In 2019 the Financial Services Legislation Amendment Act (FSLA) was passed. Before that, roughly 80% of insurance advisers in New Zealand were not required to have any qualifications before calling themselves an adviser. Even more surprisingly, they were not held to any code of conduct. They did not have to place the interests of their client first. They had plenty of flexibility in operating, and their success was primarily measured by how much insurance they sold.
When the FSLA was introduced, this all changed. Advisers, the business they work for, and the insurance companies now share responsibility for the advice your adviser gives you. If advice is faulty, everyone around the adviser becomes liable. There are now financial consequences and the distinct possibility that the regulator could get involved.
The new Act is a very positive change for the insurance-buying public. The odds of a bad outcome because the adviser did something they shouldn't is reduced. However, how the industry is remunerated still creates some risks that legislation won't always protect against.
HOW ADVISERS ARE PAID
In almost all cases, your adviser is paid a lump sum commission payment by the insurer when introducing a new policy. The size of this lump sum depends on factors like:
The type of policy introduced
• Life insurance, income & mortgage protection, and trauma policies pay a lump sum commission ranging from 120% to 220% of the first year's premium
• Health insurance pays a lump sum ranging from 25% to 120% of the first year's premium
• Car, contents and house insurance pay between 10% and 25% of the first year's company premium (not counting any EQC levies or GST)
How much business the adviser introduces to that company broadly
Sometimes called a production bonus, this payment type is becoming less common as insurers move towards service & compliance-focused reward systems.
How good the adviser is at keeping policies 'on the books' once they are introduced
Usually referred to in the industry as Persistency. A successful adviser shouldn't lose more than 15% of their introduced clients. This retention rate can directly impact the lump sum commission received for future clients introduced. A low persistency rate could result in an adviser losing the right to distribute that insurers' policies.
You could be forgiven for thinking, 'that's an awful lot of money for just introducing our policy to an insurer?'. A $300 per month life insurance premium could net the adviser a lump sum commission of $7,920.
However, like a real estate agent, most of the work done by an insurance adviser is unpaid. They receive a small service payment for looking after their clients, but this doesn't go far when they have to pay for expenses like:
• Office space
• Staff
• Professional Indemnity Insurance
• Vehicle running costs
Not every client they speak to buys the insurance they have recommended. Most advisers provide comprehensive advice, detailed written reports, and a lot of ancillary services to five clients before one buys. So, suddenly, that $7,920 just became $1,500 for the work they did for each client.
The kicker is that if the client cancels the policy within the first two years, the insurer recovers some or all the commission paid. When a real estate agent sells a house, they can bank the commission and move to the next one. The insurance adviser must sit tight for two years and hope that s/he gets to keep the money they earned.
With such large sums of money available, there is the chance that an unscrupulous adviser might take a few shortcuts. These can have a devastating impact on your ability to claim.
Here are the 6 most common reasons a bad adviser can cause your claim to be declined.
1. Regularly moving you from insurer to insurer
Finding a new client can be hard work, so an adviser might instead look to their existing clients to earn some income. If a client's policy has been in place for more than two years, the adviser is not required to repay previous commissions. Moving to a different insurer will create a whole new lump sum, so why not do that?
One of the reasons why that may not be a good idea is that you have to provide health information each time you apply for a new cover. Your health situation may have changed in the intervening years, or you could inadvertently forget to re-disclose a health issue you've told the adviser about repeatedly in the past. The new insurer will still decline your claim for non-disclosure even if you disclosed the health issue to your previous insurer.
Sometimes the new policy might not cover things that the old one did. Some stark examples of this are cover for expensive cancer treatment drugs. Some insurers cover these, and some don't. You could move to a slightly cheaper insurer only to discover that some of the essential features of your cover have been lost.
Of course, the vast majority of good advisers will only recommend that you move to a new insurer if there are significant savings and/or improvements in the quality of cover.
Before you agree to move, make sure that you check any transfer options available with your current insurer. Sometimes those same improvements and savings can be achieved with an internal transfer to the latest policy with your current insurer. The advantage with this is that you have a continuation of cover and don't have to provide updated information about your health.
2. Your adviser 'helpfully' completes the application for you
While your adviser's intentions are almost always good here, having them complete the health declaration with you sitting beside them (or on a Zoom call) has its risks. They have a good grasp of what an insurer is looking for when assessing an application and can inadvertently 'massage' your answers for a faster, cleaner application.
As an example, when asked "do you take high blood pressure medication?" an applicants answer might be "My doctor has been insisting that I start the medication, but I don't like taking that stuff, so I have never taken anything". The adviser might consolidate that answer in the application to 'No'. While it's technically correct, there is a whole lot of context the insurer would want to know. And if a claim happens later, the insurer will consider this intentional non-disclosure.
Always, always complete the form yourself. If you find you can't add extra notes, make sure you email any additional information to your adviser. Anything you tell the adviser is assumed to have been told to the insurer. Having it in writing protects you when questions are asked later. If your adviser doesn't pass the information on, that can't be your problem. The insurer will pay your claim and take the matter up with the adviser.
