Replacement case puts spotlight on 'churn'

New regulations coming into force in the insurance industry and financial advice sector may help avoid situations where people are left exposed by insurance replacement.

Monday, July 6th 2020, 5:56AM 7 Comments

It was reported last week that a South Auckland man, Ailepata Ailepata, was denied a $100,000 payout for gastric cancer because their New Zealand Home Loans broker moved their trauma cover from Westpac to Fidelity Life.

The amount of cover was reduced and when they went to claim they were reportedly turned down by Fidelity Life because he did not disclose “impaired glucose tolerance” when the policy was taken out.

The family told media they felt betrayed.

Fidelity Life said on Tuesday that it was still in discussions with the Ailepatas and their representatives. “We prefer not to comment further while these discussions are ongoing.”

NZ Home Loans was reviewing the case.

The Financial Markets Authority, which has previously highlighted concerns about insurance “churn”, said new rules could address the situation if it were to arise in an advice situation again.

The Conduct of Financial Institutions Bill, which is currently before Parliament, introduces a new conduct licensing regime for banks, insurers and non-bank deposit takers, regarding their general conduct. Licensed institutions will need to implement effective policies, processes, systems and controls that provide for how they will ensure the fair treatment of consumers.

“While the bill does not contain specific provisions on replacement business, once the new regime is in place we would expect to focus on insurers’ conduct through the lens of the systems and processes they have in place to take responsibility for customer outcomes, where intermediaries are involved in the sale of its products.”

FSLAA, which takes effect next March, will mean all advisers need to comply with the code of conduct. That includes an obligation on anyone who gives financial advice to ensure it is suitable for the client.

“The recently released disclosure regulations for FSLAA include expectations for providing information on the material limitations of advice given, disciplinary history of the person giving advice, and the fees, commissions or conflicts of interest that may apply.”

Tags: Churn conduct FMA FSLAA insurance replacement business

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Comments from our readers

On 6 July 2020 at 9:46 am Tash said:
There is only one person responsible for this mess (and maybe the client has some responsibility, I don't know the facts)and that is the salesperson (and probably NZ Home Loans).

Fidelity Life cannot be responsible unless they had prior knowledge and still did nothing.

The FMA say the new laws will make it an insurer's liability to have systems in place to prevent this churn. What does this mean? how far does this extend? If it's simply a matter of checking with the client that they understand disclosure and the consequences in general terms, that might work (I think this is what Partners Life is doing already anyway). If it is much more than this, then they live in LaLa Land. Insurers cannot determine whether or not an adviser has given acceptable advice without reviewing the whole care in detail, which means interviewing the client themselves, doing their own fact-find, comparing all the possible products and providers available to find the most suitable solution, and redoing application forms all over again to catch non-disclosure.

Insurers are not advisers! If they are lucky they will have a relatively few employees who could reasonably do an advisers job, most employees of insurance companies cannot, they do not have the skills or knowledge!

If NZ law continues on this 'the insurer must take responsibility where intermediaries (who are independent contractors not employees and not subject to instruction)are involved in the sale of its products' it will mean the end of independent financial advisers in the insurance space at least (very bad for customer outcomes). What sensible insurer would pay commission to an adviser when they have to hire an army of their own advisers to redo most of the work just to confirm it was good enough. No, we will revert back to the bad old days of tied agencies with the attendant lack of choice for clients (unless they engage multiple agents from different providers which won't happen). Maybe that is exactly what the Government and FMA wants and if so why don't they just say that.
On 7 July 2020 at 7:32 am Skeptical said:
@Tash, I think the most pertinent point you made was that you weren't aware of the facts.

If I put on the shoes of the adviser, review the client's policy, see a missold trauma policy that's far too high on a reduced wording bank policy (which is incredibly common). I too would suggest that a worthwhile consideration would be to seek companies that specialise in insurance as their policy wordings reflect this. In the process, reducing the trauma and implementing a strategy to protect income.

To the point of the case - The only question is around disclosure. Did the client know that a test which reported high glucose (not a condition such as diabetes), needed to be disclosed? Did the adviser know this? Is it possible for an adviser to second guess a clients disclosure, look at someone based on demographics and go are you sure?? Is it reasonable for Fidelity to decline the claim for gastric cancer based on impaired glucose as one doesn't necessarily cause the other - there has to be a lot more detail, which I imagine will come out in the wash.

