The Financial Markets Authority (FMA) and Reserve Bank of New Zealand (RBNZ) review into the life insurance industry has delivered a 'high noon' moment to the 16 life insurers active in the New Zealand market – and its influence will extend well beyond them.
The FMA and RBNZ are clear that “all insurance sectors should be actively considering conduct risk within their business" and the Government will fast-track legislation to address the consumer protection issues highlighted in the report, and will apply the changes also to the banking sector.
This will run alongside the reforms to insurance contract law that are currently underway.
The FMA/RBNZ report found “extensive weaknesses in life insurers' systems and controls", including weak governance and management of conduct risks and a lack of focus on good customer outcomes.
It also found that efforts to remediate issues in the past had been “generally very poor" and that the industry had been “too complacent…and not focused enough on developing a culture that balances the interests of shareholders with those of customers".
The criticisms were expected as both the RBNZ and the FMA had telegraphed their concerns in advance:
- the RBNZ through the publication of a graph in the November Financial Stability Report showing that New Zealand has the highest reliance on commission payments in the OECD, and
- the FMA through multiple investigations over recent years.
Despite those criticisms the report concludes that it would not currently categorise instances of poor conduct and potential misconduct as widespread and that while some issues are similar to those highlighted in Australia, they are on a “much smaller scale".
Key recommendations for life insurers include:
- the removal of internal sales incentives by 31 December 2019 or (if they are not removed), an explanation of how conflicts of interest will be mitigated
- high upfront commissions to be abandoned and other commission structures and volume bonuses for intermediaries to be reviewed to ensure they incentivise good consumer outcomes
- the qualifying criteria for soft commissions to be reviewed for their incentive effects – i.e. that they don't simply reward volume or value of sales, and
- intermediaries to be encouraged to disclose all commissions to the customers.
- new products to be designed to provide good customer outcomes
- products to be reviewed on a regular basis to ensure they are relevant and fit for purpose, and
- insurers to engage with customers to consider their needs and the suitability of their insurance cover.
Issue identification and remediation
- to put appropriate systems and processes in place to record and resolve customer complaints and incidents, and training for staff so that they know how to recognise and deal with these situations, and
- to establish formal remediation frameworks and policies, adequately resourced and with a mission to act on matters proactively and without undue delay.
The report also recommends that the Government, as part of its review of insurance contract law, addresses the regulatory gaps around the FMA and RBNZ’s powers to respond to life insurer misconduct.
The FMA and RBNZ will be providing specific findings to each insurer by the end of February 2019 and will require them to report back and provide an action plan to address the feedback by 30 June 2019.
The Government announced yesterday that it will legislate to respond to the findings of the insurance report and of the report on banking conduct and culture released in December. The proposed changes will promote:
- clearer duties on banks and insurers to consider a customer's interests and outcomes, and to treat customers fairly
- an appropriately resourced regulator to monitor the conduct of banks and insurance companies, with strong penalties for breaching duties
- changes to both banking and insurance regulation, as the issues identified in both are similar. There are also overlaps between the sectors, with banks also selling insurance products, and
- a strong response to internal sales incentives and soft commissions.
While the scope of the legislative changes has not been explained in detail, Cabinet has specifically agreed “to get rid of sales incentives in the insurance industry that are driving behaviour that is not in the best interest of consumers".
A consultation paper will be released in May and legislation will be introduced later in the year. This will run parallel to the review of insurance contract law, with the intention that both bills will be in Parliament by mid-2020.
Chapman Tripp comments
The recommendations in the report, as well as the new legislative changes announced by the Government, are driven by a view that the customer should be put at the centre of all aspects of the insurance relationship. This was already a major theme of the insurance contract law review announced in 2018.
The implications of this review for the industry should not be underestimated. There are plainly risks that the changes imposed will add significant compliance cost and will impact on existing modes of doing business.
The Government’s announcement that it will fast track legislative changes, including the introduction of a regulator to monitor the conduct of insurers, indicates that a more “hands-on” approach will be taken. But the degree of regulation which is imposed will depend upon the Government’s assessment of how much the industry can be relied upon to be self-regulating and to keep its own house in order.
In order to manage these risks insurers will need to be able to demonstrate that effective strategies can quickly be put in place to address the report’s major criticisms. This will not prevent regulation but may temper the possibility of regulatory overreach.