Insurance conduct report shows lack of understanding: Adviser
We have a report from the Reserve Bank about the insurance industry, and it's pretty rough, but it's misguided. Adviser Jon-Paul Hale explains why.
Monday, February 4th 2019, 8:55AM 
5 Comments
by Jon-Paul Hale
Frankly, it is a tub-thumping political point scoring media frenzy beat up. Orchestrated in the same way the petrol prices beat up was delivered.
And likely to result in another government own goal when they realise their legislation is causing most of the issues highlighted. 60-70% of fuel costs are government taxes.
And in the four days since we've seen the very usual communications from the insurers saying they respect the Reserve Bank's opinion and they're waiting for their individual reports and the media looking at angles to create more headlines.
However, I call BS on the respect; the Reserve Bank has shown no respect to an industry that exists to help people in their time of need. They have done a significant amount of harm to both consumer confidence, and their own credibility in the process.
What the Reserve Bank has achieved, in their somewhat opinionated report, is miss the core focus of the report. It was about the insurers, not the advisers.
It was also based on voluntary disclosures from the insurers with little real digging and follow up from what has been said.
Let's review a few facts the FMA have published.
- Disclosure by RFAs needs to improve, commissions and soft dollars. Yes, this is needed and will be addressed in the FSLAB and disclosure changes proposed. Presently it's not law, because the Government abdicated doing this in 2010.
- Churn in the industry is an issue. No, the FMA found that three RFA advisers, was it three or 3%?, were found to be a problem but the rest were ok. Yet churn still comes up all the time.
- The review of QFEs found 30% were not doing the right thing. 30%! One-third of advisers under a model FSLAB is looking to effectively roll over RFAs and AFAs to a lesser extent.
Let's put that into perspective. And I'll use per cent rather than three for RFAs to make it a little fairer to the QFEs.
- 3% of 4,500 RFA Advisers is 135 possible individuals not doing the right thing.
- 30% of 25,000 QFE members (the estimated QFE adviser workforce) is 7,500 possible individuals not doing the right thing.
So really, where is the harm to the New Zealand public? Hmm... by my numbers, which as a financial adviser and qualified engineer may not be correct, the problem lies with the QFEs salespeople and not RFA / AFA advisers. RFA and AFA commission-based sales people are predominantly advisers, not just salespeople.
So recent reports, with some level of credibility, say RFA advisers are not causing the harm perceived, and the QFE VIOs and advisers are the ones where the harm sits.
Predominantly QFE advisers are not commission-based, they have salaries and bonuses, and they have limited access to products from more than one provider. That last bit is probably more the real problem.
I have two issues with the Reserve Bank weighing in on this issue.
- They are bankers, and time and time again bankers have proven they have little to no understanding of how insurance works other than when they sell it, it helps their bottom line.
- The Reserve Bank has demonstrated a fundamental lack of understanding about our current insurance laws. And this is very disturbing.
The added one is much of our economy and environment we live in would not function or operate without insurance. Just think about the requirements on a mortgage for a second ;)
Commerce Minister Kris Faafoi stepped on a similar issue with his tub-thumping on the box last year about medical notes. Again demonstrating a lack of understanding about the rules restricting and governing insurers and advisers.
I am just picking one of the headlines, as it relates to many of the others.
- 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.
What the Reserve Bank has failed to understand here is the insurer has very little it can do to remediate this without the policyholders' authority.
Because the error worked its way all the way through to the policy, and the clients would have been advised at the time, that cover change is now in place and in play. If there was a claim, the increase is claimable.
What the Reserve Bank has overlooked in its understanding of the issue, once the cover is in place, the insurer is legally not able to reduce the cover without the written request and authority from the client.
This comes back to a basic tenant of our insurance law, once the cover is issued the insurer cannot impose terms or changes that are worse or detrimental to the cover place. Yes, this was an error, at the same time an error applied through the normal terms and conditions of the contract.
The policy does not determine the CPI rate, the insurer determines it. Once the insurer publishes that, it flows through to the policy which is how this gets locked in.
Which presents an interesting challenge. Yes, clients who complained, the insurer will have backdated the cover and refunded the premiums, that's what they do when they spot an error, and the client complains about it.
However, there is another side to this, what about those policyholders, through a change of health or circumstances, who cannot buy this cover or buy this cover at the rates they have in place?
As an adviser, if one of my clients was subject to this error and they had health conditions that would now result in loadings or exclusions, I would be advising them to ignore the opportunity to rectify the mistake and hold onto the cover because that is in their best interests.
At the end of the day, while the Reserve Bank is banging the drum on this, and it is coming from the Reserve Bank and not the FMA, the real harm from many of these errors isn't harming to clients, it is harm to the insurers.
Which again demonstrates the Reserve Bank's lack of understanding on how insurance works, at a quite basic level.
The real harm with this example is to the insurer and comes from 111 policyholders with 30-90% (haven't done the CPI calculation for 2015) more cover than they had without underwriting the underlying risk.
