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Random Insurance (Prudential Supervision) Bill Comments

I am taking a brief break from my read through the bill - pen in hand because nothing beats manual note taking for etching important stuff into memory. Just reflecting on silly things already - in an effort to be very up to date and right-on advertising new licenses is specified as taking place on the "Internet Site" of the Reserve Bank.

It occurs to me that the bank might be trusted with a little more flexibility. I mean, we're still getting over a bunch of legislation that specifies written signatures, and while the Internet has been wildly successful, we may well have a new format in less than a twenty years, and in New Zealand we make a point of revising insurance law only once or twice in a century... still, this is only a draft, and if this is as bad as it gets we'll have precious little to submit on.

Speaking of matters to do with time, it's a reminder of how much current legislation owes to historical legislation when you come across the entry defining Lloyds as "...the society of that name incorporated by the Imperial Act known as the Lloyd’s Act 1871." You know, the Lloyds option looks interesting too.

Matters of definition appear to be a great relief to read - although I am taking more input on this as the week rolls on - as the definition of continuous disability insurance appears to be a deft piece of work to permit the continuation of the status quo - after all, this Bill is about supervising what we've got, not wrecking accepted market definitions of products.

Section 22, the notice period looks a bit light, given the requirement to be reasonable and the complexity of life operations, and the difficulty in making large changes to such businesses very quickly. I suspect that this is there because the nature of changes are expected to be either (a) minor or (b) apply to conditional licences for operations not yet commenced, but they can apply to existing, and the requested conditions are not limited in any way other than 'reasonableness'.

Section 26 looks a little confused, a quick reading left me feeling public notification occurs before the insurer has had a chance to respond, but I may be wrong.

Wide powers of search will capture IT managers and staff as well as the specified officers of an insurer - which all makes sense, but will mean better explanation of their role.

Friday Fun

Friday fun this week comes courtesy of the comments on Phil's Blog. Phil commented on the daftness of the idea of a 'product recall' on ING funds, and he was promptly flamed by a a few readers, all firmly of the opinion, it seems, that ING should simply refund investor's money in full. Oh ho, should they now?

But let's enjoy the fun first, here are some select extracts from the comments.

"This particular fund was markered [sic] as a low risk investment.Now we find out that it has been invested in CDO’s which is on the high risk side."

A subsequent commenter identifies the share in CDOs in one fund as 27% - not overwhelming. Until recently you could have an equity component of 27% in a fund and still consider it 'low' risk. But I sense a dreadfully dull debate about the definition of 'low' coming up. They weren't considered high risk when the funds were designed either. But the credit crunch has done for many once solid investments. But let us continue with the tale of people who...

'...withdrew funds from fixed deposit at a New Zealand bank on the advice of that banks fund manager and were told “It is as safe as the bank”'

Well it hasn't proven to be as safe as the bank, but that wasn't in the investment statement either. The danger here is that there is a confusion about terms. If anyone did say in the meeting with the investor that the fund is as safe as the bank, that's certainly serious. I wasn't there, so I suppose that in some cases perhaps it was said - but given what we do know is in the investment statement, most of the time, most likely it wasn't. What may be likely is that there was confusion over the term 'low risk' meaning, perhaps 'no risk'. Without commenting on the sales process of these funds, we can nevertheless smile at the exact same sin of confusion being repeated by these ardent supporters of a product recall. By calling for a full refund, they seem to imply that low risk should mean no-risk. Whereas the prevention of future problems like this probably relies on investors knowing the reverse - that low risk means the presence of relatively less risk, but still some. The problem of course is that this some might reasonably expect to be exposed in the worst credit crunch since the 30s...

Advice Giving Conundrum - Guidance from those that have got it wrong

We've got an opportunity, just, to learn from those that have got it wrong in regulation. Over in the UK there's a report out showing (over 116 glorious pages, no less) that 70% of consumers buying critical illness cover believe that they are getting advice even when this was meant to be a direct sale. The distinction 'direct' has important implications in the UK regulatory structure. Oversimplifying you could say that this is analagous to the difference between category 1 and category 2 in our own new Financial Advisers Act.

