The update released yesterday by the Financial Markets Authority (FMA) demonstrates the FMA is increasing its focus on fire and general insurers’ conduct, and provides a clear guide to the fire and general insurance industry of what the FMA expects ahead of when the Financial Markets (Conduct of Institutions) Bill is passed into law.
We look at the main findings.
The key takeaways from the FMA’s evaluation of fire and general insurers’ responses to the 2019 Life Insurer Conduct and Culture review are:
- learn the lessons from the FMA and RBNZ’s reviews of the life insurers and now the fire and general insurance review
- the FMA wants a shift from a “compliance-led” or tick-box approach to a “conduct-led” or principles-based approach which embeds a customer focus in all business decisions
- it wants the same standards and levels of care applied whether the products are provided directly or by an intermediary
- be prepared to demonstrate that you have met the FMA’s customer-centric expectation. A first step would be to ensure conduct and culture issues are within the Board’s remit and that the Board drives a business’ focus on those issues, and
- consider seeking external advice in order to test your conduct programme against the market and whether the programme achieves the desired outcomes.
Pricing and design issues
- failures to apply multi-policy discounts and no claims bonuses
- overcharging of premiums
- incorrect application of late payment fees
- inaccurate storage of customer data, and
- out-of-date product features and benefits, unlikely to be claimed by customers.
Incentives and commissions
The FMA has been particularly critical of volume-based incentives for internal staff. Of the 36 insurers who provided a response on this matter, 28 committed to remove these.
But there has been less action in addressing incentives and commissions where distribution is via an intermediary. The FMA considers that insurers should:
- have a “clearer line of sight” of intermediary commissions and whether those commissions are fair and reasonable, and
- ensure their remuneration structures incentivise good conduct of intermediaries.
Oversight of intermediaries
The FMA has found this is poor across the insurance industry (life, fire and general) and that insurers need to take ultimate responsibility for delivering fair customer outcomes, whether the product is sold direct or via an intermediary.
The FMA notes that many respondents seemed to have “a poor understanding and commitment to conduct and culture”. In particular:
- the tone of some responses suggested conduct and culture were considered irrelevant to the organisation, and
- several insurers were confident their business did not suffer from any conduct issues, despite not undertaking a meaningful assessment.
Product and portfolio reviews
The FMA found that customers were often experiencing sub-par outcomes due to poor value and legacy products, a failure to monitor the suitability of a product to the individual policyholder, and a lack of ongoing communication with policyholders.
The FMA found that several insurer Boards were not sufficiently engaged in managing conduct and culture risk.
The FMA’s report is a timely reminder that a customer-centric business focus should already be well-embedded in the business operations and culture of all financial service firms, and preparation for the new CoFI regime should be underway.
We’ve provided considerable legal and consulting advice helping clients from across the banking and financial services industry to respond to the evolving regulatory conduct expectations, including preparing policies, procedures and controls, action plans, conduct guidelines, gap analyses with the Australian Royal Commission report and remediation programmes. We can help tailor an approach suitable for fire and general insurers and all other types of businesses.