In this second interview with Adrian Orr from the Reserve Bank, we talk about life insurance conduct and commissions and some of the things that he'd like to see happen in the industry.
I'd quite like to just switch now to a totally different topic, to life insurance and the conduct review, which you did earlier this year. It's interesting, it seems to me this conduct thing has sort of become a bit of a fad, suddenly, it just has suddenly appeared out of nearly nowhere, and we're hearing about it all the time. Is that a right interpretation?
I think it's correct in terms of if you've been looking at headlines, certainly culture and conduct, but wrong if you think about how we as consumers have confidence and faith in that what we are being delivered is what was on the package. So culture and conduct is a key critical part to having trust in the capital assistant. And the way it's embedded is really through the boards and the senior management of institutions, and that's why we put a lot of emphasis on self-discipline. The companies themselves, the banks, the insurance companies have the disciplines, have the culture that is necessary to take money, someone's money, and to put it into long tail agreements, which are very complex. So try and drive the snake oil out of it and make sure that what you see is there. Culture ...
Is there a lot of snake oil on it though?
Well with the insurance, life insurance area. I mean the banking we didn't find any real sense of widespread misconduct. We did find a real lack of systems in the way of being proactive and making sure that the products and what they're doing are what was written on the packet, and that their staff are incentivized to be selling the right thing to the right people. It was very reactive and piecemeal.
For the insurance companies, the life insurance, it was worse. The whole concept of frameworks, measures, activities for understanding what an appropriate conduct behavior was were absent, largely.
Is that partly because a lot of life insurance is sold through third party distribution?
It's a big part of the problem, or a challenge I would say. But you can, what do you say, you can outsource the activity. You can't outsource the responsibility, and this has been a gap. The way that a lot of the third parties have been incentivized is through the volume of sales, the churn. Not through the outcome for the customer through their lifetime.
See but then I think the advisors would disagree with you in the sense that they are trying to build a customer base of long term customers which they're going to look after through the process, so they're not going to go out there and not look after their best interests.
Well they can build customers, but if there's asymmetries of information, if there are new products coming in that may or may not be suited, if your lifestyle is changing or your needs are changing through time, how do you break down that asymmetry of information to say, "Is this the best product? Is this the best time?" How do you do this? And if people are being incentivized to sell the latest, greatest, or different and so as, you can have the same customer but you could've changed their product many, many times throughout their life.
So you've talked about longer term thinking and societal changes and the way things like life insurance are distributed. Do you have any ideas of what it could look like?
I mean I think it is a conversation that's happening globally and New Zealand is awakening to it slowly, very similar to the environment challenge that we've had, the climate change challenge. We tend to interview each other. We don't tend to look outside of our little small world that often. Globally, particularly post the GFC, is a fundamental challenge to what I would say capitalism's traditional behavior. When you think about capitalism, you know, I'm a huge fan of it, totally dedicated, but it will fail at times. And often it fails through a series of incentive structures that end up defeating itself.
A lot of that is, for example, if I have a 30 year strategic plan to build an amazing, sustainable company I have to provide a five year strategic plan to start implementing, and I have to provide an annual update to show where it's going. I have to do the quarter reporting. Then I have to do real-time disclosure. I'm looking here, and I've been driven there by a series of well-meaning interventions all the way through, to the point where I'm here. Economic growth is sustainable when it's consistent with cultural inclusion, when it's with environmental sustainability. It's not economic growth at the cost of it, and it's about getting those virtuous circles growing, and it's simply about thinking the horizon.
And so just not enough of that has been going on?
I would say very little. It's this, again, versus that. I mean, what is it, "Why are diamonds expensive and water is free?" used to be the test. And it was meant to be, "Well diamonds are scarce and water is plentiful." Now, you know, diamonds are controlled by a cartel, and water never had property rights. So the question is the same. The answer has changed.
Yeah. When it comes to, you touched on commissions and stuff like that, you haven't been supportive of up-front commissions, I think is a correct interpretation from the conduct review.
That was one of the challenges. Again, a global challenge.
Yeah. So have you any idea of how you think that could change?
Well what we're hoping, well what we are doing not hoping to do, is we've received the reports back from the various insurance companies. We're working through those at the moment. We did the banking first, and when I say we, us and the Financial Markets Authority. And what we want to do is hear from them about how they can have better structures or more sustainable structures because we want them to run the business. You know we're talking about -
You don't want to dictate them how to.
