Regulators 'may misunderstand' legacy products

As part of their report into the conduct and culture of New Zealand life insurers, the Financial Markets Authority and Reserve Bank questioned how legacy products were dealt with.

Legacy products are those that are no longer open to new clients but which are still offered for those who already have the policies.

The regulators said they heard evidence that insurers’ staff and advisers lacked understanding of legacy products because they had insufficient training and guidance.

“Insurers rely heavily on a relatively small number of long-tenure staff members’ experience with these products. There is a risk to the insurer and its legacy product customers if these staff members leave. Insurers need to better mitigate this risk,” they said in their report.

“Some insurers’ systems for legacy products were outdated, with many relying on manual systems and processes. A lack of investment in systems and training appeared particularly acute for legacy products and needs to be addressed. Our expectation is that legacy customers should not be given less attention than newer customers or treated in a way that risks poorer outcomes for them.”

Naomi Ballantyne, managing director of Partners Life, said her firm had decided as a new entrant to the market that it would automatically upgrade existing clients’ policies as new products were released.

She said, while it took commitment to keep increasing the risk associated with the customer base, it paid off in the reduced cost of administering old products and protection against churn.

But she said regulators needed to realise that life insurers were not like fire and general insurers, where one policy would effectively be replaced with another each year.

Life insurers are bound to continue to offer the terms a client signed - or better - as long as that person was paying for the policy.

“Legacy products are a bit more complex than the regulator would like to think… it isn’t a banking system or a fire and general system where it doesn’t matter what the client was covered for three years ago. We have to keep it forever.”

Some legacy products offered more generous wordings than modern policies, and customers might want to stay with them, she said.

But she said the regulators’ criticism could have come from some insurers leaving policies in old systems and “forgetting about them altogether”. Some insurers were stuck with large books of legacy products on old software systems and it was unwieldy and expensive to try to update them, she said. "Making any change on the old systems is hard."

The main criticism of automatically upgrading old policies was that it meant higher premiums for all clients, she said, and policies upgraded whether the client wanted it or not. But she said that was offset by clients no longer having to wonder if their policy was up to modern standards.

Comments from our readers

On 14 February 2019 at 8:39 pm Chatterbox said:

Behind legacy management is a culture of policy generation churn in a mature market. The industry BS just keeps flowing. Let's just say some legacy products are version altered over time to advantage the insurer because "generous wordings" are no longer part of new management's culture. Forgetting that version changes to replace existing legacy products so as to reduce liabilities is a widespread fraud. A fraud that has yet to be exposed and which regulators are presently unaware.

On 14 February 2019 at 10:59 pm Graeme Lindsay said:

#Chatterbox. What are you talking about.

I have been following and analysing policy wordings for 25 years and cannot understand what you are talking about.

If you have evidence to support your claims, I suggest that you set it out for the rest of us to understand.

You claim: "version changes to replace existing legacy products so as to reduce liabilities is a widespread fraud" but don't add any explanation. Those of us with a few years experience might appreciate some elaboration rather than just possibly exaggerated allegations.

On 15 February 2019 at 9:37 am dcwhyte said:

Agree GL, Chatterbox may have lost the silver-foil helmet!

Naomi's point around complexity is highly relevant. A generation of policies priced to support the benefits - and the anticipated claims - can't just be changed to meet modified conditions without a pricing impact on the policyholder.

That's why this suggestion in the FMA/RBNZ report about product quality should be of concern.

What are the regulators' qualifications to assess the suitability of products? More to the point, who has the accredited, qualified, expertise within the NZ regulatory bodies to judge risk product quality?

Some products are more or less claims sensitive and are priced accordingly - that's a commercial decision made by the product manufacturer.

Outside the VIOs, the application of those different products to clients' circumstances should be assessed by suitably qualified Financial Advisers assisted by independent research.

Legacy products that are no longer fit for purpose, no longer meet clients needs, and cannot be amended to do so, should be replaced.

That is not 'churn' in any sense of the word and, providing appropriate explanation, disclosure, and documentation accompanies the process, this is an important obligation of the Financial Advisers duty of care toward the client.

Also, from my perspective, policy wordings of medical insurance policies have become less generous over the years I agree, but in general terms, life and lifestyle policy wordings have become more claims sensitive with enhanced definitions in Trauma policy coverage, terminal illness benefits, etc. Apart from withdrawing the lifetime income replacement benefit option, Income Protection policy wordings retain their claims sensitivity.

As for Chatterbox's allegation of an industry-wide conspiracy to perpetrate fraud - there are some chaps in white coats arriving shorty - go quietly into the night!

On 15 February 2019 at 10:41 am Dirty Harry said:

The fact that many legacy products which should have been replaced, but have not been is as much a failure of advisers as it is the providers. It's our job to review and advise. This may well be evidence that "high upfront commissions" are not in fact the "incentive" they are thought.
It may be evidence that "churn" is not the issue it is thought to be. FFS with so much legacy stuff kicking around that SHOULD be replaced, it's a bit rich for anyone to say churn is widespread and driven by trips.

While the report's comments regarding suitability of legacy stuff may or may not be appropriate (given the role of the authors) they are correct regarding investment in upkeep, maintenance and staff training. It's long been known unique benefits such as loyalty discounts, terminal bonuses, time-based conversions and enhancements and other quirky features of legacy business is not at all well understood by staff and, to be fair, many advisers who may rely on those staff for information. How many times has a call been transferred to some dusty corner office where a long-term, somewhat curmudgeonly old rogue resides that knows everything about the products and systems that orignate from a company that was taken over by the company that took over before the name was changed and then the whole shooting match was moved across town...

