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Review’s damning verdict on life insurance sector

30 January 2019

A new report has found extensive weaknesses in life insurers’ systems and controls, revealing the life insurance sector “in a poor light.”

It has found products were designed and sold without good customer outcomes in mind, and that some insurers did little or nothing to assess a product’s ongoing suitability for customers.

The findings come in the Financial Markets Authority (FMA) and the Reserve Bank’s review of life insurers - Life Insurer Conduct and Culture’ Findings.

“Overall the report shows the life insurance sector in a poor light,” says Rob Everett, FMA Chief Executive.

“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.”

Sixteen life insurers were reviewed between June and November 2018. The review included analysis of documents provided by life insurers, onsite interviews with frontline staff, management and executives and directors.

Examples of poor conduct found:

  • Neglecting to effectively notify policy-holders of increases to their premiums;
  • Old policies not being 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 charges after the policy end date.
  • Where sales were through an intermediary, there was a serious lack of insurer oversight and responsibility for the sales and advice, and customer outcomes.

In addition the review found little evidence of products being tailored and sold with good customer outcomes in mind and very few policies for identifying and dealing with potentially vulnerable customers.

There was evidence of sales incentive structures which created risks of sales being prioritised over customer outcomes although the review found clear evidence of claims staff having a strong focus on good customer outcomes.

There was little evidence to suggest that insurers had considered conduct, systems and processes prior to the review.

“The industry must act urgently and 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,” says Adrian Orr, Reserve Bank Governor.

“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.”

The FMA and RBNZ will provide the findings to each insurer with a set of actions to be completed by 30 June 2019.

This includes:

  • Developing an action plan to address the review feedback;
  • Explaining how the expectations of the regulators will be met;
  • Completing a systematic review of the insurers existing life products and policy-holder portfolios covering at least the past five years.

If the FMA is not satisfied with the level of urgency applied to addressing the areas of concern, further action will be taken.

Last updated on the 16th September 2019