3. Your adviser prompts you with recommended answers while working through the application form
This is a variation on example 2 but differs in that you might be completing the form yourself. Your adviser might suggest what the answers should be for each question. It's always best to answer the questions how you think they should be answered. Your adviser is probably just trying to help speed up the lengthy process but doesn't know the full extent of your situation. Make sure that the suggested answers still fully and fairly answer each question.
You will sign the form to confirm that these are your answers and are truthful and complete. It will be impossible to convince the insurer later that your adviser caused you to under disclose.
4. Your adviser doesn't review your cover regularly enough
Getting your cover in place is the first step to ensuring the important parts of your life are protected. Once in place, the ongoing review of that cover is the area where many advisers fall down. They receive a large part of their income from introducing new policies. So, not surprisingly, most of their attention is directed to that activity.
These are some of the ways that regular reviews will leave you uninsured or underinsured:
The insurer placed a reviewable exclusion of your policy when it was set up
Sometimes an insurer might exclude a pre-existing health issue for a set time frame. At the end of that time, you can apply to have it removed. This will happen only if you or your adviser submits some updated information about the condition. If the adviser fails to do this, you might discover the condition is still excluded many years after it was supposed to be removed.
You had an option to upgrade to a better cover for free and without health information
Insurers are constantly upgrading their cover to compete in an ever more competitive market. This might mean higher claim limits, broader coverage or better policy definitions that make claiming easier. Unfortunately, most insurers don't automatically pass these improvements on to their existing policyholders. They require the adviser and client to submit many forms and requirements before the new terms become available. If this isn't done, the policyholder can be left in a very old out-of-date policy.
An extreme example of this is some of the old AIA/Sovereign health policies with an annual claim limit of $150,000 and limited cover for expensive cancer treatment drugs not funded by the public health system. By simply submitting the correct form, these covers can be increased to $500,000 while the cost reduces.
You don't want to be told you need lifesaving drugs that you can't get because your adviser didn't do the reviews regularly enough.
Your situation changed, but your cover didn't change with you
Some covers ideally suits employed people while others are more appropriate for the self-employed. Some important changes in your circumstances could mean you're left covering the wrong risks without regular reviews.
Too many clients pay for redundancy cover even though they changed to self-employment years before. They should have been spending their hard-earned money on insurance for business owners. A self-employed person has no way of being made redundant.
Your adviser needs to regularly review your cover to make sure it suits your current circumstances. You can't claim on a policy that was never put in place.
5. Your adviser didn't fully explain your disclosure obligations
Most people know that they need to tell their insurer about their past history, any dangerous pastimes they participate in and anything else that might be relevant to the risk being accepted. But how many know that this obligation continues right up to the moment the insurer's policy is put in place?
We know of many claims that have been declined because something happened in the intervening period between the application being submitted and the insurer agreeing to the cover. One client tried cocaine at a wedding; another got caught drunk driving, and others were diagnosed with new health conditions.
This information is relevant to the insurer until it accepts the cover. There's no requirement to tell the insurer about any changes once your cover is in place.
Most insurers will provide the client with an offer of terms that they can accept while also confirming that nothing new has happened. Most advisers send this to the client but don't require it to be signed and don't highlight the need to mention any changing circumstances.
6. Your adviser only deals with a limited number of insurers
While the cover offered by insurers operating in the New Zealand market are usually very similar, some offer such markedly better cover that you would be foolish to look elsewhere.
You might think that your expert adviser will know the critical differences in these cases and will always place you in the right cover. Unfortunately, many advisers are limited in the number of insurers they can offer. This might be because of a contractual limitation placed by their employer, their inability to gain distribution agreements with some insurers or simply because they prefer placing most or all of their business with one or two companies.
Here are some areas where this can make a massive difference to your ability to claim:
Income Cover – Specific Injury Benefit
Some insurers (Fidelity & Partners Life, for example) include a Specific Injury Benefit with their income and mortgage repayment cover. This benefit pays the insured an immediate lump sum if they suffer a minor fracture to a larger bone (wrist or larger). The payment is made simply because of the diagnosis. The insured isn't required to stop work or wait for a few months. The claim is also paid in addition to anything ACC pays.
Having a benefit like this in your Income or Mortgage Repayment cover dramatically increases your chances of a claim.
Health Insurance - Non-Pharmac Drug Cover
Non-Pharmac drugs are expensive cancer treatment drugs that the public health system won't fund. Funding isn't available because the cost for just one person can run into hundreds of thousands of dollars.
Surprisingly, the major health insurer in New Zealand (Southern Cross) provides only $10,000 of this cover per year. Other health insurers will cover them up to $600,000 per year.
Remember, at the end of the day it is you that bears the consequences for any changes you make or any advice that you follow. Advisers hold professional indemnity insurance that they can call on if they make a mistake that costs you.