Government to fast-track bank, life insurance customer protection measures
By Rebecca Howard
Jan. 29 (BusinessDesk) - The government will look to remove sales incentives in the life insurance industry and fast-track other customer protection measures in the financial sector after a report highlighted major issues in the insurance sector impacting on consumers.
The joint report on the industry by the Financial Markets Authority and the Reserve Bank released today found the life insurance industry is vulnerable to misconduct, is ignoring whether its products are suitable for customers and is too slow to make changes.
It followed an earlier report by the two regulators on retail banks that was published in November.
The problems highlighted in both reports are similar, Commerce and Consumer Affairs Minister Kris Faafoi said, though more extensive in life insurance.
“The report has found New Zealand life insurance industry has a culture that prioritises sales over customer interests and customers deserve better. Cabinet today agreed we are going to get rid of sales incentives in the insurance industry that are driving behaviour that is not in the best interest of consumers," he and Finance Minister Grant Robertson said in a joint statement.
“This, with the findings from the earlier report on banking conduct and culture, mean that we have to take action. We plan to release a consultation paper on the changes by May and introduce legislation later this year,” Faafoi said.
According to the report, 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 percent of total premiums paid each year, far higher than in other countries – Mexico and Hungary are the next highest at about 15 percent with Australia at about 12 percent and the United States about 9 percent.
Up front commissions on new policies can range from about 170-210 percent of the first year’s premiums.
The FMA had previously concluded that only 2 percent of sales of life insurance policies are genuinely new, rather than just churn, or switching customers between policies to generate income for life insurance agents.
Robertson said while the industry has started to address issues raised in the reports, it is clear that the government needs to act on regulation and conduct of financial institutions, including banks.
He said given the issues identified with insurance and banking are similar, the government will consider changes that apply across both sectors. He said the government wants clearer duties on banks and insurers to consider a customer’s interests and outcomes, and to treat customers fairly. It wants an appropriately resourced regulator to monitor the conduct of banks and insurance companies, with strong penalties for breaching duties as well as a strong response to internal sales incentives and soft commissions.
Faafoi says the consultation on these measures will run alongside work already underway to update insurance contract law.
“It is an ambitious timeframe but my intent is to have both pieces of legislation in Parliament by mid-2020, because it is time to ensure consumers get protection that is clearly needed," he said.