The Financial Markets Authority (FMA) and Reserve Bank of New Zealand (RBNZ) have released their joint review of 16 life insurers. FMA Chief Executive Rob Everett says the report has shown the life insurance sector “in a poor light,” and “significant weaknesses” have been found in its management of conduct risks.
The review assessed whether there were widespread conduct issues within the sector, and whether there were adequate processes in place to allow insurers to prevent, detect and remediate issues of misconduct. The overall findings of the report have been significantly more negative than the regulators’ bank review, published in November of last year.
“We assessed insurers against four main categories – good customer outcomes, governance, risk management and issue identification and remediation,” Everett explained. “We looked at interviews with staff, boards and management, we surveyed financial advisers, and we looked at the MBIE survey that was part of the insurance contract law review.
“What we found was poor governance of conduct risk, underdeveloped systems and controls for managing that risk, a general lack of focus on customer outcomes, and some examples of poor conduct and potential misconduct – the latter being cases where there may be a breach of the law.”
Everett said that although instances of misconduct did not appear to be widespread within the sector, firms are still not doing enough to develop a culture focused around consumer interests. He highlighted that sales incentives need to be reworked, and that there is “little evidence” of products being designed with customer outcomes in mind.
He also expressed disappointment with life insurers’ lack of analysis of their practices against the FMA’s conduct guide, and against conduct issues in other countries, including the issues arising during the Australian Royal Commission.
“We particularly want to call out the poor oversight of intermediaries and advisers, and this is a particular issue in New Zealand given the high proportion of life insurance that is sold through third parties,” he said.
“In some cases, we found insurers were confused as to who the end customer was, and who they should be serving. We found staff training was inadequate and under resourced, and training and management processes above frontline staff was insufficient to equip and incentivise them to do more in that space.
“The message this report delivers to the industry is that they need to transform the way they approach the risk to customers from poor conduct, and to achieve a genuinely customer-focused culture. We have encouraged them to think beyond the minimum requirements, which we have not seen in the past.”
According to Reserve Bank Governor Adrian Orr, the lessons gleaned from this report are also relevant for the general insurance space, and insurers will need to revisit their policies en masse to ensure that they remain relevant and suitable for their customers.
“The insurance sector as a whole is critical for a sound and efficient financial system, and the life insurance sector is a very big part of that,” Orr explained. “This report focuses primarily on life insurance, but we believe that a lot of the lessons and messages here are consistent for the rest of the insurance sector too.
“For insurance to be effective, it has to be relevant. The products need to suit their purposes, firms need to be able to meet their commitments with those products, and the products have to be relevant over time, not just at the point of sale.”
Orr emphasised that while neither the FMA nor RBNZ has a direct remit over regulating conduct and culture in an explicit legislative sense, conduct and culture is a key part of its various operations around licensing, registration, governance, prudential management and consumer and product supervision. Life insurers have until June to address the issues raised in this report, when they will be expected to report to the regulators with a solid plan of action.
Orr also drew attention to poor oversight of intermediaries, which has been a key issue throughout the review.
“A large part of profitability is also down to distribution channels, and the reliance on intermediaries who have high upfront charges and fees at the point of sale,” Orr explained.
“That is the standout difference for the New Zealand life insurance industry relative to the vast majority of the OECD. You are paid a decent clip for having sold the product upfront, as opposed to ongoing smaller clips over time if that product remains sound and sufficient for the consumer. Effectively, you’re driven to churn the product rather than think about whether the product fits the customer.”
“Our expectation is that insurers should remove – or at the very least, substantially revise – volume-based incentives for staff, intermediaries and management within their organisations,” Everett added. “If those incentives are not removed or substantially revised, we want to understand exactly how they’re going to strengthen the mitigating controls in that space.
“The industry needs to fundamentally rethink what incentives it puts in front of its sales staff.”
The report into life insurers has been welcomed by Financial Advice New Zealand, which has highlighted the report’s focus of the adviser side of the transaction. According to FINANZ CEO Katrina Shanks, ensuring good customer outcomes will be “the collective responsibility” of all life insurance sector participants.
“Financial advisers add significant value to the customer both at the initial point of advice, through the life of the policy and when a claim needs to be actioned,” Shanks stated. “The relationship between a quality adviser and the customer is based on obtaining the best outcomes for the customer.
“We are supportive of a review of intermediary commissions to ensure the model is relevant and sustainable. It is essential that commission models are in the best interests of consumers, but also ensure that the life insurance advice sector can continue to provide this valuable service to New Zealanders.”