Insurance Alert – January 2019
The Financial Markets Authority and the Reserve Bank of New Zealand have today released their joint findings following their review of the conduct and culture of the New Zealand life insurance industry, stating that insurers need to "act urgently and undergo major change".
The report forms part of broader investigations into the financial sector, prompted by the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The stated objective of the review was to "understand whether there are widespread conduct and culture issues present in life insurers in New Zealand, and to understand how life insurers identify and remediate issues". The review commenced with a request for information by the regulators, followed by onsite interviews with staff and management and input from industry stakeholders.
The regulators have stated that all insurance sectors (not just life insurers) should be actively considering conduct risk within their business, and considering and acting on the relevant recommendations in the report.
A copy of the report can be accessed here.
Although the regulators did not, on the basis of the evidence and information presented, identify widespread incidents of misconduct of the kind uncovered in the Australian Royal Commission, their view overall was that life insurers have been too complacent when considering conduct risk, too slow to make changes following previous reviews, and not sufficiently focused on balancing customer and shareholder interests.
The report presents the regulators' findings under four themes, reflecting different elements of managing conduct and culture. The findings include the following:
- Delivering good customer outcomes: There was limited evidence of products being designed and sold with good customer outcomes in mind, and few policies for identifying and dealing with potentially vulnerable customers. While some insurers have good policies and practices for regular ongoing contact with customers, others did little or nothing. There was evidence of sales incentive structures creating risks of sales being prioritised over customer outcomes, and of policies being "churned". The report also questioned whether soft commissions would be prohibited by the Financial Services Legislation Bill that will, if enacted in its current form, require advisers to give priority to client interests.
- Conduct and culture governance: Only few life insurers had seriously considered conduct and culture – and there was little evidence of insurers having analysed conduct, systems and processes against the Australian Royal Commission and the expectations set out in the FMA Conduct Guide – prior to the review. Boards and senior management were not setting the tone for managing conduct risk, and there was a lack of insurer oversight and responsibility for intermediary distribution channels.
- Conduct and culture risk management: Reporting of conduct risk was limited, ad hoc and reactive, and focused on "lag" rather than "lead" indicators. Risk management functions and training on products, sales and advice processes were often poorly resourced, and formal whistleblower policies not well understood or utilised.
- Issue identification and remediation: While some insurers had specific remediation activities in process, across the industry there was an acute lack of effort or processes in place to identify, monitor and manage issues requiring remediation. Issues were often identified through customer complaints rather than an insurer's own monitoring processes. Processes and systems for customer complaints, incident management and analysis of issues suffered from under-investment, and were poorly embedded and inconsistently used.
The report goes on to make over twenty recommendations, including in relation to the role of insurers' boards, oversight of intermediaries, product design, training and support, policies and processes, identification and remediation of issues, and incentives.
Life insurers are required, by 30 June 2019, to have developed a plan to address the feedback and to report progress, explain how they will meet expectations in respect of incentives, complete a gap analysis against the final Australian Royal Commission report (once available) and complete a review of their existing products and policyholder portfolios to identify conduct and culture risks.
Shortly after the report was released, Finance Minister, Hon Grant Robertson, and Commerce and Consumer Affairs Minister, Hon Kris Faafoi, announced that a consultation paper in response to the review is planned for release in May, with legislation to be introduced later in the year.