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Another law review proposes more changes for insurance advisers

Life and health insurers could be required to obtain clients' medical records when they issue new policies, as part of Government proposals to tackle non-disclosure issues.

Friday, May 3rd 2019, 6:00AM 4 Comments

A review of insurance contract law is under way and an options paper has been released.

The Ministry of Business, Innovation and Employment said it had noticed a problem with non-disclosure in the insurance sector. It was a significant source of complaints and dissatisfaction from clients who discovered their policies would not pay out as expected.

“At the moment, individuals must tell insurers everything that could affect their decision to offer insurance or how much they charge in premiums,” said Commerce and Consumer Affairs Minister Kris Faafoi.

“The review has found that people often do not understand the kind of information that must be disclosed and that the consequences for not disclosing the information can be very harsh.

“This paper proposes options to change the rules about disclosure to better reflect the information known by consumers and businesses. It is proposing several options to deal with that.”

MBIE said ordinary consumers could not reasonably be expected to know what an insurer might consider material, and therefore what facts must be disclosed.

“Consumers usually know that they must disclose official medical diagnoses, but not necessarily signs or symptoms which have not been diagnosed.”

An option it proposes to tackle the problem is to change the law so that clients would only have to answer insurer questions truthfully and accurately.

“It would be easier to know what you have to tell insurer but getting insurance might take longer because there would be more questions to answer,” MBIE said.

The second option proposed is to change the law so that clients have to disclose only what a reasonable person would know to be relevant.

MBIE said this could still be hard to understand precisely what was expected.

Another option in addition to those was to require life and health insurers to use third-party records in their underwriting.

That would take the burden of disclosure from clients but could lead to higher costs for insurers which would be passed to clients, MBIE said.  There could also be problems if the non-disclosed issue was not in the consumer’s records.

It also said remedies could be introduced including allowing insurers to avoid contracts only if the nondisclosure was deliberate or reckless and misrepresentations material.

Advisers and information

The options paper flags as an issue that insures are deemed to know matters known by their representatives.

It said this was introduced because insurers were seen as better placed to bear the risk of default or lack of adviser skill than consumers; and insurers should only pay commissions to those advisers they trusted.

But MBIE said it had been told this was unreasonable.

Advisers were often selected by the client and paid commission even when they were not under direct insurer control.

Some advice businesses were also substantial entities with PI insurance.

“The New Zealand position is unique in common law jurisdictions, where brokers are not deemed agents of the insurer.  We have also heard that it is problematic that consumers may not always be aware whose agent an insurance intermediary is, and may not know that they will be responsible for an intermediary’s failures if the intermediary is not entitled to commission from the insurer. However, this seems unlikely to be a major issue if in practice almost all intermediaries are paid commission by the insurer.”

An option proposed was to provide for some brokers and advisers to be agents of the insurer, in situations such as when the intermediary was collecting information under the insurer’s express authority – or provide that an adviser was the agent of the client unless indicated otherwise. Someone who held themselves out as a provider of impartial advice about a range of products across the industry would deem not to be under direct control of the insurer.

A statutory obligation could also be introduced to require advisers to pass information on to insurers.

Other issues

MBIE wants policies to be easier to read and compare.

Options it is considering to facilitate this include requiring plain language insurance policies, requiring core policy wording to be clearly defined, requiring a summary statement, requiring insurers to work with third-party comparison platforms and requiring insurers to disclose key information. It was suggested there could be a government-run insurance website.

How the Fair Trading Act deals with insurance-specific exemptions to unfair contract terms requirements is also being considered.

Terms such as those that allow an insurer to unilaterally change an insurance contract would not be permitted without those exemptions.

Submissions close on June 28.

Tags: insurance law Kris Faafoi

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Comments from our readers

On 3 May 2019 at 10:05 am Skeptical said:
I'm curious as to where they are getting the data from. Can someone shed some light?
The reason why I ask, it is appears to me at least that the powers at be have certain ideas that they believe to be issues and then pursue them with reckless abandon.

Life insurers have fantastic reputations of actually paying claims, both under the policy wordings and ex-gratia. I also read not too long ago there are actually very few complaints in the life insurance industry (less than a third about life insurance, less than 3% about advisers). I understand it does say above that is a 'significant source of complaints' but I'd be keen to see the numbers before legislation is considered to solve a problem for which the extent is questionable. To develop this point further, it is very unlikely that someone will attempt to claim on a policy within the first few years of having it. So these complaints are likely to be the result of policies underwritten even prior to even FAA 2008 being in force.

It just seems quite similar to the 'churn' issue last year. The powers at be believed it to be an issue, did a full review of the entire industry and of 4,500 market participants found 11(I think it's 11, but the number later reduced to 3?) that were worthy of censuring. I would challenge any industry of this size to find less bad actors. There almost seems to be a narrative of how they expect the industry to be and chase those ideologies as opposed to researching the industry then identifying the issues and trying to fix those. Tail wagging dog etc.

One thing I will say is a positive out of all of this is in the other considerations piece. Plain language policies is an absolute must. The compendium I received a couple weeks back regarding changes to an insurers trauma product is confusing for most advisers I know, let alone the clients at the other end.

But hey, that's just my $0.02
On 7 May 2019 at 6:05 am JPHale said:
@Skeptical here here! Echo your sentiments.

While there are complaints and many are tackled at the insurer end rather than the DRS end, its a perception looking for the data to support it.

3% of claims typically have non-disclosure issues, and no matter what is done, about half of those will always be non-disclosure claims because of the people concerned. Blase or actively hiding things.

The rest we’d need medical notes, and we’re back to my comments after Easter and the 2009 privacy commissioner ruling. Yet the government is still silent on their commissioners ruling.

Until the government comes out talking about or with a direct change to the commissioners directive this is all political noise.

Because after the PC change you still have to get the medical council to agree as they are echoing the PC decision.

And, to top it off, like the 2008 finance company issue, how many issues of disclosure and incorrect cover are coming from the DIY crowd who never consulted an adviser

This whole issue isn't about the advisers its about the behaviour of consumers, and the sooner an industrial psychologist and behaviourist are involved the better, we’ll start seeing more sense in proposals.

I'd like to see the data on the source of advice on these problem claims, with the overlay of recommendation against client decision. Then we have something worth talking about. And I'll put money on it not being adviser conduct...
On 7 May 2019 at 11:00 am dcwhyte said:
These are reasonable comments and questions, Skeptical. There is little empirical evidence to support concerns over any of the issues raised.

Reports on Churn and Soft Dollar Remuneration, while well-intentioned, were poorly constructed and appeared to be research conducted to reach a preconceived conclusion - much like the Trowbridge Report in Australia.
Constructing legislation based on what "can" happen or what "might" occur based on the actions of a statistically insignificant percentage of the adviser population seems to be an answer to a non-existent problem.

But here we are and we have to make the best of it - if there were no issues to address - real or imaginary - we'd have no need for regulators!
On 7 May 2019 at 3:56 pm Skeptical said:
Dcwhyte - very eloquently summarised in your last sentence!

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