Market discipline, self discipline, and then regulatory discipline, that's us. That's the third cousin and the weakest of all. If you get market and self discipline done, say "How can you be more transparent to the public? How do you reduce the asymmetries of information? How do you make people think longer term about they actually do or don't need? How could you make it far simpler for people to understand what is the value of what you just bought?" The complexity of these products is immense. To pretend that people will read the background material, that they understand the nesting of the different issues is wrong. We know we don't.
It's a very difficult issue to break down for a consumer though, isn't it? So how they do that is going to be their challenge.
But that's not an excuse for not trying. I mean, a jar of peanut butter just used to say "Peanut Butter" on the front in the 1980's. Now we know on the back of the jar no one was killed in the making. There's certain allergies, and what other sugars, fats, and carbos went into it.
All those sorts of things are on there. You said that the weakest part was the regulation I guess around the conduct. Where should that sit?
I mean weakest in terms of its influence because if you have to just put and make people do things, well then that ends up with corner solutions, quantity targeting, quality targeting. Why do you have to play as if it's a kindergarten ground and kids can only do something in the sandpit? So I meant weakest in that way. I don't mean it's ... it is powerful. We're busy at the moment thinking very hard on the background of this about how to bolster out people on the ground and how to do activities. By the way, you know, CBL collapsed, so how much abuse did we take through that process?
Quite a bit.
And how much, "Oh, wow. I didn’t know all that was happening in the background," have we heard since? None. And so you never get applause from the regulator. You get, "What are you doing in my face?" And then, "Why didn't you do more?" So it's about trying to get that balance.
Is it something which should sit with the Reserve Bank or should it sit somewhere else?
I'm very comfortable with the Reserve Bank, so I think the banking and the insurance. New Zealand's small economy, we've got the economies of scale and scope from the Reserve Bank trying to recreate something else somewhere. We see all of the daily transactions happening between the banks. We see a lot of the insurance activity. It's critical to financial stability, which is our purview, so I'm very comfortable with being there. I would prefer to have more resource.
So one of the things which, sort of coming back to the start, is this whole conduct thing has come up recently, quickly I would've argued it in New Zealand. I'm interested, the Super Fund that went and had invested into a life insurance company. I would've thought that issues like that would've got picked up at that sort of stage.
Life insurance companies are great. There's no ... they're necessary. And I know that the NZ Super Fund has cleared mandates around how they want their firms to behave around environmental, societal, and governance issues. And they have been at the forefront of New Zealand in trying to create and demand that the owners of the capital behave for ... I should say the agents, the boards behave consist.
So an organization like that, by investing into a life company, can help drive this cultural change?
I hope so. Absolutely. I mean that's where change comes from, intervention. Being a shareholder brings responsibilities and it also brings the ability to have influence, and so that is why the New Zealand Super Fund has been so active in engaging with companies where they see poor practice rather than just excluding and burying their heads in the sand. It's better if you're inside and you can influence. There will be a certain point where you just say, "Too hard," and you walk away.
And life insurance companies must be a good investment otherwise you wouldn't see people like the Super Fund and others investing into the life sector.
Well, you know a real challenge is that some of them have been fantastic through time, and one of my concerns around the climate change, for example and the asymmetry of information is how do we know if they're not making super profits and spooking us for the sake of it? How do we know these things? So while insurance, absolutely they can say, "Oh, sea levels are rising. We're going to have to charge you more," or, "We won't insure this," or, "We'll do that and the other." Are they shifting their relative revenue streams or are they increasing one revenue stream? So it's about getting that transparency out there.
So people know more of what's going on.
That's right. That's right.
And accurately understand the process. And the report which you did with the FMA, you sort of called for urgent change in the life sector. Has that been moving quickly enough?
Yes. So we've got a lot of conversations to have ahead. You know a lot of this, you have to remember that we're so heavy Australian dominated that our interviews with banks, the equivalent to that in Australia was a Royal Commission. An up front blamestorming, period. We got there quick because we wanted to have a real conversation to see what was under the hood. Is this necessary or not? In banking we said there are lots of things you need to do better, and they understood. A lot of them had had the panhandle anyway in Australia. In insurance there's a lot more work to be done.
But they're making progress?
I hope so.
And they've responded to the report, so ...
Responding.
Responding, so no doubt we'll hear about it later.
Yeah. You will. You will.
Excellent. Look, thank you very much for your time. It's great that you came in, and it was nice to see you.
Yeah. Wonderful. Thank you.
To watch the interview, click here.
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