But in spite of all this; Remember one critical fact that I will keep coming back to:
It's the 5th paragraph on page 4, which goes:
"Neither regulator has an explicit legislative mandate for the regulation of conduct in relation to life insurance."

Nuff said.

On 15 February 2019 at 11:07 am JPHale said:

Both my learned colleagues have covered most of this, Thanks Graeme and David.

The other aspect that has not been mentioned and is almost always overlooked in every discussion involving legacy products, is the reinsurance treaty the insurer has.

The reality is the reinsurance treaty in the background carrying the risk is often limited in its flexibility and to 'move' these older policies opens up the issue of transferring reinsurer, which demands new underwriting.

Life insurance unlike any other product int he market is not manufactured and distributed solely by the branded company you see. There are deep contractual obligations sitting behind this that are designed and expected to endure potentially 90-100 or more years.

So no there is no conspiracy in insurance and insurance contracts.

The conspiracy is in the systemic dumbing down of everything with an expectation that a 5-year-old can understand how everything works.

We have a complex world and it has complex things in it. Dumbing it down does no one any favours.

We have an education system specifically for the purpose of educating people; if you don't understand something go and learn about it.

The present expectation of dumbing the world down so people understand only leads us to an education system that finishes at the end of the Dr Seuss series of books. And that's not a pretty sight. Great books, but not where we should be going.

On 15 February 2019 at 6:19 pm Chatterbox said:

Hmm, thanks GL for time to comment. All in good time the evidence will be presented. Like so many long term frauds, it has been part of considerable self-regulation misconduct, infecting demutualisation processes, misleading the ombudsman scheme, abusing share market listings, capital markets, as well as consumers and their advisers. So its not only related on your level of advisory capacity. Such matters will be presented all in good time. Obviously few know of the misconduct otherwise the fraud and related issues would not exist. Its best advisers are not aware otherwise they would become complicit. Some insurers are well versed in concealment via complexity, sophistry, systems excuses, use of the confidential internal complaints process and semantics. If advisers did know, such as David who hopes or thinks he knows it all, then they would not dismiss the subject out of hand with silly comments. Some advisers have been tested and their comment was "that can't be possible; they can't do that can they?" Like you, work has been undertaken to monitor policy wordings and related products for more than 20 yrs. Policies are long term contracts of good faith. Therefore the administration of them must be monitored over many years and cross correlated as to version changes and amendments. I suspect you never monitored the same policy legacy products for years and then went back and double-checked. In fact I know you. You do not have the systems to do that as you rely on the insurer to keep archives.

Lets take one example only. What would you say if the insurer stated "we do not retain previous versions of the policies issued, just umbrella templates (that get amended over time). Now think carefully "what does it mean for an insurer to alter over time after point of sale when eyes are not looking (and without disclosure) the previous generous wordings that helped advisers to sell the product, under processes that allow the original "replacement". Such processes may include "policy assignment", "registration", "lost policy", "claim processing only with the original or a replacement", "systems replacement", "upgrade", "enhancement", "copy reproduction", and shall we keep going? Such as 'product rationalisation, or consolidation, or new product range transfer at no cost....etc..or are you going to deny also knowing about the industry use of 'weasel wordings' to provide open-ended hidden discretions for the life office to opt for control of its product risk of the entire product range and insured generation pool.

Let me ask, have you ever asked for a product financial conditions report (FCR)? I know you have not - I know you personally. Guess what! - if you had, then you would have stop acting in your career and capacity over all these years because I know you personally do not stand for dishonest practices, but may be other than accepting some tax schemes and related stretched commercial accounting practices to sell large business insurance cases.

Just ask yourself, why might well-known insurers now decide to sell off their businesses such as AMP not listing until it has done so. Only C-level management are the ones who know what is going on as their remuneration packages are reliant on it to their advantage.

Turning a blind-eye and pretending its all "covered" (concealed) under the auspices of insurance complexities is their "get out of jail free card" they hope. Well the day has come for that to now stop and for some to face the courts.

Not even the actuaries know the ultimate game and how its played by the marketing department. All they know is that they do not want to resign, so they recommend to the board to set aside 'reserves for bad behaviour' if the misconduct is ever discovered.

This is all about gaming the reserves diminishing liabilities which you nor advisers are up to speed with. So any comment back to David or any others is a waste of time. Only you have at least some comprehension of what I am referring to. Will you stay in the industry now or face being exposed also?

On 16 February 2019 at 9:14 am guscott said:

#Chatterbox - Suggest you take your weird whacky conspiracy theories to another forum. Having worked 20 years in senior positions for a large insurer and 15 years running my own advisory businesses I can assure you your comments couldn’t be further from the truth.

Clearly you have had some unfortunate experience in your world as we will do with many industries and this has translated into a full-blown misguided attack.

I am proud of the work we do and when it comes to the moment of truth i.e. paying genuine claims, I have never had an issue with any insurer and usually find them working hard to ensure a claim is accepted. This was the same approach we took when I was working in corporate world.

I guess you probably think man never landed on the moon either and the US Govt blew up the World Trade Center.

Regulators 'may misunderstand' legacy products

Regulatory scrutiny of legacy insurance products may highlight a lack of understanding about how the industry works, one insurer says.

Thursday, February 14th 2019, 4:00PM 7 Comments

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