The Financial Markets Authority (FMA) has released a report into insurance sales and advice titled Insurance replacement business - who benefits?, highlighting the risks associated with replacement business.
The regulator said it is calling for cooperation from the life insurance industry and financial advisers to address the potential harms to consumers from the relatively high levels of switching of existing insurance policies.
The FMA this morning released its first report into sales practices within the life insurance industry and the date reveals that of the $1.7bn New Zealanders spent on annual life insurance premiums in the year to 30 June 2014, a significant number of existing policyholders were switched between providers, known as ‘replacement business.’
Data in the report was gathered from 12 life insurance providers and analysed over the past year. It focuses on replacement business sold through either authorised or registered financial advisers (AFAs and RFAs, respectively). The review focused on this distribution channel because advisers sold over 40% of the policies in force in June 2014; and because there is a higher risk of churn in this group, because they generally sell policies from more than one provider.
Replacement activity carries the highest risk of potential so-called ‘churn’, where the switch is primarily done to benefit the adviser and not the consumer.
Although the FMA acknowledged there are many reasons for advisers to consider it is beneficial to their clients to recommend a change in life insurance policy, it pointed out the high proportion of replacement business compared to new business in NZ means the impacts on consumers need to be examined.
The FMA is highlighting the risks associated with replacement business, both to ensure that providers and advisers properly consider the risks of potential conflicts of interest and to enable consumers to make more informed decisions when they are considering a recommendation from their adviser to replace their existing policy.
The FMA’s director of regulation Liam Mason, said, “We saw that the majority of advisers do not have high levels of replacement business, regardless of the way they are paid for their services.
However, there is a clear link between high rates of replacement business in certain areas and high up-front commissions, or incentives for high sales volumes, such as overseas trips laid on by providers.”
The report’s findings include:
Source: FMA Report Replacing life insurance — who benefits? June 2016
|There are 8,200 RFAs and AFAs in New Zealand. Of those, 3,700 advisers sold at least one life insurance policy that was active in 2014.
|Among the 3,700 with at least one active policy, 1,100 had more than 100 active life policies on their books.
|Of the 1,100 with more than 100 active life policies, 200 met the FMA’s criteria for a high estimated rate of replacement business.
|In June 2014, those 200 advisers:
- had 65,000 active policies between them, involving about $110m in annual premiums
- and earned almost 50% more from commissions on life insurance than other high-volume advisers.
|On average, RFAs had higher rates of replacement business than AFAs. About two-thirds of the high-volume advisers, and 86% of the high-replacement advisers, were RFAs. Some RFAs replaced more than 35% of their life policies in one year.
“Following our report, FMA staff will be taking a closer look at the conduct of those advisers with the highest volumes of replacement business as the next stage of this work,” Mr Mason said. “We will be examining the basis on which policies have been switched or replaced and the drivers for that activity – with a particular reference to incentives (of whatever form) provided by insurance providers.”
“As a conduct regulator, our focus across the entire financial services industry is to ensure that customers’ interests are always at the centre of a business operation. So we will be paying particularly close attention to the behaviour of insurance advisers where it is unclear that the appropriate care, diligence and skill are being provided to their customers,” Mason said.
The Ministry of Business, Innovation and Employment has received the findings from the report to be considered as part of its review of the Financial Advisers Act.
You can read a full copy of the report here.