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RBNZ needs more resources, not more powers: Bascand

The Reserve Bank needs more resources rather than new powers to better fulfill its role as prudential regulator of insurance companies, deputy governor Geoff Bascand says.

Tuesday, September 24th 2019, 9:01AM 2 Comments

by BusinessDesk

Geoff Bascand

Currently, the central bank has just seven or eight staff overseeing more than 90 insurance companies, he says.

Before the CBL situation blew up, it had tended to focus its energies on the larger companies that have the greatest impact on New Zealanders – CBL provided builders' insurance, mostly in France.

"We're satisfied that our powers for our prudential purposes are adequate. We have the authority to look at the governance and risk management and to engage with them very purposefully about these elements," Bascand told BusinessDesk.

"In terms of resources, we can only do that lightly with the number of insurers that exist." While RBNZ does focus on the most significant institutions for policyholders, "we're limited in the depth of that," he says.

"I would never be able to promise that we could find everything and look at every institution. We would like to go more systematically through the insurance sector and have frequent discussions and more scrutiny over their practices than we do at this time."

Last week, after RBNZ and the Financial Markets Authority publicly expressed disappointment with the life insurance industry's response to their joint conduct and culture review, FMA chief executive Rob Everett called for greater investigatory powers for his organisation.

Currently, the FMA can only respond to complaints or to specific examples of mis-selling or other types of misconduct before it can act. It would like to be allowed to "go in and poke around" inside banks and insurance companies so it can stop potential problems for consumers before they happen, Everett said.

The government appears receptive to the FMA's plea: Commerce and Consumer Affairs Minister Kris Faafoi has said he shares the FMA and RBNZ's concerns about the unwillingness of the life insurance industry to change and that the government has been working to fast-track measures to improve conduct in the financial sector which will be announced shortly.

Bascand says he believes the government is similarly sympathetic to RBNZ's plea for greater resources.

"We've had indications from the government that they understand resourcing and funding is part of the need for a stronger regulator" and that's being considered in the phase-two stage of the review of the Reserve Bank Act, although that hasn't got to the point of 'a specific number,'" Bascand says.

"The direction of travel is for us to be significantly more resourced and stakeholders are receptive to that."

The conduct and culture review has turned up at least 75,000 customer issues valued at least $1.4 million from the 16 life insurance companies subject to the review, but that amounts to just 0.05 percent of the life industry's $2.57 billion in annual premiums.

Bascand says those estimates of remediation costs came from only "a small number" of the companies.

"I would be surprised if that was all there was. I don't have specific remediation figures that suggest big operational issues," he says.

"But when you see a company not knowing whether it's got a conduct problem, or finding a little one, having not looked very widely, you wonder how good their risk management is."

The two regulators have ordered the laggards to "get it done and get it done by Christmas."

The Reserve Bank is also tasked with ensuring financial stability, although that side of its prudential regulatory efforts is more keenly focused on banks and day-to-day critical activities such as payments and other transactions.

Nevertheless, an insurance company failure "would damage confidence in our investment market" and it would indirectly impact the banks because they rely on general insurers to insure the property banks lend on.

Life insurance policies also often have a savings aspect to them.

Everett has said the problems he's aware of don't rise to the level of the FMA wanting to warn consumers away from particular companies, so he doesn't want to name names at this stage, although he indicated that may change.

RBNZ appears more willing to name names in the wake of the CBL collapse. It has done so with ANZ Bank, New Zealand's largest bank, on a number of high-profile occasions, calling out the bank's governance failures and requiring ANZ to hold more capital for a number of reasons

Bascand says RBNZ won't hesitate – "if there's a particularly egregious breach of regulation, then it's likely that entity will be named," particularly if there's an enforcement action.

That would also be the case "if we had an entity that was in serious breach of our requirements or not paying nearly enough heed to our requirements."

And it does appear the life insurance companies are falling into that category. "At this stage we have a widespread lack of focus and attention … a great number of these insurers need to do better."

Some have suggested the industry has a fundamental design problem that only legislation can change.

As the Reserve Bank has pointed out, commissions to salespeople in New Zealand amount to about 25 percent of total premiums paid each year, far higher than in other countries.

Mexico and Hungary are the next highest at about 15 percent with Australia at about 12 percent and the United States about 9 percent.

And the FMA has found that only 2 percent of sales of life insurance policies are genuinely new, rather than just churn, or switching customers between policies to generate income for life insurance agents.

Those within the industry have said that the first company to reduce commission payments would simply lose business to its competitors.

Bascand isn't buying that. "It's a problem the industry has to confront. Some are looking at that. Some are trying. We need them to move further and faster, especially some of the bigger companies," he says.

"I think it's a sad day that businesses think that the only way to create a more competitive dynamic is to rely on a regulation. I think there is opportunity for businesses to change distribution models" by, for example, changing to using a digital channel.

Legislation governing commissions "is a last resort, not a first resort."

Tags: RBNZ

« Advisers feeling overwhelmed by change and scrutiny, group saysWhat SMEs think of life insurance advisers »

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Comments from our readers

On 24 September 2019 at 4:26 pm What Charlie Munger said... said:
FFS quit it with this stupid % of premium nonsense.

BTW where is the UK and South Africa in that chart? Sure we have Austria, Belgium and Chile, and Israel, Ireland and Italy. Why not UK and SA?

That chart includes Denmark, Sweden and Finland - all very low commission as a % of premiums - also all countries that have banned/restricted commissions!

Here's a question: How much does someone in those "other countries" get PAID for selling $500,000 of life cover to a healthy Male, non-smoker?

Is their car, office, phone and computer paid for? Their PI insurance, admin and support, photocopier and parking? Their super, and taxation and professional development? Their tertiary training, personal mentoring and annual conference? What do those things add up to as a % of premium?

Would the RB like to just come out and say that they think 98% of insurance sales are mostly for the benefit of the adviser who is driven by enormous upfront commissions and motivated by sales-based incentives?

And that 98% of insurance sales are not necessarily a "good outcome" by virtue of the mere fact that only 2% of sales are "genuinely new"?
On 25 September 2019 at 8:41 am Paul Flood said:
"And the FMA has found that only 2 percent of sales of life insurance policies are genuinely new, rather than just churn, or switching customers between policies to generate income for life insurance agents."

Who wrote this nonsense? The 2016 FMA report "Replacing Life Insurance - Who Benefits" did report (page 5) that overall life insurance policies grew by around 2% each year.

It did NOT find that the remaining 98% was churn, or written for the purpose of generating income for life insurance agents (with the implication that this was the sole or main purpose).

The 2018 “Update on the FMA’s Ongoing Review of Insurance Replacement Business and Conflicted Conduct” contains more detailed information on what their investigations DID find:

Of 3,700 advisers with at least one life insurance policy on the books, 1,100 were “high-volume advisers” (more than 100 active policies).

Of those advisers, around 200 were “high-replacement advisers” (advisers who have a “high estimated rate of replacement business”).

Of those roughly 200 “high-replacement advisers”, 24 were selected for further individual analysis.

Of those 24, 14 faced sanction or further investigation.

Even if we assume that these 14 advisers were churning up a storm, 1,100 high-volume advisers divided by 14 churners does not equal 98% churn.

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