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Don't hold your breath for life insurance reform

Will 2020 be the year New Zealand's life insurance industry calls time on policy churn and excessive broker commissions?

Monday, January 6th 2020, 7:45AM 11 Comments

by BusinessDesk

Despite the Financial Markets Authority and Reserve Bank's efforts over the past 18 months and Commerce Minister Kris Faafoi introducing the Financial Markets (Conduct of Institutions) Amendment Bill into Parliament in December, the short answer is - probably not.

The industry's economic significance is far from small: there are about four million life insurance policies in force with annual premiums totalling $2.57 billion.

The FMA and RBNZ exposed the industry's degree of dysfunction through their conduct and culture review and highlighted that, not only are commissions way out of whack with international comparisons, but churn is endemic.

The FMA has said 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.

The industry disputes this figure. Naomi Ballantyne, founder and managing director of Partners Life, for example, has said about 60 percent of her company's sales are new policies.

The industry also argues that there are many legitimate reasons for changing policies, especially if the customer's circumstances have changed.

However, any long-time observer of the life insurance industry would know how obsessed it is with figures showing new sales. Little interest is shown in other statistics, such as how much existing business each firm has in place.

That's because churn actually is the name of the game.

Reserve Bank figures show commissions 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.

Upfront commissions on new policies can range from about 170-to-210 percent of the first year’s premiums.

In September, the two regulators expressed their disappointment with the industry's response to their review and said there is significant work to done before they will be satisfied.

The lack of action was despite 16 life insurers identifying more than 75,000 customer problems worth at least $1.4 million.

The problems the regulators identified ranged from selling policies to people who were ineligible to ever make claims, overcharging and incorrectly recording basic details such as date of birth to continuing to charge premiums on policies that had been cancelled.

They found limited evidence of products being designed and sold with good customer outcomes in mind, that some insurers did little or nothing to assess a product’s ongoing suitability for customers and that companies were slow to respond to or remediate complaints.

The FMA has said it wants the government to give it more powers to prevent problems before they happen and that is what is supposed to be addressed by the legislation Faafoi has been working on.

The bill will introduce a licensing regime, require all financial institutions and intermediaries, such as insurance brokers, to comply with fair conduct principles and regulate how salespeople are paid, including banning volume-based incentives or volume targets.

But the bill hasn't even had its first reading yet, so it's anybody's guess on how long it will be before it goes through the select committee and public consultation stages, and its second and third readings, before it finally becomes an act.

Law firm Chapman Tripp describes the bill as "largely framework legislation, with the 'meat' to come later. The timeframes for introduction of the requirements can be measured in years rather than months."

A number of details won't be in the bill but in the accompanying regulations and "often the devil is in the detail," Chapman Tripp noted.

Another law firm, MinterEllisonRuddWatts, said the bill needs refining to assess how it will operate in practice.

"The bill should be carefully considered to determine whether there may be unintended consequences," its commentary said.

« Partners Life criticises VitalityPartners growing while other insurers deal with issues »

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Comments from our readers

On 6 January 2020 at 11:20 am Tash said:
I wonder who wrote this? A disappointing article.
On 6 January 2020 at 11:33 pm Denis said:
I think some of the numbers have gone a bit awry in this article:

Four million life insurance polices in New Zealand?

16 (?) life insurers identifying 75,000 "problems" worth at least $1.4m. That's about $18 per problem.

I am not in denial over the issues that need addressing but the devil really is in the detail - and these numbers don't seem right.
On 7 January 2020 at 9:21 am dcwhyte said:
Ho-hum - another decade, another year - and another unbalanced rant against the Life Insurance industry without any factual base or statistical evidence included.

References to suspect research from supposedly credible sources doesn't make this nonsense any more palatable.

I'll pick only two examples of mistaken and inaccurate conclusions in the "Business Desk" article - whoever the anonymous author happens to be.

1. "The FMA has said that only 2% of sales of life insurance policies are genuinely new..." - there is no statistical evidence to confirm a 98% replacement rate. Neither the Trowbridge nor the MJW reports could produce statistically significant supportable evidence of the rate of churn and just because the FMA said so doesn't make it so.

2. The chart published in the FMA/RBNZ Conduct and Culture review comparing the percentage of premiums taken up by commissions is disingenuous and misleading. The other territories cited predominantly distribute life insurance via tied or in-house agents within vertically integrated organisations. Add back in the cost of funding the subsidies provided these distribution channels and the percentage of premium taken by acquisition cost sky-rockets well over 25%.

But why let the facts get in the way of a biased and ill-informed rant?

It's high time the industry stood up to this kind of Trumpian lies and deceit which amounts to nothing more than social media bullying.

Kelly Ann Conway would be proud of Business Desk's ability to regurgitate alternative facts based on flawed research and unsubstantiated conclusions.

Here's hoping the standard of articles on financial services matters in 2020 improves.
On 7 January 2020 at 9:45 am Referee said:
Well said David Whyte - totally on the button!
On 7 January 2020 at 1:52 pm All hat no cattle said:
It took 10 seconds of googling to find out the original author is Jenny Ruth. She writes for NBR and others, as well as Radio NZ.
This piece is several orders of magnitude below her usual standards.
She has created a piece that makes the same mistake we have seen in those reports from FMA/RB of lumping several unrelated issues together, tarring everyone with the same brush, and losing the argument in the confusion.
On 10 January 2020 at 7:29 am Tony Vidler said:
I would challenge either the FMA (as the apparent source cited) or the author of this article to justify what I perceive is a ludicrous claim that only 2% of business written in the life insurance sector is actually new business/new lives.

