A report into the culture and conduct of the New Zealand life insurance industry has issued a damning indictment, saying insurers have been too slow to clean up their act and that they were not sufficiently focused on meeting customer needs.
Some of the issues canvassed in the report by the Reserve Bank and Financial Markets Authority were similar to those highlighted by Australia's banking Royal Commission, though on a smaller scale.
FMA chief executive Rob Everett said the report cast the insurance sector in a poor light and Reserve Bank Governor Adrian Orr said insurers needed to "urgently" change.
"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 said in a statement.
• Limited evidence of products being designed and sold with good customer outcomes in mind, and very little in the way of policies for identifying and dealing with potentially vulnerable customers.
• Some insurers did little or nothing to assess a product's ongoing suitability for customers.
• Sales incentives structures risk sales being prioritised over good customer outcomes.
• Where sales went through an intermediary, there was a serious lack of insurer oversight and responsibility for the sales and advice, and customer outcomes.
• Remediation of conduct issues is generally very poor, with insurers slow to respond to issues and in some cases not fixing them sufficiently.
• Problems were often compounded by the fact that issuers' products were often sold by intermediaries.
• A small number of cases of potential misconduct are subject to investigations by the appropriate regulator.
In one example, an insurer's life product had been sold to foreign customers who were ineligible for the insurance cover - as cover is only provided to New Zealand residents - and therefore would never be able to make a claim.
In another, an insurer sent mail-outs containing information that – for some customers – it knew to be incorrect.
In one case, an insurer had a one-off system error that resulted in an excessive consumer price index increase (up to 30 times) being applied to the sum insured, with a corresponding increase in customers' premiums.
The 223 affected customers were charged and had been paying the incorrect premiums.
This issue occurred and was discovered in 2015. Three years after the event, the insurer had yet to remediate 111 of the customers.
In one other instance, an insurer was only "remediating" customers if they complained about the high premiums for their funeral insurance.
"This was offered on a case-by-case basis (depending on the age of the customer and how much their premiums exceed the sum insured), creating a 'two-tier' premium scale between customers who complain and those who do not."
The premiums become increasingly hard for customers to afford as they aged and in many cases the total amount of premiums paid was more than the sum insured.
Other examples included:
• Neglecting to effectively notify policy-holders of increases to their premiums,
• Old policies not cancelled when customers transferred to a new policy, and premiums still being charged for the old policy,
• Selling of credit insurance to potentially ineligible customers,
• Annual inflation rate not applied correctly to cover and premiums,
• Premiums continuing to be charged after the policy end date
The regulators found extensive weaknesses in life insurers' systems and controls, with weak governance and management of conduct risks across the sector and a lack of focus on good customer outcomes.
Everett said the industry needed to undergo major change to address these weaknesses, "as their services are vulnerable to misconduct and the escalation of issues that have been seen in other countries".
"Public trust in life insurers could be eroded unless boards and senior management transform their approach to conduct risk and achieve a customer-focused culture.
"Ultimately insurers need to take responsibility for whether customers are experiencing good outcomes from their products, regardless of how they are sold," he said.
The life insurance industry had been braced for the findings of a dive into its culture and conduct by regulators after warnings from the Reserve Bank governor that it will be tougher than its stance with the banks.
The FMA and the Reserve Bank visited insurers between August and November last year following requests for proof that there are "no material conduct issues" within their businesses.
The insurance report follows a look into the banking industry which found no systemic issues but "significant weaknesses" in the way New Zealand banks govern and manage conduct risks.
The report highlighted there are about four million life insurance policies in force with annual premiums totalling $2.57 billion.
It shows commissions to salespeople in New Zealand amount to about 25 pe rcent of total premiums paid each year, far higher than in other countries – Mexico and Hungary are the next highest at about 15 per cent with Australia at about 12 percent and the United States about 9 per cent.
Up front commissions on new policies can range from about 170-210 per cent of the first year's premiums.
The report also sought to address regulatory gaps around the FMA and RBNZ powers to respond to life insurer misconduct and its drivers.
No regulator has oversight of insurers' and intermediaries' conduct over the entire insurance policy lifecycle, the report noted.
"There is also inconsistency in the protections available for products sold with and without advice and no overarching obligation to protect or enhance customer interests."
The report outlines recommendations for the government to consider, while stressing that regardless of regulation gaps, "insurers should have a genuine focus on improving customer outcomes, rather than simply doing the minimum required to comply with the law."
"The responsibility to make change rests with the insurers. However, closing the regulatory gaps would give us the ability to monitor improvements, and provide options for enforcement where we see noncompliance."