The Financial Markets Authority (FMA) says it is considering regulatory action against three large financial institutions or qualifying financial entities (QFEs) following a review of insurance replacement business practices.

The review of 11 firms found that two entities' internal policies and process were high quality. Six firms had taken some steps to mitigate the risks associated with replacement business b ut need to improve their practices, and three entities were found not to be meeting their legal obligations.

Among the key review findings, the FMA says most firms had processes in place to identify when a customer was being advised to replace life or health insurance, showing awareness of risk associated with these transactions.  Generally, these processes seemed oriented towards reducing firms’ legal risk, rather than to identifying and mitigating risks for customers.

The FMA also found that fewer than half of firms reviewed advise customers that replacing their life insurance could lead to worse cover or the potential loss of benefits. Insurers need to acknowledge that replacing insurance policies is a high-risk transaction for customers.

Although firms use transaction-specific “replacement business forms”, these are used mainly as a risk management tool for insurers, presented at the end of the advice process, rather than being used to help and support customers in their decision-making

None of the insurance providers reviewed have an independent process to distinguish between new and replacement business.

"The inherent risks of conflicts of interest involved in selling financial products are heightened when vertically integrated organisations both create and then sell their own products. This thematic review looked at how insurance firms identify and manage these risks through their policies and procedures when a replacement insurance policy is sold," the FMA says.

The FMA considers that replacing insurance policies is a high-risk transaction for customers, because of the risk of claims being declined in the future and original policy benefits being lost. Customers may never discover this, until they try to claim on the insurance.

"Even where the impacts on the policy-holder are neutral, the FMA is concerned that replacement of the policy benefits those making the sale rather than the customer. Most 'new' life insurance written in New Zealand is actually replacement insurance rather than a customer taking out insurance for the first time."