Regulators will pressure NZ life insurers to reduce or remove all sales incentives, including third-party commissions, in the wake of a damning industry review released today.
While the joint Financial Markets Authority (FMA) and Reserve Bank of NZ (RBNZ) report falls short of recommending a formal ban or cap on commissions opting instead for the ‘if not, why not’ approach taken in last year’s companion review of the banking sector, the government later confirmed it would legislate to remove conflicted remuneration across the insurance and banking industries. A consultation paper on the government proposals is due in May.
“We expect insurers to review their commission structures and volume bonuses for intermediaries – including structures with very high upfront commissions – to ensure they are incentivising intermediaries to deliver good customer outcomes,” the report says.
“In our view, high upfront commissions are not acceptable as they drive poor conduct and can result in poor customer outcomes.”
The NZ life insurance industry has long been criticised for paying high upfront commissions with third-party advisers able to garner one-off payments of up to 230 per cent of the annual premium cost. Last November the RBNZ noted NZ life insurance commissions in total represented over 20 per cent of gross premium revenue – a global outlier: the same metric is below 10 per cent in most comparable countries including Australia where the statistic is 9.2 per cent.
Following a review of the life insurance industry in 2015 the Australian government introduced a cap on upfront commissions set to bottom out at 60 per cent next year: ongoing commissions thereafter must not exceed 20 per cent.
The FMA/RBNZ report also calls for life insurers to “remove or substantially revise” sales incentives for in-house staff and management by the end of this year or face a ‘please explain’ letter.
So-called ‘soft commissions’ – such as offshore trips for advisers – will also need to be revamped, the regulatory report says.
“We expect insurers to change their qualifying criteria for soft commissions to ensure they mitigate conflicts of interest and incentivise advisers to improve customer outcomes rather than just reward them for the volume or value of products sold,” the review says.
In a statement, Rob Everett, FMA chief, says the review in general “shows the life insurance sector in a poor light”.
“Life insurers have been complacent about considering conduct risk, too slow to make changes following previous FMA reviews and not sufficiently focused on developing a culture that balances the interests of shareholders with those of customers,” Everett says.
Despite the poor industry report card the regulators failed to find any “widespread cases of misconduct” within life insurers, the statement says.
But the review did uncover “several instances of poor conduct” and “a small number of cases of potential misconduct (ie: breaches of the law) that are now subject to investigations”.
As well as problems with financial incentives, the report highlights a number of other shortfalls in the life insurance industry including:
- little evidence of consumer-centric product design and sales procedures;
- limited attempts to assess product suitability for consumers;
- a “serious lack of insurer oversight and responsibility for the sales and advice, and customer outcomes” through third-party advisers; and,
- poor remediation of conduct issues.
The joint regulatory review also says the impending final report of the Australian Royal Commission (ARC) into financial services – due for publication this Friday – would likely impact the NZ industry despite some complacency this side of the Tasman.
“This points to a potential lack of appreciation among New Zealand insurers of the possible drivers of the issues identified in Australia or the broader implications of the issues being highlighted by the ARC for their business,” the NZ report says.
The regulators also dismissed industry feedback that the imminent Financial Services Legislation Amendment Bill (FSLAB) would resolve many conduct issues in the life insurance sector.
FSLAB would have little impact on life product design, the report says, nor “discharge insurers’ responsibility for customer outcomes” on products sold via external advisers.
The report recommends the government consider tackling four ‘regulatory gaps’, namely:
- imposing a “basic duties” on life insurers to protect consumer interests across all distribution channels;
- requiring insurers to have “adequate systems and controls” to manage risks and remediate breaches through all distribution channels and the “insurance product lifecycle”;
- bolstering regulatory powers to compel insurers to meet their obligations including tougher penalties; and,
- clarifying management responsibilities for misconduct with the option of “direct liability” for senior managers.
Insurers have until June 30 this year to provide regulators with an “action plan” to meet the concerns highlighted in the report. Specifically, NZ life insurance firms must also address how they will address the regulators’ strong hints on commission and staff incentive structures and produce two analytic reports covering:
A “detailed gap analysis” of the final ARC report; and,
A “systemic review” of current life products and policy-holders to identify any “conduct and culture” issues.
“If we are not satisfied with the level of urgency applied to addressing the areas of concern and to remediating identified issues, we will take further action,” the report says.
The life insurance review covered responses from 16 firms including seven NZ-based entities, four Australian firms, three US-owned companies and two from Hong Kong.
Both the insurance and banking reviews were sparked by the ARC hearings last year that uncovered systemic problems in the Australian financial services industry.