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Life insurance industry will need to be dragged kicking and screaming into reform

Monday 4th February 2019

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Financial Markets Authority chief executive Rob Everett was under-stating the case when he said the life insurance industry isn’t capable of making necessary changes on its own.

Everett said the FMA had told the government that it hasn’t seen sufficient evidence of the industry’s willingness to change.

“I don’t believe the industry will do it quickly enough or well enough, left to itself,” he told journalists last week.

Given the life industry reaps premiums totalling $2.57 billion a year, some sort of rearguard action to protect their patch is to be expected. 

Yet, to date, the major firms have been conspicuous by their silence.

The way industry reacted to a much milder report produced in November 2015 by consultants Melville Jessup Weaver suggests it will have to be forcibly wrestled, kicking and screaming all the while, into dealing with the root cause of the problem - its commission structure.

The industry had financed the 2015 report through the Financial Services Council, which represents 10 of the companies included in the FMA/Reserve Bank report on the life insurance industry published last week.

When the 2015 report was published, a number of companies including Asteron Life, AIA and Partners Life said they were resigning from the FSC because of it – they obviously relented because they’re still members.

And the report was published with a disclaimer including the statement that “some FSC members believe there are matters covered in the report that are outside the scope as approved by the funders.”

Partners Life managing director Naomi Ballantyne, who also founded Sovereign, said her company had only joined the FSC on the understanding that it would raise awareness of the benefits of life insurance and would avoid undertaking any projects relating to distribution models.

Ballantyne accused MJW of having “a pronounced bias against independent advisers” and that, rather than genuinely consulting with the industry, it had used its report to “sell” its opinion.

Asteron Life’s then managing director Nadine Tereora, now Fidelity Life’s chief executive, said the MJW report didn’t fairly represent the adviser community.

John Body, ANZ’s managing director of wealth, which includes OnePath, said the industry shouldn’t be debating commission structures because “the market sets commissions” and that it’s difficult to draw conclusions from lapse rates.

It was hardly surprising that the Professional Advisers Association leapt to their defence, saying that tipping advisers’ business models upside down wasn’t in consumers’ interests.

The PAA disagreed “with the view that advisers present the greatest conflict of interest,” chief executive Rod Severn said then.

A similar report with similar conclusions and recommendations came out in Australia earlier in 2015, known as the Trowbridge report.

Michael Dowling, president of the Institute of Financial Advisers argued that New Zealand’s environment was quite different to Australia’s, a complaint that has eerie similarities to Reserve Bank governor Adrian Orr’s argument early in 2018 before he faced up to the fact that such dismissals of the revelations coming out of the Australian royal commission were untenable.

That’s especially so since Australia’s Big Five financial institutions, Commonwealth Bank of Australia, National Australia Bank, Westpac, ANZ Bank and AMP, own New Zealand’s big five.

The complainers in 2015 and other companies in the sector have been conspicuous by their silence in the face of the FMA/Reserve Bank report, although in some ways, the 2015 report was mild by comparison.

For example, MJW had requested information from insurers on the percentage of sales of “new” policies that were actually new, rather than simple switches from one policy to another.

From the responses, it concluded that about 10 percent of the business written by banks was replacement of existing policies but that it was between 40-50 percent of the business written by financial advisers.

That proved to be a significantly conservative estimate.

The FMA used its legislative teeth, section 25 of the Financial Markets Authority Act 2011, to require 12 life insurers to provide it with data for the period April 2011 to March 2015.

From that data, the FMA concluded that just 2 percent of supposed new business is genuinely new and the rest is replacement activity.

A certain amount of replacement activity is legitimate because people’s circumstances change over time, but that level of replacement activity is a strong indicator that advisers have been churning their customers out of old and into new policies to generate commissions.

Adding to that suspicion, MJW found that much of the replacement activity occurs three years after a policy starts. Usually, clawbacks of commission only last for the first three years a policy is in place. After that advisers are free to switch their customers to restart the commission merry-go-round.

The FMA/Reserve Bank report estimates that upfront commissions paid on “new” policy sales range from 170-210 percent of the first year’s premiums, followed by trail commissions of less than 10 percent a year, and that commissions account for about 25 percent of gross premiums paid in New Zealand.

That’s way out of whack with the rest of the world: data sourced from the OECD shows Hungary and Mexico are the next highest commission payers but that accounts for only about 15 percent of total premiums in those countries.

Australia pays about 12 percent of total premiums in commission, although a number of industry players point out that many Australians get their life insurance through their superannuation funds.

Asked about such differences, the FMA and the Reserve Bank say they believe the data is essentially comparable across countries, in particular in relation to sales costs incurred as commission.

It’s clear that changing the commission structure in New Zealand’s life insurance industry is going to take legislation, something Finance Minister Grant Robertson and Commerce and Consumer Affairs Minister Kris Faafoi have promised to fast track.

That’s because if any one insurance company decided to follow the MJW recommendation to cut its upfront commissions to 50 percent of the first year’s premiums, most, if not all, of its agents would immediately switch their clients into policies provided by other companies that continued to pay the current industry standard 170-201 percent commissions.

As the cliché goes, turkeys don’t vote for Christmas.


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