Finally, to your point about insurers being completely absolved from responsibility. I'd suggest an easier way to get around this is for every replacement business request PMARs. Problem solved.
On 7 July 2020 at 10:55 am Tash said:
thanks skeptical, the main purpose of my comment was to highlight how ridiculous the notion is that insurers know more about advising than advisers and that they should second guess all advice. Imaging making the pharmacist responsible for the Doctors prescription!

As far as PMAR's go, I've been told that doing this on a blanket approach whether necessary or not, would be very expensive (and time consuming for Doctors already under great pressure). Would you or the client be prepared to pay for the costs of a PMAR and the underwriters time?
On 7 July 2020 at 1:58 pm Skeptical said:
@Tash - Apologies if I was a tad abrupt, the finger pointing to advisers whenever there's an issue gets a tad repetitive.

I think the analogy you used is more apt if pointed at the drug manufacturer. Them labelling and marketing a drug for a condition, yes the doctor needs to do their research on it, but if the drug fails to do as promised the doctor can’t be solely to blame.

Humour me for a minute though, let’s run through this current situation with the circumstances I propose. A replacement deal is put in, the default position for replacement by the provider is to request medical notes – this issue doesn’t occur, neither do the raft of the issues exactly like this that gives our industry a blackeye. I do get your objections, however they are very easily solved:
Time - not as much of an issue as clients already have existing cover the risk of them going a while without cover.
Cost - A request costs only $2-300 factor this into the commission payable. Some other OECD countries don’t pay any commission on upfront replacement, only renewals. If commission was dropped by 20%* for replacement, it would still be viable, more time consuming, less profitable but still worth it if it is legitimately in the client’s best interest. Plus I’m sure the regulator would like to see lower profitability for replacement.

*Calculation as follows, $1,500 API @230% commission = $3,450 @ 20% = ~$700, which still remains profitable if only 50% of submitted replacement business cases end up being issued.
On 22 July 2020 at 11:32 am JPHale said:
It seems that we are lacking significant facts on this case.

The anecdotal comments I have received also suggest much of what the advice industry would expect to be done has been glossed over in the reporting but was present in the actual client file.

Now to stick my neck out.

As many know I worked for NZHL for a couple of years and I implemented much of the risk advice process they use while I was there given the pending regulatory changes back in 2010/2011.

To highlight a few points for those who haven't seen the inside of NZHL and how they work. And from what I have been advised the process of providing risk advice hasn't changed greatly.

First off, all clients are expected to have the following with risk advice when I was there.
* A completed needs analysis
* A full statement of advice
* That statement of advice is designed to engage the client in what they have against what they need as they work through it.
* The SOA is signed off with a clear approach to what is going on, the SOA has been delivered and there is a decision on intended action. Some, all of it, none of it, or 'thinking' about things further.
* Once the decisions on the cover that is proceeding are made, that decision is documented and signed off too. Specific cover types, amounts and structure.
* The SOA should also have notes relating to the discussion too.
* Then the application is completed.
* the BRA is completed and signed, and in this case it does appear appalling, but isn't the only thing that covers replacement in the advice process.
* The application is submitted to the insurer
* A copy of the application with a copy of the Signed SOA is also sent to the client to check.
* And in the cover letter to the client is a declaration that they received the SOA and application for them to return.
* And potentially a copy of that declaration is on the client file after they returned it, unlikely in this case, stating they have checked it and all is good, or that it has been checked and there are included changes to been made/added. The experience on this is somewhere between 15-25% of these declarations are returned.

Now as I said in a recent article I'm not commenting on the case itself, as I don't have access to the file and have no direct knowledge of what the client file says.

However, even if half of this is covered, it is still more than the requirements of the present legislation and under the new legislation, if followed fully, would be compliant advice.

So, let's not get too carried away with bashing NZHL just yet, as this may well be technically ok with a shitty client outcome, that happens too. It also may be an individual that didn't do the advice bit appropriately, they have since left and NZHL gets to clean up the resulting mess.

Either way, it is a crappy situation with a crappy outcome. This is somewhat a reflection on the world we live in where the fault lies with someone else. The law states contract of good faith, which is the opposite of where the fault lies, with the policyholder.
On 22 July 2020 at 12:14 pm gavin austin adviser business compliance said:
Hi JP
I don't always agreed withyour comments on Good Returns but in this case I complement you and wholeheartedly agree (before the soothsayers make comment about who the hell is this guy saying this I'd point out one thing - 50 years in the industry.) The advcie procss you described looks from my compliance experience (13 years) hard to fault. Love your comments here.
On 23 July 2020 at 8:58 am JPHale said:
Thanks Gavin appreciate the comments.
Also too healthy debate is how we move forward and Improve and develop and make things better.

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