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The Financial Markets Authority (FMA) is expecting insurers to lift their game in relation to add-on insurance products and extended warranties in light of its recent thematic review under the Conduct of Financial Institutions (CoFI) regime. We detail the review findings and the FMA’s response.
Scope
The FMA engaged with seven of nine identified insurers offering add-on insurance and extended warranties, examining whether products such as mechanical breakdown insurance (MBI), guaranteed asset protection (GAP), consumer credit insurance (CCI), payment protection insurance (PPI), and extended warranties align with the fair conduct principle and support fair consumer outcomes in practice.
These products are commonly sold alongside consumer purchases such as vehicles, appliances and electronics and have been the subject of sustained domestic and international scrutiny - including in New Zealand, a 2021 review by the Commerce Commission and in Australia, the introduction of a deferred sales model separating the decision to purchase add-on insurance from the underlying transaction.
Key findings
Sales practices and distribution arrangements may not consistently support informed consumer decision-making
The FMA considers that intermediated distribution is the clearest area where industry uplift is required to ensure practices consistently support fair consumer outcomes, finding that oversight of intermediaries was not consistently supported by structured, risk-based frameworks.
Oversight often relied on relationship management rather than structured monitoring or formal testing, and some approaches to sales focused on progressing the sale rather than supporting informed customer decision-making. Such approaches included applying objection-handling techniques and recommending products beyond those needed to meet customers’ requirements.
Products may not consistently meet consumers’ requirements, objectives or expectations
The FMA observed significant variation in approaches to product reviews. While most insurers had review processes, these were not consistently defined, documented, or evidenced.
Claims and loss ratio data raised particular concerns. Good practice was observed by some insurers acting on product performance indicators to make changes to product features, pricing and eligibility criteria. However, GAP, CCI and PPI products exhibited consistently low loss ratios, in some cases below 20% and as low as 3% to 6%, raising questions about whether consumers are receiving a meaningful benefit.
The FMA noted its expectation that insurers with persistently low ratios carefully consider whether their products continue to meet consumers’ requirements and objectives.
Consumers may purchase products without fully understanding them
Insurers generally relied on disclosures, policy documentation, training, and sales scripts to support consumer understanding, but there was limited evidence of consistent assessment of consumer understanding or product suitability. The FMA identified instances where important product features, exclusions, or obligations were not clearly explained at the point of sale. These risks were noted as being heightened for consumers in vulnerable circumstances, particularly where financial pressure, limited time, or the complexity of the transaction may limit their ability to assess information.
Overall, the FMA found that insurers had limited assurance that consumers understood key product features, limitations, exclusions, and eligibility requirements, increasing the risk of poor outcomes and the sale of unsuitable products.
Conduct issues are not consistently identified and responded to
While insurers collected information through complaints, product reviews and quality assurance, it was not always clear how insights were analysed and translated into action. Often the data was not clearly linked to the product review or oversight. The FMA noted that low complaint volumes may not necessarily indicate an absence of issues, and that consumers may not be raising concerns or complaints may not be being consistently recognised and recorded.
Extended warranties
The FMA has taken the view that, under specific arrangements, extended warranties can be considered contracts of insurance and therefore fall within the CoFI regime.
The FMA found it was not clear how insurers can be confident that consumers are treated fairly in relation to extended warranties, noting insufficient evidence of oversight of sales practices, consumer understanding, and outcome monitoring.
Actions for insurers
The FMA’s report includes a range of considerations and actions for insurers and expects insurers across the sector to self-assess against its findings. Key actions include:
Product design and value
- Regularly assessing whether products continue to meet the requirements and objectives of consumers (viewed as a group)
- Interrogating persistently low loss ratios and act where products are not delivering meaningful consumer benefit
Sales practices and distribution
- Eliminating unfair pressure, undue influence and objection-handling techniques that override consumer choice
- Implementing structured, risk-based oversight of intermediaries – independent of commercial objectives
- Ensuring training equips distributors to identify when a product should not be offered
Consumer understanding
- Going beyond disclosure – actively verifying that consumers understand key features, limitations and exclusions
- Supporting consumers in vulnerable circumstances with tailored processes
Governance and monitoring
- Establishing clear triggers, thresholds and escalation pathways for conduct risk identification
- Linking complaints, claims data and QA insights to product reviews and distribution oversight
- Ensuring extended warranties receive the same governance rigour as other add-on insurance products.
Next steps
The FMA has provided targeted feedback to participating insurers and will continue to test their arrangements through its supervisory and monitoring activities. Where conduct is inconsistent with legal obligations, the FMA will consider using its regulatory tools.
If you need assistance assessing your distribution, product review, or conduct oversight frameworks, one of our experts will be available to assist.