If such a claim were even remotely correct there would be absolute justification for the continual efforts at "policy reform via propaganda". If such a claim were anywhere near close the insurers themselves would be leading the charge on this topic.

It is an apalling statistic if it is indeed accurate. If it is not accurate (as I firmly believe) then it is apalling that the market regulator should allow their reputation to be attached to it as it would bring into question their ability to even gauge accurately what is occuring in the industry.

It should be vigorously challenged by industry & journalists. It should be even more vigorously challenged by the market regulator publicly if they believe it to be incorrect. If they believe it be correct however, then substantiate it.
On 13 January 2020 at 12:33 pm Hoops said:
Some very relevant comment made by all regarding the replacement of existing business --- especially that of the FMA.
While there calculation of 2% may well be correct there is one factor that is not taken into consideration and that is the non reported churn - -no replacement of business report is completed by an adviser at the time of applcation. This is a very common practice which would have some impact on the FMA,s 2% claim. We all know that this is common practice with some advisers. My recent call to a client who has gone directly to the insurance company to cancel their cover went something like this. Do you mind if I ask why you are cancelling your current cover? Some one phonned and said to my wife he could get the same cover for less cost. The wife and the adviser completed the app and my client signed it
Upon further discussion he was not aware of the cancellation and existing cover sections of the application and was assisted by the adviser on how to cancel his existing cover directly. While this behaviour will not come as a surprise to any of you and is normal operating proceedure for some I would like to finish with two very relevant points. Clients who are generally uniformed are not aware of what the process and best practice should look like. How every this is not so for advisers. While the twisting of the existing business in this case may well not have any impact on the client, the adviser will know that the non disclosure of existing business etc to the new insurer could at claim time have massive non disclosure ramifications for the clients. In summary the 98% of churned ? would seem like a problem within the industry which pales into insignificance for the client in comparision to the non disclosure
On 16 January 2020 at 8:26 am JPHale said:
It’s all been said in other comments. An uneducated, unsupported, and biased rant against the industry.

Waiting for a time when facts, understanding, and dialogue overcome uneducated opinion.

Like pro-plague and flat-earth, bashing the life industry is a common sport.
On 16 January 2020 at 11:22 am JPHale said:
Speaking to the 2%, the function of calculation is unclear. Is this by benefits, policies, or just premiums? If just premiums then there an argument that nothing was new, inflation would explain it.

What these large numbers with bold statements without qualification fail to convey is the 65 year old losing their income protection needing 4-5 30 somethings to replace that premium.

That’s by premium, by benefit; premium impact of aging causing the reduction of benefits, but not the whole cancellation of all covers, will hide new business that is genuinely new business.

And on this, level premiums are not the panacea for this either, as that restricts the breadth of cover for the available budget right now, to enable affordability later. That too needs consideration in the advice. Short term is often the client focus when given the choice. Value of return right now.

When we look at changing needs, it’s rather offensive for the FMA to say it’s churn when they have publicly stated that consumers should shop for the best deal they can until their health prevents them moving. That’s called the free market at work.

And lastly any decent adviser is looking at the whole market, as client needs and situation changes, cover requirements also change.

It might be the client has a great product which is affordable to start with, but 10 years later the premium against benefits is 15-20% more expensive than an alternative product of similar quality.

Or maybe the current cover won’t work for the new situation and they have to move. Indemnity IP with high passive incomes or low taxable income because they are self-employed rather than the typical employed approach they used to be.

The point. Clients moving because they are better informed is the actual point of consulting an adviser.

Which is it? stagnant stability of the market that means clients have a worse experience than they presently have, or a vibrant market where clients get the best possible response for what they face?

I work on the basis of the latter, it’s why advisers exist and why advisers need to speak up.

There are thousands of reasons that are quite valid to justify product movement within providers and across providers.

To sit at the top and say 98% is churn is both insulting to the industry and unhelpful for the mandate that the FMA has for confidence in the market.

As I saw earlier today, right is right and wrong is still wrong no matter how many people subscribe to taking the wrong position. The problem is being right can be a lonely place when the majority are swayed by opinion and not facts.

And on the basis of the BS 2% numbers, I must be responsible for the majority of the new premiums/policies as the majority of what I have done in the last year is new benefits where there have been none.

And me being the majority of that 2% is BS!
On 17 January 2020 at 9:24 am BayBroker said:
Having read both the article and the comments I can only agree with what has been said in the comments.

Further, I am surprised Good Returns has allowed this article to be published with the obvious BS "facts" in.
On 17 January 2020 at 1:57 pm Denis said:
That's a good observation from @JPHale there. "2% of sales" has even less meaning when you don't know if it's 2% of premiums or clients.

A life insurance premium of (say) $5K could cover one overweight, pre-diabetic, wheezing boomer - or, it could be insuring 10 youngsters.

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