1 February 2019
In January 2019, the Financial Markets Authority and the Reserve Bank issued a joint report on Life Insurer Conduct and Culture. The report makes some damning assertions about the industry and has given insurance companies until 30 June 2019 to respond with detailed action plans about how they will change.
Decline staff have worked in the insurance industry for over 37 years and have seen this report coming. An industry shake-up is long overdue, and we applaud everything being done by the FMA and Reserve Bank.
The Government followed up within 24 hours, announcing that they would be regulating commissions and incentives in the life insurance industry. It is expected that changes will take effect in May 2019.
KEY FINDINGS IN THE FMA/RBNZ REPORT
1. The industry has had a lack of focus on good customer outcomes
2. It has been too complacent about identifying, managing & fixing poor conduct by its staff and advisers
3. Many Life insurers consider 3rd party advisers & brokers to be their customers – not their policyholders
4. There is limited evidence of products being designed and sold with good customer outcomes in mind
5. High commission rates paid to insurance brokers account for over 20% of customers' premiums, making cover far less affordable.
The only highlight is that they found staff dealing with claims generally had a good customer focus. Insurers are usually looking to achieve fair claim outcomes.
UNINTENDED CONSEQUENCES OF THE 'HIGH COMMISSION' BUSINESS MODEL
Having such a drastically generous commission and incentive package creates some unintended but perfectly predictable consequences:
HOW THINGS NEED TO CHANGE
INSURERS
Insurers who want to be successful in the future need to flip their thinking and change their priorities. Rather than allocating their time and resources to supporting advisers to sell their products, they need to concentrate on client outcomes and product innovation. Their success in the future should depend on the quality of their product offering, price, service and claim paying ability. Not on the commission terms they have devised for distributors.
ADVISERS
Adviser remuneration models need to move away from large upfront commissions to much smaller service commissions that reward providing ongoing service and meeting clients' needs. Some of the advisers operating today probably don't have a place in the industry of the future. The fast and loose 'hunter' will be replaced by the careful, methodical and technically savvy 'farmer' who will focus on servicing clients to the best of their ability. The rewards will come from building a large and well-serviced book of clients. Working out how to create a pathway into the industry for new advisers will be a challenge.
REGULATORS
As they are doing here, regulators must focus their attention not only on the adviser's conduct but also on the environment created by insurers.
LEGISLATORS
The Government needs to focus on law changes that outlaw harmful behaviour and further protect the consumer. An example of this could be changing the law around transfers of existing policies to another insurer. Right now, this presents a significant risk to consumers who can find themselves uninsured for a health issue they were covered for previously. Removing the 'up-front' financial incentive to do this would be the first step. Requiring the new Insurer to carry over the previous policy's terms on like for like cover would also help.
CLIENTS
Clients need to become savvier about the advice they receive from their advisers and be far more demanding in their expectation of service. They also need to change their expectation about paying insurance advisers for quality advice. It won't be possible to receive comprehensive advice from a suitably qualified expert at no charge if that adviser is not being remunerated by way of a commission from the insurers.
SPECIFIC EXAMPLES OF POOR CONDUCT CITED
• Selling products that can’t be claimed - insurance policies being sold to foreign customers who were ineligible for the insurance cover and could never claim.
• Some insurers sent out promotional material to clients promoting policy enhancements the insurer knew those clients weren’t eligible for.
• Creating products that represent poor value for money – policies that have such low levels of claims that their cost, or even the product itself, is hard to justify.
• Overcharging groups of clients because of a system error and still not fixing the problem for many of the clients more than 3 years after the error was discovered.
The report named the 16 New Zealand insurers it reviewed but didn’t individually identify where the problems were found. However, the broad issues seemed to be almost universal.
DECLINE'S PERSPECTIVE
Most people who work in any industry for a long time quickly see the flaws and unfair practices that go largely unnoticed or unreported by customers. Banks that camouflage their fees by scattering them throughout the monthly statement or charge dishonour fees if you miss an automatic payment – even though this costs the bank nothing. The accountancy or legal firm that charges what it thinks it can get away with, rather than strictly based on time spent. The traffic officer who sits at the bottom of a steep hill waiting for ‘prey’.
When pressed, all will provide perfectly logical and sensible answers for why they do what they do. However, those working on the inside know that achieving profitability targets are essential and there are always tricks and tips that will help you do this.
As this report is going to show, sunlight is the best disinfectant.
Insurers trade on their reputation and this kind of publicity is the last thing they want. They now have both a reputational and legislative reason to make sweeping changes to how the industry operates.
THE LIFE INSURANCE INDUSTRY TODAY
New Zealand life insurers consider market share to be a key performance indicator. For most industries, this is achieved by creating a great product and service offering and getting it out there. The more innovative and cost-effective the product the better chance it has of success.
The New Zealand life insurance industry has always operated a little differently. While there are some particularly innovative companies out there most would quietly admit they offer a generic product that differs little from their competitors. Being the first adopter of a new feature or benefit is to be on the ‘bleeding edge’ – a risky proposition for a risk-averse industry. Most life insurers are quite comfortable sitting back from the bleeding edge and will implement new product enhancements only once they have observed how the early adopter fared.
Instead, the insurer chooses to trade on their reputation and financial strength. Their advertising rarely focuses on the features or benefits of their offering but rather brand awareness. Almost all rely largely on their network of 3rd party distributors – financial advisers.
To encourage 3rd party advisers to sell the company’s products there has been an incremental increase in the commission and incentive packages offered. If you go back 30 years, there was a time when an adviser would have received as little as 45% of the first years’ premium for the sale of a life insurance policy. This has now grown to as much as 230%, with other add-on benefits bringing the remuneration even higher. Ironically, the average cost of insurance back then was higher than it is now.
Insurers are able to offer such large up-front commissions because they know that, on average, a client will hold a policy for around 5 to 7 years. After deducting commissions, the cost of acquisition, fixed expenses and claims they can reasonably expect to ‘book’ a profit of between 1- to 1½-years premium. If a new policy is canceled within 2 to 3 years some or all of the commission paid to the adviser is ‘clawed back’.