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Insurer response 'not good enough'

Commerce Minister Kris Faafoi says insurers are "passing the buck" to advisers.

Tuesday, September 17th 2019, 10:03AM 6 Comments

Kris Faafoi

The Financial Markets Authority and Reserve Bank have said today they are disappointed with insurers' response to their conduct and culture review.

Insurers were given individual reports and asked to respond with an outline of the steps they were taking to address conduct concerns.

The regulators have now released their response to those reports.

Overall, the regulators said they were disappointed. Significant work was still needed to address the issues of weak governance and ineffective management of conduct risk identified in the regulators’ report earlier this year.

Rob Everett, FMA chief executive, said: “While we’re disappointed, we’re not surprised as the responses confirm what we found in our original review. It’s clear that progress has been slow and not as far-reaching as required. Some providers have started work to identify the customer and conduct issues they face, others have not provided any detail on this.”

Sixteen life insurers were asked to provide work plans outlining the steps they will take to improve their existing processes and address the regulators’ findings and recommendations.

There was wide variance in the comprehensiveness and maturity of the plans provided.

Adrian Orr, Reserve Bank Governor, said: “We’re disappointed the industry’s response has been underwhelming. The sector has failed to demonstrate the necessary urgency and prioritisation, around investment in systems, to provide effective governance and monitoring of conduct risk.”

There was also a wide variance in the quality and depth of the systematic review of policyholders and products. Some did not complete this exercise and others did not provide data on the number of policyholders affected or the estimated cost of remediation activities. Insurers that completed the exercise identified at least 75,000 customer issues requiring remediation, with a value of at least $1.4 million. Some of the new issues identified included:

·         Overcharging of premiums and benefits not being updated due to system errors, human errors and under-reporting of deaths.

·         Poor customer conversations overlooking eligibility criteria and poor post-sale communications, which lead to declined claims and underpayment of benefits.

·         Poor value products were identified, where premiums charged were not fair value for the cover provided.

Sales incentives and commissions

The FMA and RBNZ committed to report back on staff incentives and commissions for intermediaries. Previous reports by the FMA reflected the concerns with conflicted conduct associated with high up-front commissions and other forms of incentives, (like overseas trips) paid to advisers.

Although some insurers have committed to removing sales incentives for employees and their managers, not all committed to removing or altering indirect sales incentives.

Those providers that have removed sales incentives for employees did not typically use external advisers to distribute products. Providers using external advisers told the regulators that changing long-held business arrangements and distribution models was difficult and would take time to implement.

Everett said: “We’re ready to work with life insurers to ensure they prioritise their focus on serving the needs of their customers, while at the same time balancing the need to remunerate advisers for the important work they do to help these customers. But we do not think high up-front commissions create confidence that insurers and advisers are acting in the best interests of customers.”

Orr said: “Good governance within insurance firms requires the effective management of conflicts of interest. We need to see much better systems and controls in place to manage the inherent conflicts where advisers or sales staff are offered incentives to sell or replace insurance policies.”

Those companies that have not undertaken comprehensive systematic reviews of policyholders and products have been asked to complete further reviews of their systems to identify issues, and to develop mature plans to respond and remediate any of their findings. These plans must be completed by December 2019.

The FMA and RBNZ will continue to monitor how the insurers are responding to recommendations and implementing their work plans. Life insurers are currently not legally required to become more customer-focused and the FMA and RBNZ found that the sector has a weak appetite for change.

Deficiencies in some of the plans received, and some insurers’ lack of commitment to implementing the regulators’ recommendations, further demonstrates the need for additional obligations to be included in the regulation of conduct of life insurers.

Government response

“Disappointingly, in many cases the responses from some life insurers show slow and inadequate progress, and I share the regulators’ concern,” Faafoi said.

”Many of the plans life insurers provided to the RBNZ and FMA for improving their internal systems were poorly expressed and incomplete.

“Some life insurance companies also appeared to be trying to ‘pass the buck’ to the brokers and advisers they use to sell their products.

“I want insurance providers to understand that they remain responsible for the quality and appropriate design of the products they sell, whether directly or through contracted agents, to ensure those policies fit customers’ needs."

He said Government had been working to fast-track measures to improve conduct in the financial sector, and will announce action on this shortly.

