As part of our ongoing feature on life insurance broker incentives, it’s worth reflecting back on a report from the International Monetary Fund (IMF) on New Zealand’s insurance sector last year, which suggested that the high rates of commission paid by life insurers to brokers may be hampering growth within the sector.
The IMF recommended in its report that there is a need for more focus on regulation of insurance intermediaries and insurance conduct.
“The government and the Financial Markets Authority (FMA) have been moving in this direction under recent legislation and in the FMA’s supervisory initiatives, including on high life insurance commissions,” it said. “The current approach takes account of the relatively limited conduct risks in insurance, given the product range, while self-regulation by industry bodies is developing and there is a well-established system for dispute resolution.
“However, there is a need, which the government is addressing, to enhance the deliberately low intensity regime currently applying to most independent insurance advisers and brokers, which does not even include basic competence and disclosure requirements.”
The top eight life insurers account for 87% of life premium income and 93% of industry assets, while the top two life insurers account for 47% of the market. Assets in the life sector are about 45% of the total insurance sector for New Zealand.
The IMF said the life sector was exposed to mortality and disability morbidity risks, but also to risks associated with its commission paying practices – as there is no back-up for policyholders should insurers become insolvent due to excessive commissions and soft incentives.
“There are risks associated with distribution practices in this market, where payment of high-levels of upfront commission to distributors (brokers) has become prevalent,” it said. “Insurers are exposed to lapse risk, where they are unable to recoup acquisition costs, while the apparent unsustainability of current commission practices exposes life insurance companies to significant business risk as practices eventually change.”
The FMA conducted its own report last year that showed New Zealanders spent $1.7 billion in annual premiums for life insurance policies in the year to June 2014 – just under half of these were sold through financial advisers, and a significant percentage were shifted (churned) from one insurance provider to another.
“We have previously raised concerns about the extent of replacement business in the life insurance industry,” the FMA report highlighted. “Replacing one insurance policy with another can be in a consumer’s best interest. However, if most is driven by what the adviser will earn in incentives and commission, and there is no clear benefit to the consumer, it is known as churn.”
The FMA said the reason it was concerned about insurance churn is:
- There is a risk consumers could have claims denied that might have been accepted under their original policies
- By replacing policies, consumers could lose benefits they might have received under their original policies
- Policies that are cheaper in the short term can be far more expensive in the long term
- Consumers could be over-insured, or under-insured, because of poor advice.
The FMA said a 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.
Life insurers are spending around $430 million a year on commissions – the report suggested that if this were reduced by 50%, premiums could be cut by up to 12%, according to the NZ Institute of Economic Research.
The FMA also highlighted in its report that overseas trips appear to be an effective sales incentive for advisers. Policies no longer subject to a clawback period (a period in which an adviser must pay back the commission if a policy is cancelled with a specific timeframe) were 2.2 times more likely to be replaced if overseas trips were offered as an incentive. Even new policies still subject to clawback were 8% more likely to be replaced if an overseas trip was offered.
During the FMA’s review period, advisers were offered trips to Shanghai, Prague, Las Vegas, Hollywood, Rome, New York and Rio de Janeiro as sales incentives by life insurers.
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