A detailed survey by the Financial Markets Authority (FMA) indicates that there is a significant amount of churn in the life insurance industry, to the possible detriment of consumers.
Many people will be unsurprised by the finding, but will appreciate the research to back up their impressions. The empirical evidence provides a helpful measure of the extent of the problem, and should provide a solid foundation for future reforms.
The next challenge for regulators is what to do with the results, particularly as part of the Financial Advisers Act review and the FMA's on-going focus on improving market conduct.
FMA surveyed the last four years of data from the 12 main life insurance providers in New Zealand. The period covered was April 2011 to March 2015 and included four types of cover: life, trauma, income protection, and total and permanent disability.
Particular interest was paid to registered financial advisers (RFAs) and Authorised Financial Advisers (AFAs) with more than 100 active life insurance policies on their books or who had a high rate of replacement business.
- The number of policies grew at under 2% each year over the review timeframe but in those years, the survey group described 11% to 13% of their policies as “new”, suggesting they were probably replacement policies.
- The majority of advisers do not have high levels of replacement business. 200 out of 1,100 of advisers who currently have a book of more than 100 active life policies, have a high estimated rate of replacement business. Those 200 advisers earned almost 50% more from commissions compared to the others.
- Policies with a high upfront commission were more likely to be replaced once the commission clawback period ended (the period within which an adviser must repay a portion of their commission if the policy is cancelled).
- The quality of the new policy was only a minor factor in whether it was replaced, indicating that some advisers are putting their self-interest ahead of the consumer’s interest.
- Policies no longer subject to commission clawback were 2.2 times more likely to be replaced if the advisor was offered an overseas trip as an incentive.
- RFAs had higher rates of replacement business than AFAs, some replacing more than 35% of their life policies in one year.
Actions FMA is taking
The FMA is working with insurers and the Financial Services Council to address the risks posed to consumers from these high churn rates and plans to conduct site visits where it has identified a particular risk.
It is also planning to provide further guidance for the industry and further resources to assist consumers to make better informed decisions. The FMA has the power to take action against advisers if they have breached their statutory duty of care, diligence and skill or been misleading or deceptive as to the benefits of changing policies. The FMA can also refer AFAs to the Financial Advisers Disciplinary Committee if they breach their Code of Professional Conduct.
In addition, the FMA:
- has provided its report to the Ministry of Business, Innovation and Employment (MBIE) to inform MBIE’s current review of the Financial Advisers Act 2008 (the Financial Advisers Act) and the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (FSPA), and
- will provide it to the Council of Financial Regulators (comprising the Reserve Bank, FMA, the Treasury and MBIE) which coordinates financial regulation across government agencies.
Chapman Tripp comments
Because pure risk insurance policies are category 2 products under the Financial Advisers Act, most insurance broking has been subject to the base level of financial adviser compliance. Arguably choosing the most suitable insurance policy is as important for consumers as choosing the right investment, where additional conflict of interest restrictions apply. Where AFAs have been involved, they are being held to the higher standards, but then different regulatory responses arise for performing the same activities (which will also need to be re-thought from a policy perspective).
Concern that adviser incentives are driving insurance policy churning have been openly discussed worldwide and have led to commission bans in some countries. Rightly, in our view, banning commissions is not government policy in New Zealand. But other responses to insurance policy churning will need to be developed.
The Financial Advisers Act and FSPA review will provide a useful opportunity to explore these responses. The Report may also be the catalyst for more active responses from the FMA against insurance brokers involved in churning policies, some of whom have already come to the attention of the FMA.