The Financial Markets Authority (FMA) is considering regulatory action against three major financial institutions as a result of its review of insurance replacement business practices.
The thematic review took a close look at how insurance businesses identify and manage the inherent risks involved in selling replacement insurance policies, a transaction which, according to the FMA, heightens the risk of claims being declined and original policy benefits being lost. The regulator is specifically concerned that replacement policies benefit those making the sale rather than the customer, even when the impact on the policyholder is ‘neutral.’
The review found that while most firms had an awareness of the risks associated with replacement transactions, their processes were driven more by mitigating their own legal risks rather than those of the customer. Less than half of all firms advised customers that replacing their insurance could lead to loss of benefits, and none of the insurers’ reviews had an independent process to distinguish between new and replacement business.
According to FMA director of regulation Liam Mason, firms need to re-visit how they define and oversee replacement insurance business.
“We’ve seen some real spread in terms of quality,” Mason told Insurance Business. “It’s disappointing that there are a small number of firms who haven’t recognised that replacement business is a high-risk transaction, and that it’s important to have appropriate processes and oversight in place. But in other firms, we were impressed with what we saw – there are some improvements that can be made, but most firms bar a few seem to be complying with their obligations.”
The FMA is currently providing feedback to reviewed firms on how they can improve their customer protections, and Mason says that there needs to be more conversations between firms and customers around the pros and cons of purchasing a replacement policy. Of the 11 firms reviewed, two were deemed to have “high quality” processes with customer outcomes in mind, six had taken steps to mitigate risks, and three are suspected of not meeting their legal obligations.
Blair Vernon, the managing director of AMP New Zealand, said he is confident that AMP falls into the “high quality” end of the spectrum and that the review highlights the fact that replacement business leads to poor customer outcomes. AMP was one of the QFEs surveyed as part of the FMA’s review.
“We’ve had an uncompromising approach to replacement business practices and advice standards for our QFE advisers for a long time,” Vernon told Insurance Business. “Not being in the replacement business is commercially challenging, but, in the long run, it is the right position for the interests of policyholders. This is going to be a challenging time for some industry participants, but we hope that it will drive some major improvements.”