The controversial Financial Services Council (FSC) review of New Zealand’s insurance advisory industry has recommended seven major industry reforms including a drastic scaling back of upfront commissions.
While the reforms listed in the FSC-sponsored document largely follow its Australian exemplar – the 2014 ‘Trowbridge’ report – the New Zealand version calls for tougher policy renewal restrictions than the trans-Tasman equivalent.
According to the report, if upfront life insurance commissions – that can currently go as high as 230 per cent – were capped at 70 per cent, with a 20 per cent ongoing payment, premiums could fall by between 10-15 per cent.
“Our analysis, from examining the effect of reduced lapses rates, indicates inappropriate policy replacement activity adds 10% to 15% to industry costs. In a $1b industry (annual life risk premium) this equates to over $100m every year in excess cost to customers and to the economy of New Zealand,” the FSC-commissioned report says. “It is expected that with lower premiums personal risk insurance uptake could be higher than it is now and this would assist in reducing the under insurance problem in New Zealand.”
Somewhat out of left field, the report – authored by actuarial consulting firm Melville Jessup Weaver (MJW) – also suggests incorporating a group life option in KiwiSaver to boost insurance coverage in New Zealand.
The report has sparked much internal friction in the FSC with two members – Partners Life and AIA – resigning this month in protest.
Peter Neilson, FSC chief, said while the board approved a budget as well as terms of reference for the MJW report it should be seen as an independent “discussion document”.
“There were some grumbles from a few members after the first draft,” Neilson said. He said following an addendum, which is included with the report, MJW produced a final draft that was approved by the board.
Neilson said the FSC itself tipped in only about $20,000 (to cover GST) while the insurance members individually stumped up for the base report cost of roughly $200,000.
“Our members couldn’t form a collective view [on life insurance reforms] so we commissioned the MJW report to form the basis of a discussion,” he said.
David Chamberlain, MJW executive, said he was “very confident” the seven recommendations – all of which would require legislation to implement – would “change and grow the industry”.
“The evidence is that all successful industries today must be consumer-centric,” Chamberlain said.
The recommendations cover:
- Defining the role of financial advice, including dispensing with the registered financial adviser (RFA) designation – and making all advisers AFAs or QFE advisers – and the current dual category approach to financial products;
- Capping insurance commissions to 70 per cent upfront and 20 per cent ongoing with a seven-year claw-back period for replacement business;
- Tighter rules and insurer accountability for replacement business;
- An industry code of practice to be policed by the Financial Markets Authority (FMA);
- A 2020 review to be commissioned if the recommendations were introduced; and,
- Members able to purchase group life insurance via KiwiSaver.
The FMA is also compiling a report on life insurance ‘churn’ – or inappropriate policy replacement – based on specific data supplied by life insurers under a ‘section 25’ mandatory order. While the regulator’s ‘churn’ report could be months away, changes to the life insurance remuneration were mooted in the recent review of the Financial Advisers Act (FAA).
It is understood the Ministry of Business Innovation and Employment (MBIE) FAA discussion document was due for publication within days.