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FMA Consultations

The FMA sent out an email this week providing details of upcoming opportunities to provide feedback.

"Over the next few months FMA will be embarking on a series of consultations and discussion workshops to seek input into both proposed new guidance, and the upcoming Financial Markets Conduct Bill legislative changes.

In some cases we will seek initial input directly from affected market participants or from their representative industry bodies.  In other cases, we will publish public consultation documents. And in others, we will do a mixture of these things.

Your feedback and input into these discussions and consultations is very important. To help you plan your time and identify those topics you would most like to provide feedback on, we have put together the following indicative consultation timeline.  Please note, that these dates are subject to change, depending on the feedback we receive during the consultation process.

We recommend you also talk with your industry association or body.  For access to current public consultations, please visit FMA’s ‘current consultations’ web-page:http://www.fma.govt.nz/laws-we-enforce/policy/current-consultations/"

Upgrade in Policy Wordings Provisions - Review Criteria

We are reviewing the upgrade in policy wordings provisions in many policies and note the differences as follows:

  1. No promise to upgrade
  2. Promise to upgrade - but which doesn't apply to any future claims from conditions or events that started prior to the upgrade
  3. Promise to upgrade - but which doesn't apply to any future claims from events that occurred prior to the upgrade

We have been asked to differentiate between item 2 and 3 on the basis that conditions (e.g. Asthma) may exist prior to the upgrade but not result in a claim 'event'.

At present the upgrade in policy wording feature is worth 1 point in our model, and the proposed change would deduct .25 from the point for the upgrades in category 2.




Policy Document Readability

Asteron's recent product launch, which the team here are busy poring all over, included a completely re-written suite of policy wording. The documents were re-written with the help of Writemark, a Wellington-based consultancy with a good grounding in producing 'plain English' documentation. Being situated in Wellington is probably ideal.

Initially we were not impressed by the changes. In spite of the effort put in to make the language easier Asteron persists with the booklet approach to policies. That means that even if a client buys only life insurance they have a booklet filled with the other wordings. We think that can cause confusion, and it is certainly a bit strange in these days of electronic documents.

The first product we reviewed was life, and the average number of words per sentence and the average length of words in each sentence have increased. That is usually deemed a worsening of readability. On the other hand if just read the document, it is clearly easier to read, which goes to show how hard the readability issue is to get right.

As we worked our way through the policy document upgrades to the balance of the database the scores improved. All the products other than life show an improvement in readability: shorter sentences and shorter words in each sentence, although total word count appears to have increased. We also note that the medical definitions section was not included in the readability effort, and understandably so.

On balance, the document has definitely improved. It is an effort worth pursuing. It shows, too, that readability is still an emerging capability for insurers. There is plenty yet to do, and no one has yet achieved a really straightforward policy document. For the complex, feature-rich, products sold through advisers, it may be functionally impossible. However, I am sure that they could be a whole lot better.

A number of strategies could be employed. One is the goal directed approach which has revolutionised application design with the rise of mobile devices with small screens and small processors. To my knowledge no one has considered the actual use of policy documents in this way.


FMA DRAFT Guidance for Consultation

The FMA has released draft guidance notes for consultation for advisers covering:

• Discretionary Investment Management Services (including custody)

• Personalised Financial Advice

• Client Communications and Record-Keeping


I think it remains difficult to provide substantially limited advice services with no aspect of the AFA code provisions being reduced or withdrawn. Essentially all the risk remains with the AFA to successfully define their limited advice service and identify which clients can safely be dealt with in that way. Few individual AFAs are likely to promote this approach heavily without further risk reduction. Those in QFEs may do more.

Value of a Statistical Life

Anyone interested in the value of a life - and everyone in the life insurance industry should be - should fin the "Value of a Statistical Life" model interesting. It is a public policy model used to help work out the practical allocation of capital to things like changes to roads that are expected to reduce fatalities. Essentially it supplies the economic number meant to represent the value to society for avoiding one of those fatalities.

When you click through you will notice that the amount, at $3.35m about two years ago, is quite a bit higher than the average sum insured for lives in New Zealand. Now, those two concepts are quite different, but they must be related, and the tension between them raises some useful questions. Link.

NZHerald Gets it Completely Wrong On "Playboy Mansion" Story

The recent article in the NZHerald on the incentive trips offered by life insurers is a disgrace. I cannot make up my mind what's worst about it, you decide:

  1. The story is focused on the aspect of the incentive trip most likely to attract a reader's attention: that winners may be: "...treated to a dinner party "like no other" at the Playboy Mansion." There is a legitimate debate to be had about soft-commissions, but whether they go to Playboy Mansion for dinner, the Cabaret at Jupiter's, or the Moulin Rouge in Paris is completely irrelevant. These are the kinds of things people do on holidays. What is relevant is a discussion of whether these should be available, limited, or disclosed, and this is a debate that is on-going. Right now, the trips are a permitted part of the environment and companies are entitled to play to the referee.

  2. The journalist fails to spot that Partners Life is a Life insurer - the clue is in the name. Is this because it is simply too tempting to contrast a sales incentive trip with general insurance? "...consumers are facing skyrocketing premiums, particularly property policy hikes which have risen markedly since the Christchurch earthquakes." This is irrelevant. Partners Life could take insurance advisers to the moon and it wouldn't affect your house insurance costs. Partners Life offers life insurance and doesn't insure anyone's house. The same is true for the other companies quoted: Fidelity Life and Sovereign Assurance are also life insurers. They don't insure homes. Life premiums aren't 'skyrocketing' either.

  3. Then we are fed a completely unfounded assertion: "...the trips are a closely guarded secret..." No they aren't. They are well known, they are described as sales promotions, they are talked about, they are debated with regulators, they are written about (check this recent story about soft-commissions), and they are advertised. Some advisers put them in their disclosure documents. Some advisers choose not to take them. The pictures from the trips are often part of company magazines. The assertion is completely undone by the fact that Mr Hurley proceeds to give us quotes from discussions with Milton Jennings and David Haak - they weren't closely guarding a secret. A two-second google search shows that several journalists have written about the subject, Eloise Gibson and Rob Stock for example. The Herald even has an expert on staff entirely familiar with the "closely guarded secret": David Chaplin.

Victorian era moral outrage, a complete failure to address the real issue of soft commissions, failure to notice the difference between a life insurer and a house insurer, and the bogus 'secret'. It is generous to describe this as merely lazy. If, in fact, the writer knew that Partners, Fidelity, and Sovereign issue no house insurance then it was worse.

Soft commissions may be deemed harmful to the process of giving good financial advice: it is arguable and it is worth writing about - but I would like to see it done with a bit more care, precision, and less misplaced passion.

Direct Policies Suffer from Heavy First-Year Lapses

Data from Australia reveals the sharp disparity between adviser-sold business and direct-sold business. This article contrasts first year lapse rates for the two channels:

  • 40% first-year lapses for direct sold
  • 13.5% first-year lapses for adviser sold

Interestingly the situation levels out considerably in the second year. Link.

Risk is Real

Once again earthquakes reminded us all that risk is real. Here is a link to the pictures of the BNZ regional headquarters on Habour Quay. I draw attention to this office because it is one I have been in a couple of times, and I know some of the people who work there. I am glad they are all safe, to judge by the state of the office I am sure there would have been many more injuries had the quake occurred during working hours. Link.

Speaking to some of the folks at AMP yesterday they tell me that a number of people have cancelled trips to Wellington as a result of the quakes. Alan Rafe and I, on the other hand, are heading down tomorrow :-)