The regulators' review has exposed "significant weaknesses" in conduct
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 overall findings of the report have been significantly more negative than the regulators’ bank incentives review, which was published in November of last year.
“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 explained.
“Although instances of misconduct do not appear to be widespread within the sector, firms are still not doing enough to develop a culture focused around consumer interests. Sales incentives need to be reworked, and that there is little evidence of products being designed with customer outcomes in mind.”
Everett 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.
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.”
Reserve Bank Governor Adrian 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.
“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 since 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.”
