Tuesday 29th January 2019
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The life insurance industry is vulnerable to misconduct, is ignoring whether its products are suitable for customers and is too slow to make changes.
That’s the conclusion of the joint report on the industry by the Financial Markets Authority and the Reserve Bank.
But that judgement is hardly surprising given the FMA’s previous conclusion 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.
The report says there are about four million life insurance policies in force with annual premiums totalling $2.57 billion.
It shows 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.
Up front commissions on new policies can range from about 170-210 percent of the first year’s premiums.
“Overall, the report shows the life insurance sector in a poor light,” says FMA chief executive Rob Everett in a statement accompanying the report.
“Life insurers have been complacent about considering conduct risk, too slow to make changes following previous FMA reviews and not sufficiently focused on developing a culture that balances the interests of shareholders with those of customers,” Everett says.
The regulators say they found extensive weaknesses in life insurers’ systems and controls, with weak governance and management of conduct risks across the sector, and a lack of focus on good outcomes.
Reserve Bank governor Adrian Orr says the industry has to act urgently to make major changes to address these weaknesses.
“Their services are vulnerable to misconduct and the escalation of issues that have been seen in other countries,” Orr says.
Indeed, the report’s findings echo those of Australia’s royal commission into financial services which is due to lodge its final report on Friday.
It was ongoing evidence coming out of the Australian commission that sparked the New Zealand regulators into action and their report on the retail banks was published in November.
Australia’s 'big five' financial institutions, AMP, ANZ, Commonwealth Bank of Australia, National Australia Bank and Westpac each own one of New Zealand’s big five.
“Public trust in life insurers could be eroded unless boards and senior management transform their approach to conduct risk and achieve a customer-focused culture,” Orr says.
“Ultimately, insurers need to take responsibility for whether customers are experiencing good outcomes from their products, regardless of how they are sold.”
The report looked at the practices of 16 life insurers operating in New Zealand including AIA, AMP, Asteron Life, BNZ Life Insurance, Cigna Life, Fidelity, Kiwi Insurance, OnePath Life, Partners Life, Sovereign and Westpac Life.
• limited evidence of products being designed and sold with good customer outcomes in mind
• some insurers did little or nothing to assess a product’s ongoing suitability for customers
• sales incentives structures risk sales being prioritised over good customer outcomes
• serious lack of insurer oversight of third-party insurance sales people
• very poor remediation of conduct issues with insurers slow to respond to complaints
The report says the regulators didn’t find widespread cases of misconduct but did find several instances of poor conduct and a small number of cases of potential law-breaking that are now subject to investigations.
“Some of the issues and themes are similar to those highlighted in the Australia royal commission, albeit on a smaller scale. The FMA and RBNZ are not confident that insurers themselves are aware of all the current issues. This creates a serious risk of further conduct issues arising,” it says.
The regulators have tasked the 16 firms to report back by June 30 with an action plan addressing such matters as incentives based on sales volumes for both internal staff and third-party sales people.
Those plans will be subject to regular reporting on progress.
In July last year, the FMA published its findings after a review of 11 life insurance companies and said the behaviour of three of those firms was so bad that it was considering taking regulatory action against them.
It turns out that after follow-up inquiries, the FMA decided further action was unwarranted.
“At the time, the FMA was criticised in some sections of the media for failing to name those insurance companies,” the FMA says in response to BusinessDesk’s inquiry about what had actually happened.
“The outcome in this case highlights why the FMA does not name entities it may be making inquiries of until further investigation has been carried out off the back of thematic reports,” it says.
“Concerns and further inquiries do not mean that a business has committed wrongdoing.”
However, by failing to name the three potential transgressors, the FMA had effectively tarred all 11 companies – which were named – with the same brush. AMP and Westpac said at the time that they knew it wasn't them.
The interim report lodged by Australia’s royal commission in September last year didn’t contain a rash of recommendations and proposed law changes to address the skulduggery it uncovered.
Instead, the report noted that some of the misconduct had already been known to regulators but that “it either went unpunished or the consequences did not meet the seriousness of what had been done.”
That report noted the conduct regulator, the Australian Securities and Investments Commission “rarely went to court to seek public denunciation of and punishment for misconduct” and the other key regulator, the Australian Prudential Regulation Authority, “never went to court.”
In other words, the Australian regulators weren’t using the tools the politicians had already given them.
Today’s New Zealand report says that purchasing life insurance “is one of the most important financial decisions people will make. Customers should be able to have confidence their insurance will do what the insurance company or their financial adviser has told them.”
It says that a positive finding is that “in general, frontline claims teams were focused on good outcomes with a strong desire to do the right thing for their customers.”
It also says that the report was based on information provided voluntarily by the insurers “and it is not appropriate to name or attribute findings to any individual firms.”
The report makes a number of recommendations to the government on areas where there are regulatory gaps – it notes that insurer conduct is currently only regulated indirectly through the FMA’s oversight of financial advice.
“No one regulator has oversight of insurers’ and intermediaries’ conduct over the entire insurance policy lifecycle.”
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