“We know the wider financial services sector – including both banks and insurers – hasn’t been putting customer interests top of mind. Sales incentives are a big part of the problem. Incentives play a useful role in some cases and we don’t want to remove them entirely. But when insurers sell financial products and services, the focus needs to be on the customer and not just on profit.

“We plan to introduce a regime where banks and insurers are primarily focused on their customers."

Tags: Adrian Orr Commission conduct FMA insurance Insurance Advisers Kris Faafoi Life insurance Reserve Bank Rob Everett

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Comments from our readers

On 17 September 2019 at 10:24 am Backstage said:
I loved this comment in the media response, "Mr Everett said: “We’re ready to work with life insurers to ensure they prioritise their focus on serving the needs of their customers, while at the same time balancing the need to remunerate advisers for the important work they do to help these customers. But we do not think high up-front commissions create confidence that insurers and advisers are acting in the best interests of customers.” Its like me saying that his very expensive salary is affecting his judgement and job performance... his uninformed stupid statements are not helpful. If he wanted to explain its not the quantum of commission but how it is often expressed or constructed (until now) may have driven some wrong behavior then that could almost be plausible!
On 17 September 2019 at 10:29 am Skeptical said:
One day after stating there is a problem with consumer confidence in the industry he releases a press release ruining insurers credibility.

I'm sorry, but 'we don't think high up fronts are good' isn't an appropriate rationale for this sort of action. Give us empirical data. Last time the report was ran the FMA only went after 3 advisers in an industry of thousands. Doesn't sound like a systemic problem to me.

To be fair to the man, all of the stuff regarding human error, client overcharging and failures to review policies is a completely fair criticism and should be the focus of this report. That sort of thing is a black eye on this industry.

But it feels like the attack on commission is just tacked on to that because they don't like it.

How about let's all just work for free?
On 17 September 2019 at 10:34 am Ron Flood said:
Wow. 75,000 recognised issues with a total of $1.4 million in remedial costs.
Pity you were both asleep at the wheel when Ross was running rampant.
Time to stop trying to look lmportant and let the insurance companies do what they do best, proving great insurance policies for their clients
It would appear that most of problems have related to consumer credit and credit card insurance, where most are sold at point of sale,not through an adviser.
On 17 September 2019 at 10:59 am lewiboy said:
As expected, commission is the root of all evil, someone working on commission is conflicted, while someone on a salary with isn't. Now they have Sue Chetwin on board, this commission bashing will only intensify.
On 17 September 2019 at 12:25 pm Pragmatic said:
Full disclosure – I’m not an adviser and know nothing about the insurance industry. However, I am intrigued at @Ron Floods comments which uncover a bigger issue.

Whilst it’s very easy to point the finger at various industry participants and suggest that they could do better, this constant finger wagging and threats of heightened regulation continues to erode consumer confidence without solving the issues. I am in no doubt that the financial services industry can (and does) continue to improve, although regulators and commentators need to be aware of the long-term implications of their layers of meaningless bureaucracy and idle threats. Increased regulatory burdens will add costs to the industry, restricting advice for those who are able to afford it, and will helping to stimulate an increasing ‘self-drive’ consumer mentality. The industry is already witnessing Kiwisaver mediocrity, with many suppliers afraid to provide anything other than low cost conservative strategies that will fail both consumers and the social structure of the economy. All of this will continue to occur whilst any rogues will continue to be rogues – albeit operating behind the veil of compliance.

My advice to the armies of salaried watchdogs is to focus on practical aspects of improving consumer transparency enabling them to make informed buying decisions (hint: this is not commissions v fees, and does not require further pages of stuff that consumers will never read), whilst building a framework that looks beyond the next election cycle. The current pathway will motivate industry suppliers to disintermediate whilst attracting consumers to a wide range of direct financial solutions – both regulated and otherwise – that will fail to meet their expectations.
On 17 September 2019 at 1:30 pm Elephant1 said:
Last year didn't Adrian Orr supervise the purchase a controlling interest in Fidelity Life. And before he went off to the Reserve Bank he would have cancelled all fancy trips to the World Cup. Can he please tell the industry he did that .And also the NZ Super Fund has formally told Fidelity Life to cancel the trip.

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