QFE insurance providers appear to be considering their own risks ahead of their customers when it comes to replacement business, the Financial Markets Authority (FMA) review of insurance replacement business practices has found.
The review looked at how life insurance providers identify and manage risks around replacement business through their policies and procedures when a replacement insurance policy is sold. It is part of the FMA’s broader focus on managing conflicts of interest in the life insurance industry.
As a result of its findings, the regulator is concerned that QFE processes seem to be set up to manage the risks faced by the firms; not to help customers.
The report stated:
- Most firms had processes in place to identify when a customer was being advised to replace life or health insurance, showing awareness of risk associated with these transactions. Generally, these processes seemed oriented towards reducing firms’ legal risk, rather than to identifying and mitigating risks for customers.
- Fewer than half of firms reviewed advise customers that replacing their life insurance could lead to worse cover or the potential loss of benefits. Insurers need to acknowledge that replacing insurance policies is a high-risk transaction for customers.
- Although firms use transaction-specific ‘replacement business forms’, these are used mainly as a risk management tool for insurers, presented at the end of the advice process, rather than being used to help and support customers in their decision-making.
- None of the insurance providers reviewed have an independent process to distinguish between new and replacement business.
The 11 QFEs included in the review were:
- Asteron Life
- Partners Life
- Farmers‘ Mutual Group
- Medical Assurance Society New Zealand
- AA Life
The FMA is now considering regulatory action against three QFEs, of which the findings indicated were falling short of meeting their legal obligations.
Of the remaining eight firms from the 11 subject to the review, the FMA concluded two had high quality internal polices and processes designed with better customer outcomes in mind, while six firms had shown some effort to mitigate risks, but need to improve their practices for customers.
FMA Director of Regulation, Liam Mason, said, “We are concerned that a number of firms are not recognising or treating the risks to customers in replacement insurance transactions. Processes seem to be set up to manage the risks faced by the firms, not to help customers.
“It is disappointing that despite the risks to consumers, some insurance providers do not identify insurance replacement as a particular area of risk.”
“It is disappointing that despite the risks to consumers, some insurance providers do not identify insurance replacement as a particular area of risk,” he added.
The FMA noted its thematic review of incentive structures in banks is due to be completed by the end of 2018 and the RBNZ/FMA culture and conduct review is also ongoing.
Financial Services Council (FSC) CEO, Richard Klipin, said, “We don’t shy away from the fact that the findings of the review are mixed and that there is a clear challenge from the FMA for the industry to improve practices related to replacement insurance transactions.
“The review found a range of different behaviours from good to bad, but the FSC and our members are committed to working with the FMA to lift industry practice in this area across the board,” he added.
Klipin also confirmed the FSC board has this month signed off on an inaugural FSC Code of Conduct to be launched in September, after two years in the making.
“This will represent a substantial step forward in improving industry conduct and delivering strong consumer outcomes’, said Klipin.
The report highlighted numerous examples of poor practice regarding replacement business which you can read here.