By Nick Stewart
Purchasing life insurance is one of the most important financial decisions people will make in their lives.
There are approximately four million life insurance policies in force in New Zealand, with consumers paying $2.54 billion in annual premiums.
Prompted by the Australian Royal Commission findings, the Financial Markets Authority (FMA) and Reserve Bank of New Zealand (RBNZ) have completed a joint review on the conduct and culture of 16 New Zealand life insurers. The report published last week will have set alarm bells ringing in many insurance firms.
The FMA's concern about a potentially negative impact on the confidence held in New Zealand's financial institutions, and the potential for complacency in the industry, led to a review of retail banking in November 2018 and this second review phase has focused on life insurers.
The 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 they identify and remediate any issues.
The report highlighted that the conduct of life insurers directly affects customers, regardless of whether the insurers sell insurance directly or through other parties – agents, brokers, advisers.
FMA chief executive Rob Everett said, "Overall the report 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."
The regulators found extensive weaknesses in life insurers' systems and controls, with weak governance and management of conduct risks and a lack of focus on good customer outcomes.
Former Fidelity Life CEO and Stewart Group's advisory board member Milton Jennings commented, "Overall it is a good report setting out the poor conduct in the industry but, it is quiet on churning policies and to me this is the biggest conduct issue."
He added, "The only policy I have concerns about in the market which is touched by the report is funeral cover. These are great policies for people who are close to death or have major medical conditions. However, they can have up to 300 per cent more premium than a normal policy and if people are healthy, they should seek advice from an independent, authorised financial adviser (AFA) to get a policy for a third of the price."
This report also highlights that New Zealand has a very high rate of soft commissions for advisers, far higher than other countries, more than 20 per cent of the cost of the premiums. High rates of commission have a detrimental impact on the premium affordability for customers.
Stewart Group, as an independent financial advisory business introduced a "no soft commission" policy in 2003, which means we work for our clients' interest, not those of an insurance company or product provider.
Soft commissions are incentives or benefits such as gifts, prizes, trips, professional development such as training or software, events including conferences, sponsorships, payment of membership fees and loan to advisers.
There is an increasing concern that soft commissions present a real conflict of interest for advisers, as remuneration or incentives provided by insurers could influence an adviser in giving advice to clients. It is very important to have an authorised financial adviser (AFA) by your side who is obliged by law to place the interests of their clients first.
With the proposed Financial Services Legislation Amendment Bill (FSLAB) fast approaching its final reading, Stewart Group would like to see an industry that is clearer to clients, treats them fairly and ensures full disclosure of conflicts and remuneration is given.
We would like a regulator to monitor the conduct of financial advisers, banks and insurance companies, with strong penalties for breaching duties. This will hopefully lead to an industry that always puts the client's interests and goals first.
Nick Stewart is the CEO and an Authorised Financial Adviser at Stewart Group – a Hawke's Bay-based independent financial advisory firm based in Hastings. Stewart Group works with individuals, families, and businesses in New Zealand who are committed to pursuing financial planning and wellbeing. Our clients understand the value of independent, goal oriented and objective financial advice that is free of conflicts. If that sounds like you, we would love to hear from you.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961.