FMA puts advisers on notice over replacement life insurance sales

Wednesday 29th June 2016

The Financial Markets Authority is keeping a close watch on the small group of financial advisers selling large volumes of replacement life insurance, which could be driving up the cost for consumers.

The market watchdog found 1,100 'high volume' advisers with more than 100 active life insurance policies on their books, and of those, 200 advisers were deemed to have a high level of replacement life insurance business - when an existing policy is switched for another. That subset earned almost 50 percent more from commissions on life insurance than other 'high volume' advisers.

FMA director of regulation Liam Mason said the majority of New Zealand's 8,200 financial advisers don't have high levels of replacement business, and that the regulator will be putting those with the highest volumes under the microscope.

"There is a clear link between high rates of replacement business in certain areas and high up-front commissions, or incentives for high sales volumes, such as overseas trips laid on by providers," he said. "FMA staff will be taking a closer look at the conduct of those advisers with the highest volumes of replacement business as the next stage of this work."

The FMA's first report into life insurance and sales said there's a higher risk of customer 'churn' - where a consumer swaps one policy for another for no clear benefit to themselves - from replacement business by authorised financial advisers (AFAs) and registered financial advisers (RFAs) because they generally sell more than one brand.

"Of wider concern is the possibility that New Zealanders are paying too much for life insurance, because insurance providers are spending too much on commissions to advisers due to churn," the report said. A New Zealand Institute of Economic Research report commissioned by Sovereign Assurance published last month "calculated that life insurers are spending around $430 million a year on commissions" and if that were halved "premiums could be cut by up to 12 percent."

The FMA sought four years of data from New Zealand's 12 main insurance providers spanning April 2011 to March 2015 to inform the report.

The issue of commissions paid for life insurance policies has been a bone of contention for providers and divided the sector when its lobby group, the Financial Services Council, last year commissioned a report suggesting commission-driven selling risked encouraging sales of unnecessary cover and created conflicts of interest for financial advisers, leading several members to quit the FSC in protest.

At the same time, the government is reviewing legislation covering financial advisers, which identified rules around the disclosure of commissions and potential conflicts of interest as being inconsistent and difficult for consumers to understand.

The findings of the report have been given to the Ministry of Business, Innovation and Employment as part of the legislative review, which Commerce Minister Paul Goldsmith has said is one of his top priorities for the year.

Among the issues the legislative review is weighing up is the two-tier system where AFAs need to meet certain education and ethical standards to sell a broader array of products, whereas RFAs simply need to register to sell simpler services.

The FMA report on life insurance found RFAs had higher rates of replacement business than AFAs, with a median of 7 percent in 2014 compared to 4 percent for AFAs. The registered advisers also accounted for two-thirds of the 1,100 high-volume advisers and 86 percent of the 200 with a high level of replacement business.

BusinessDesk.co.nz

Comments from our readers

No comments yet