 January 2019 at 9:59 am Observer said:
There is a non sequitur here: Advisers get paid a commission, therefore they cannot possibly be acting in the client's best interests.

So: reduce commissions to a level where and adviser cannot possibly make a reasonable living from this industry. One wonders how this will help to provide good outcomes to customers.
On 30 January 2019 at 10:36 am First Time Caller said:
RWAW I thought the same thing, so did a comparison for a potential client that just sent me a schedule. I dont know the provider nor can compare policy wordings at this stage but $200,000 Trauma for 34yr old male NZ = $44 per month and OZ = $46. I cant imagine mortality rates vary much across the ditch. However the life cover was quite a bit cheaper in OZ but supplied through Super Scheme so probably attracted group pricing
On 30 January 2019 at 10:36 am Murray Weatherston said:
I have to admire the arrogance of the RBNZ and FMA as they implement their doctrinaire views. In the 4th paragraph of the Executive Summary (p4) they say "Neither regulator has an explicit legislative mandate for the regulation of conduct in relation to life insurance" but despite that they wade in with recommendations that will have a profound impact on the industry.

I wonder whether any of the insurers will show any cajones and speak out.

There are some pretty serious allegations, based in my view on very flimsy evidence, against all the insurers. Will they meekly accept it on the view that if they don't obey, they will get smashed other ways by the regulators.

Or is the 30% of me that says the insurers are secretly applauding the measures, and will suck up the criticisms because the threat of the hammer and sickle will allow them to reduce their commission costs by 50% or more - assuming Europe's commission being less than 10% of premium and Australia's not much more than 10% is the benchmark. This will mean NZs current 20% will have to be halved to 10%.

Would that mean premiums would reduce by 10%? I very much doubt it. I doubt premiums would reduce at all - insurers are going to have a lot of extra cost as they implement all the systems the mandarins say they are missing, on top of their huge costs in overseeing the correct use of their policies by every adviser who recommends their product that the regulators believe should be occurring.

The poor independent adviser will be the victim here. It is hard not to assume that the impact of a halving of revenue on new business will result in a lot of independent life agents deciding to hang up their boots, with the result that there will be less unaligned insurance advice available for the small % of the population who actually seeks to purchase it - most people who have any skin in the game will tell you that most personal insurance is sold, not bought.

However, By the time the real impacts are apparent, the officials and politicians who have promulgated this will be well away and probably doing harm to some other industry they have taken a dislike to.

Seems to me that these measures run directly counter to the aim of the financial advice reforms that are supposed to increase the availability of advice.
On 30 January 2019 at 11:14 am Observer said:
So the adviser gets to pay for all that is seen to be wrong in the life insurance industry. The opening pages of the report are all about shortcomings by life insurance companies (not advisers).

Then, it is said that high commissions incentivise advisers not to act in the client's best interests.

The recommended solution is to reduce commissions to a level where an adviser cannot make a decent living. Two possible outcomes from this -

Advisers are so desperate to make sales that they do not care about the client's needs; or

The problem is solved because all advisers have left the industry and there is nobody selling insurance other than bank staff.

On 30 January 2019 at 11:47 am MAX62 said:
Excellent comments Murray saved me the trouble of going into print !
I totally agree with the rather cynical view you hold on upfront commission reduction definitely a good opportunity for the Life companies to claim they have no choice so no loss of existing relationships even M/s Ballantyne will have to comply !
On 30 January 2019 at 11:53 am Mr Slater said:
I am finding it interesting how we are interpreting the report differently. I didn't read a desire to reduce commission to 10% but moreover to reduce the large up front commission and other incentives such as overseas trips . That's certainly what the Minister stated yesterday. Is that a bad thing? It is a hard argument to mount that such things do not ever influence an adviser's decision where to place business. It may be a perception or reality but I have seen first hand such cases of this happening and consumers worse off for it happening. Further are we not all trying to make the advice industry a profession that consumers have confidence in? Removing such incentives must only help with this.
On 30 January 2019 at 12:57 pm Murray Weatherston said:
@Trevor
I have obviously spent too long ready official reports.

Let me paint by numbers and demonstrate my logic.

I am not saying commissions on new business will be cut to 10% of relevant premiums.

When officials compare NZs aggregate commissions of > 20% of total revenue (premiums on all in force business and investment returns) with overseas of 10%, I believe that that signals they think NZ should reduce to 10% (however it is paid as a mixture of upfront and ongoing).

So if commission costs have to be cut from 20% of total revenue to 10% of total revenue, aggregate commission payments have to be cut in half.

The simplest way would be to cut both the rates of commission on new business and the trail on all in force business.

If you don't want to touch trail rate, then the rate on new business has to be cut even more.

And if you want to increase trail (to offset the impact of the cut on new business) then you have to cut the rate on new business even more.

QED. It's simple maths.

