The Reserve Bank of New Zealand and Financial Markets Authority have voiced their disappointment with life insurers’ responses to the joint Conduct and Culture Review.
The regulators have released their findings on life insurers’ responses and said significant work is still needed to address the issues of weak governance and ineffective management of conduct risk identified in the regulators’ report earlier this year.
Sixteen life insurers were asked to provide work plans outlining the steps they will take to improve their existing processes and address the regulators’ findings and recommendations (see: Life Insurers Report Back to FMA…).
FMA Chief Executive, Rob Everett, said: “While we’re disappointed, we’re not surprised as the responses confirm what we found in our original review. It’s clear that progress has been slow and not as far-reaching as required. Some providers have started work to identify the customer and conduct issues they face, others have not provided any detail on this.”
Ahead of the announcement this week, during a speech at the FSC’s annual conference, Everett spoke on good conduct and told life insurers to “be very careful as to what you wish for” if they are waiting for the Government and regulators to make them change rather than changing on their own.
“…the failure for life insurers, for most of them, to have even read or acted on the Conduct Guide, I think was one of the great disappointments to me and the team at the FMA from the whole process,” he said.
“Good conduct is up to the industry. It’s up to the providers, it’s up to the advisers. Given what we’ve seen in other countries over a reasonably long period, I have to ask why the industry is waiting for us to come knocking.”
High Upfront-Commissions
Previous reports by the FMA reflected the concerns with conflicted conduct associated with high up-front commissions and other forms of incentives, such as overseas trips, paid to advisers.
The regulators noted that although some insurers have committed to removing sales incentives for employees and their managers, not all committed to removing or altering indirect sales incentives.
They added that the providers that have removed sales incentives for employees don’t typically use external advisers to distribute products.
However, providers distributing through intermediaries told the regulators that changing long-held business arrangements and distribution models is difficult and will take time to implement.
“We’re ready to work with life insurers to ensure they prioritise their focus on serving the needs of their customers, while at the same time balancing the need to remunerate advisers for the important work they do to help these customers,” said Everett.
“But we do not think high up-front commissions create confidence that insurers and advisers are acting in the best interests of customers.”
Reserve Bank Governor, Adrian Orr, added: “Good governance within insurance firms requires the effective management of conflicts of interest. We need to see much better systems and controls in place to manage the inherent conflicts where advisers or sales staff are offered incentives to sell or replace insurance policies.”
New Issues Identified
The regulators noted the wide variance in the comprehensiveness and maturity of the plans provided by the life insurers.
“We’re disappointed the industry’s response has been underwhelming. The sector has failed to demonstrate the necessary urgency and prioritisation, around investment in systems, to provide effective governance and monitoring of conduct risk,” said Orr.
They stated there was also a wide variance in the quality and depth of the systematic review of policyholders and products. Some insurers did not complete this exercise and others did not provide data on the number of policyholders affected or the estimated cost of remediation activities.
The findings revealed insurers that completed the exercise identified at least 75,000 customer issues requiring remediation, with a value of at least $1.4 million. Some of the new issues identified included:
- Overcharging of premiums and benefits not being updated due to system errors, human errors and under-reporting of deaths
- Poor customer conversations overlooking eligibility criteria and poor post-sale communications, which lead to declined claims and underpayment of benefits
- Poor value products were identified, where premiums charged were not fair value for the cover provided.
The regulators said they have asked those companies that have not undertaken comprehensive systematic reviews of policyholders and products to complete further reviews of their systems to identify issues, and to develop mature plans to respond and remediate any of their findings. These plans must be completed by December 2019.
The FMA and RBNZ stated they will continue to monitor how the insurers are responding to recommendations and implementing their work plans and although life insurers are currently not legally required to become more customer-focused, the regulators’ found that the sector has a weak appetite for change.
Deficiencies in some of the plans received, and some insurers’ lack of commitment to implementing the regulators’ recommendations, further demonstrates the need for additional obligations to be included in the regulation of conduct of life insurers.
In its response to the release of the report findings, the Financial Services Council recognises that the sector must do more and progress faster.
FSC CEO, Richard Klipin, says, “Conduct, culture and ensuring great consumer outcomes is paramount. Improvements across the sector remain a work in progress and this latest review from the FMA and RBNZ demonstrates that.
“It is important to note that there is a lot of work going on across the sector in addition to the regulator processes to improve culture and conduct. This includes the development of an FSC code of conduct, ending overseas conferences and other soft commissions, and strongly supporting the progression of the Financial Services Legislation Amendment Act.”
Speaking at the FSC Awards Gala last week, Minister of Commerce and Consumer Affairs, Kris Faafoi, said he will be making an announcement soon on the measures to regulate the conduct of financial institutions and protect consumers, which the Government plans to introduce to Parliament this year
Partners Life stated in an adviser update that they intend to continue to work with the regulators in a positive, constructive way.
“We are fully engaged with this process to ensure that the important role we all play forNew Zealanders is recognized and valued by the regulators,” the insurer stated.
“Building and maintaining the trust of customers, and New Zealanders generally, is vital. As a business, we have a proud history of supporting the independent adviser market and developing market leading product and technology to support your business and customers.