There is a conversation going on right now about what are appropriate metrics and targets for incentives. Companies exist to make money. That fact is often advanced as a reason for assuming that they will place their benefit above customers, but failing companies the world over are often exemplars of companies that have placed financial gain above the need to serve customers well. In practice, over any significant amount of time, those two goals are inseparable. Sooner or later the truth comes out. 

Short-term incentives play a part. People find it hard to always be thinking about the long-run. A certain amount of get up and go is generated by creating a sense of urgency. Time-based incentives can do that. But they risk abandoning the long-run worries about sustainability to the excitement and rewards of the moment, or at least, the period of qualification for a bonus. Time-bound rewards can create oddly powerful incentives. Think of the value of the last piece of business that takes a person across a qualifying line for an incentive or bonus. 

Yet there must be measurement. Without it shareholders will abandon the sector. Their capital and expectations of return create opportunities: they invest in new technology, the basis for efficiency gains, reduced premiums, and improved service to customers. They invest in research and development, allowing new products to be developed. Go back in time and there was no cover for heart attacks, or any other trauma condition, or income protection. There were no e-apps. Cool online tools did not exist. They did not spring fully-formed from the ether. Plenty of innovation is required to make our markets and services better. More is needed, not less, in order to close the under-insurance gap and make New Zealand's insurance industry as efficient as that of, say, the UK's. 

Some ideas have been generated about how to manage these conflicting forces. In Australia APRA has sought to advance the concept that 50 percent of the measurement criteria for executive bonuses must not be financial. That has recently come under attack. Several prominent chair people (present or past) of companies in Australia have questioned the initiative, even calling it a misinterpretation of the intention of the Hayne Commission report, as Patrick Durkin reports in this article at the Australian Financial Review. They are not alone. NAB received an unprecedented 88% protest vote against some of their plans to introduce non-financial metrics. That could be a question of exactly what those metrics are, and also communication, but highlights the risk that change will alienate investors.

Clearly, there is a lot more thinking to be done on this area. 

The AFR reports that APRA is so concerned about the crisis in insurance coverage in northern parts of Australia that it wants a new approach to the market: 

"All levels of government must act to save swathes of northern Australia from becoming uninsurable as a result of a climate change-related increase in natural disasters, the prudential regulator has warned. The Australian Prudential Regulation Authority said action should include a major shift of emphasis from disaster recovery to disaster resiliance and mitigation, pointing out the vast majority of disaster funding goes to "clean-up and recovery", with only 3 per cent on prevention and mitigation."

The piece by James Fernyhough is well worth a read, and not just for general insurers. It is also indicative of a wider interest by regulators in spotting medium to longer term issues and creating impetus for solutions where competitive pressure makes it hard for individual participants to act. That sounds a lot like some of the problems the New Zealand life insurance industry is grappling with. 

The argument over commission, and the effect of conflict of interest created by commission, is the insurance industry's equivalent of the great debate over whether advisers add value.

Supporters of the validity of the commission model received a boost on Friday from an unlikely corner. APRA's research, backing up a survey by ASIC not long ago, shows a greater percentage of admitted claims if the client received advice compared to a non-adviser individual cover see this link and table below:

There is some nuance to consider. 

Advisers tend to sell a broader cover mix. When clients buy income protection cover direct, the contracts tend to be issued based on short-form underwriting and have tougher terms. There are some stand-out numbers. The first is TPD where advised clients enjoy higher accepted claims rates over non-advised by a large margin. The second is 'accident' which is very rarely sold by advisers, but there appears to be a startling gap there, showing that non-advised clients do better in that case. 

The Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) (the agencies) have published data on life insurance claims and claims related disputes for the period 1 January 2017 to 30 June 2017. Click here to read more.  Below are some of their findings - well worth a detailed review.