Now please tell me how any other interpretation is possible?
On 30 January 2019 at 1:00 pm Interested AFA said:
I don't have a problem with halving high upfront commissions, say a maximum of 100% API as first year remuneration. If this is coupled with renewal of 20 to 30% then it seems to me a win-win.
Companies would have a lower cost to acquire the business, and Advisers would have more incentive to service clients and keep business on the books.

We do need to be alert to Insurers trying to use this as an opportunity to reduce their overall distributions costs - namely, commission paid to Advisers.

I must admit to feeling insulted that as an Adviser the report implies I am supposed to be somehow conflicted, and not providing good advice, because I am paid 'commission'. As an AFA I provide advice in written form backed by an independent Risk Research House, and stand by my recommendations.
I guess it comes down to the distinction we in the industry need to make between 'advice' and 'sales'.
On 30 January 2019 at 1:46 pm Mr Slater said:
Well said Interested AFA and I agree 100%.

Part of the problem here as my good friend Mr Weatherston pointed out to me this morning is the possible lack of proper empirical evidence to support some of these findings.

I would add to that and suggest some comments are unfairly 'tarring all advisers with the same brush'.

The conflicted inference is just one as is the incentive based product selling motivation. As one adviser once said to me 'if there was a better product available and I didn't recommend to my client to change because of the fear of criticism from incentives that were on offer, would I be criticised if the new policy would have paid when the old did not'.

It's a valid question.
On 30 January 2019 at 4:24 pm Dirty Harry said:
Interested lays out a comment that is too common. Yes, commission is conflicted rem. Period. Managing and disclosing that conflict with the client through written advice, disclosure etc that an AFA does is a good way to manage that conflict, and is perfectly acceptable to all involved, including hitherto the regulators.

And this is the rub. Why? Yes, those who will demonstrate poor conduct do so allowing their conflicted interests to rule. That is a conduct problem.

Cutting commissions by any measure will not solve that.
I submit that these same issues have worsened in Australia, and premiums have not dropped a bit.

The finger of blame in the latest report is mostly pointed at insurers. They pay the commissions, and used their various incentives to drive sales while abdicating some important considerations. They know who the churners are, and the ones who do and say unusual/unprofessional things.

But why do they continue to accept business from such advisers? What causes certain benefits such as bonuses and targets derived from extra business to outweigh other things such as good outcomes and professional integrity?
Will be interesting to see whether the real conflicts are resolved or if this is just another bash-the-adviser festival.
On 31 January 2019 at 6:15 am Murray Weatherston said:
@Interested AFA 30 Jan at 1.00pm
I hate to break the news to you that the probability of a maximum 100% upfront with an increased 20-30% renewal is zilch.

The implicit policy goal is to halve commission as % of premium revenue.

The best data I can find is in the NZIER report to Sovereign in 2015. [I would urge RBNZ/FMA to publish any other data they have on which they have based their revolution.]

Estimated annual Premium income (for both initial and renewal/trail - called acquisition and maintenance respectively in the report) was $1948 million. Manipulating the report data, I get $214m as the premium income for new policies in the year, and a much greater $1734m as premium income for inforce business.[These splits are probably + or - 5%, but the conclusion is still most premium is paid on in force policies.]

Commission costs were stated in the report to be $244m for acquisition and $197m for maintenance, making a total of $441 m.

Halving that means the "desired" commission cost = $220 million.

Please note that existing trail is $197 million.

If we say current upfront is 200% and that is reduced to a maximum 100%, prima facie that reduces acquisition commission to $122m.

That makes first round future commission costs $122m + $197m = $319m.

That is miles higher than the apparent policy targetof $220m so there is absolutely no room to increase renewal/trail - indeed, that would need to be halved as well - definitely not increased.

Enough said?
On 31 January 2019 at 2:00 pm Interested AFA said:
Murray, I don't know whether what you say re reducing the actual total commission revenue paid to Advisers will actually play out, however I have no doubt the insurers would welcome this. I also have no doubt that their cost savings on commission would not be fully passed on to policy holders.

However, as regards my comments re changing the actual spread of commissions we might receive, the report states on page 18:

'We also expect life insurers to review their commission structures for intermediaries, including the very
high upfront commissions compared to ongoing or ‘trail’ commissions. Insurers need to ensure they are appropriately incentivising the good conduct of intermediaries and the delivery of good customer outcomes. We would like to see advisers incentivised for providing ongoing service and advice to customers about product suitability and for maintaining good customer outcomes'.

I see nothing here that necessarily means that we Advisers need to accept lower total remuneration - but the expectations that accompany this remuneration certainly looks set to change.
On 31 January 2019 at 5:09 pm AndyB said:
I love how cabinet agrees with no prospect of a select committee or consultation process.

As highlighted above... the sector is all getting tarred with the same brush... however the FMA have actually highlighted the problem themselves.. who is responsible for oversight of advisers?

Wouldn't it make sense to simply audit advisers revenue. Any adviser with a static client list and large portion of revenue from upfront brokerage is clearly churning and should be taken to task.

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