I wasn't really a fan of the switch from our own earlier approach to regulation (which used categories of service levels like the UK does), but tolerant friends such as Rob Dowler led me gently to the wisdom of a product based division: and I have to say that this news story underlines the point nicely. How can you tell whether advice is given in the meeting? This quote puts it well:

“Consumers are clearly confused as to what service, advice and options they receive. They seem to have no perception of whether sales are advised or non advised, about the options available around paying for advice, and also if someone is tied, multi tied or independent.”

Oral disclosures are notoriously hard to police. Product categories make the job easier. After all, you have documentary evidence of whether it is term life being sold, or KiwiSaver, don't you? (Setting aside the recent confusion over whether Blue Chip clients were buying property or securities).

But just as we get a chance to feel chuffed that we've got it right, there is a real risk that we will promptly get it wrong again. The risk is that we will now confuse the issue by saying that if you do a full fact find to figure out exactly how much insurance a person needs - then hey presto, you are in danger of confusing the consumer and they will think you are giving a full financial planning service (I doubt it, see comments above, I reckon). So that makes you category one. Hmmmm.

Local Incorporation

This report shows that local incorporation is just not considered a priority issue in supervision of the industry. Neither, it seems, is there much of a rush to get the taxation of life companies dealt with either. Many will consider the delay happy, and once again be glad that the life industry is a mercifully quieter corner of the altogether too-exciting financial services industry.

Advisers Feel Tools Inadequate

Apparently advisers helping clients plan for retirement feel that the tools provided by fund managers are inadequate. This has reminded me about two issues recently brough up by folks I know in the industry.

The first is the matter of the weird assumptions used in the world of planning to look at retirement needs analysis. Often these include the assumption that you want as much income in retirement as you have now, that you'll stop work at 65, and that you won't receive any NZ Super. Then they fail to include any reasonable mortality assumptions, or healthcare costs, and assume income is requried in perpetuity. I exaggerate to stretch a point, but you will notice how rarely the opposite of all these assumptions is used.

The second is the cycle we have gone through with planning tools. As technology first started to be used in the industry, these were developed in-house by product provider firms. As they realised this was a darned expensive business to be in, and required capital costs to be re-couped from larger groups of users, they recommended the products of third parties.

Now we come full circle, as advisers as dissatisfied with the presentation tools - and don't always want to pay for them - so companies are subsidising, training, or making some tools available free again.

Non-disclosure in insurance stats

I've done some research for an article on non-disclosure that will be published in the next copy of Asset. Some background to the article are the complaints for non-disclosure published in a handy fact sheet by the Insurance and Savings Ombudsman for New Zealand. Here are the full stats which cannot be published in Asset because of the limitations of space in the printed form.



Source:           Case Books

Period:            1 January 2000 to 31 December 2007


Category                                Number           2006 only

Criminal convictions              143                    8        (21%)

Life insurance                           24                    8        (21%)

Other                                         66                    6        (16%)

Pre-existing conditions          120                  12        (31%)

Previous claims                        16                    2        (  5%)

Previous underwriting terms      3                    1        (  3%)

Regular owner/driver               28                    1        (  3%)


Total                                       400                  38


Number of complaints


1.         Non-disclosure was a factor in 23% of all complaints (400/1745).  In 2007, the figure was less at 18% (38/208)

2.               Non disclosure of criminal convictions was a factor in 36% of all non-disclosure cases (143/400).

3.               Non disclosure of criminal convictions was a factor in 8% of all complaints (143/1745).

4.               Non-disclosure of pre-existing conditions was a factor in 30% of all non-disclosure cases (120/400).

5.               Non disclosure of pre-existing conditions was a factor in 7% of all complaints (120/1745).

6.               Non disclosure of criminal convictions and pre-existing conditions were factors in 66% of all non-disclosure cases (263/400).

Non disclosure of criminal convictions and pre-existing conditions were factors in 15% of all complaints (263/1745).

Retention of Clients Industry Forum

We have been very busy - in part with preparations for our retention of clients industry forum to be held next Thursday. We now have five life companies attending who are sending a total of 15 staff. We're delighted that so many heads of Operations and Sales will join us as well as some actuaries and analyst people to help keep the conversation grounded.

If you haven't heard about our workshop approach to industry issues or would like to know more about the clien retention forum specifically, drop me a line.