Frankly, the insurer concerned may have substantially increased their risk, and that's potential harm to their shareholders. Not that 111 policies are likely to be significant harm in the scheme of things.
My views here are my own:
- I'm an independent adviser and business in the industry; I deal with all insurers and even some that don't work with advisers.
- I have no supply links to anyone and no obligation to deliver anything to anyone but my clients and shareholders, and that's the way it should be.
- I operate by putting clients first. If we get that right the rest follows. It's a straightforward equation. One that many observers of the industry fail to appreciate.
As to respect for the Reserve Bank, when they demonstrate they are engaging and listening to all levels of the insurance industry, I may change my view, until then, we have an industry regulator that is both ill-informed and dangerous, and we need to be significantly concerned about that.
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Comments from our readers
This is the sort of message that needs to get to Robertson, Faafoi et al.
Pleased that someone has the balls to stand up for the IFAs of this world
Either way, we need more noise from the adviser community. To lie down and take it, as they have done in every other markets is to ask for the same steam rolling they got.
Advisers are easy targets, we aren't co-ordinated, we aren't heavy on additional people to fight battles, we’re not deep pocketed as everyone seems to suggest, so it's easy pickings to play flog an adviser, or industry of them than it is to really hold the institutions to task.
That said, aside from reiterating my endorsement of J-P’s comments, there are a few additional points I would raise.
Firstly, on the subject of up-front commissions, this is a theme the FMA has been pushing for some time now.
The report states:
“We saw evidence of sales incentive structures (internal and external) creating risks of sales being prioritised over customer outcomes, and of policies being ‘churned’, ie, customers being sold new policies that are not in their best interests so the salesperson can earn a commission. “
Personally, I can’t believe that finding 3 ’errant’ advisers from their extensive investigation is statistically significant. Therefore, given the FMA’s findings in their investigation, the assertion that “In our view, high upfront commissions are not acceptable as they drive poor conduct and can result in poor customer outcomes.” is patently ridiculous.
Churn is more likely to have happened in QFEs, especially certain VIOs that we all know about, but I thought that most of the members were on salary and bonuses subject to KPIs, not ‘high upfront commissions”.
However, ignoring the FMA’s campaign to set the remuneration terms for the IFAs, there is, for me, a more concerning issue which will impact DIRECTLY on the whole concept of advice and, in particular, on all IFAs. That is the very INDEPENDENCE of IFAs. Consider the following comments in the report;
• “A few insurers distributing through third-party advisers said direct communication would be inappropriate, as the customer ‘belongs’ to the adviser. Insurers had minimal oversight of intermediaries’ interactions with customers.”
• “Insurers should have oversight of all communication about products that takes place through intermediaries.”
• “Insurers need to have systems to review the advice provided at, and after, the point of sale, and customer outcomes over time.”
• “Insurers need to proactively and regularly encourage customers to consider their needs and whether their current insurance policy is still suitable, particularly where the customer’s circumstances might have changed.”
Not only does an IFA have to act impartially (read: independently) of the insurers but MUST BE SEEN TO BE ACTING IMPARTIALLY.
How can we be SEEN TO BE if the insurers are to be tasked with checking our advice overseeing all our communications with clients and, essentially, duplicating the adviser’s ongoing role of reviewing the client’s needs and the suitability of their plan?
Not only will it destroy the concept of “independence’, but it will add another layer of costs onto the insurer adding to the strain on profitability and put pressure on premiums
AND, isn’t this what the FSLAB, Code, Regs etc are being put in place to ensure - “proper conduct”?
Let’s extend this idea to other professions/industries and see how that runs out.
Consider a doctor prescribing a course of drugs for their patient, then swap insurer for pharmaceutical company and doctor for intermediary in the above quoted comments and see what sort of sense that makes.
One could carry on with this analogy with any “product manufacturer” (and that’s what insurers are) where there is a third party supplying to the end user such as plumbers, dentists, solar energy companies etc.
In ALL these cases, the responsibility lies with the individual supplying the product, not the product manufacturer.
So it should be with life insurance and we need to ensure these making the decisions understand this.
Please, take Graeme’s advice and talk to your parliamentary representatives and lobby, lobby, lobby.
I'll add that the FMA report on soft dollar incentives also found the whole situation wanting in terms of harm.
Summary from their report on soft dollars.
During the review period we found:
• 42% of products had an independent product rating.
• 81% of sales related to products that had an independent rating.
• Where products had a rating, sales of products with a higher rating were greater than sales of products with a lower rating.
• There was no evidence that soft commissions affect the sales of higher- or lower-rated products.
I'll repeat for the hard of understanding.
• There was no evidence that soft commissions affect the sales of higher- or lower-rated products.
Yet the QFE's were 1 out of 3 not doing the right thing by the client...
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I suggest that the time is nigh for every financial adviser who operates in the life and health insurance space to meet with every MP in their area and point out the realities spelled out above. The petty bureaucrats could well destroy the public confidence in life and health insurance if we lie down and let them.