Tony Vidler: doubts that insurance churn is such a big issue

Here is an article from Tony Vidler discussing the churn of life and health insurance in NZ, and why he feels it is not as bad as everyone makes it out to be. There are some well-made points in here - for example, there are big trends towards more choice and greater consumer propensity to switch in all sorts of products (cars, houses, even once very stable banking relationships are more open to change). 


Reflections on the interactions between likely conduct law and the Financial Services Legislation Amendment Act

Following a recent speech by Kris Faafoi, Minister of Commerce and Consumer Affairs, my compliance consultant and I exchanged views on the interactions between the proposed conduct law and the other parts of the financial services legal and regulatory regime.

It is hard to envisage circumstances where the conduct requirements under the regime proposed for banks, insurers and NBDT entities will not be introduced into the new Licensed FAP regime. It is clear that FAPs will need to meet at least broadly equivalent conduct requirements. A product provider bound by a conduct law would have to require a FAP, perhaps an agent of the product provider, to meet standards if the standards were not going to be extended to the FAP.

Then consider this situation: There is the issue of those FAPs that provide advice on the products of licensed conduct entities where there is no commercial relationship between the FAP and the conduct licensed product provider. Take ABC Advice Ltd charging client fees direct and receiving no remuneration from XYZ Insurer Ltd with ABC Advice Ltd providing advice on XYZ Insurer Ltd products, with or without the knowledge of XYZ Insurer Ltd that ABC Advice Ltd is doing so. XYZ Insurer Ltd will still have conduct obligations to a consumer who is also a client of XYZ Insurer Ltd and ABC Advice Ltd, even in the absence of any contractual relationship between XYZ Insurer Ltd and ABC Advice Ltd. 

Separately to that issue, as the conduct licence is separate from the other licences required by banks, insurers and NBDTs, what does it mean if a conduct licence is withdrawn? It would seem likely that the loss of a conduct licence will be sufficient to put the total entity out of business. That raises so many questions about sanctions short of withdrawal of the licence, and also the need for a process to manage the extreme circumstance of licence removal and how to protect the interests of clients during that period of time.

 


Fake medical studies, conflicts of interest, and rationalisations

According to Dr Andrew Klein, a UK anaesthetist and editor-in-chief of the journal Anaesthesia, fake medical data is on the rise. He believes that there is about one fake medical study for every 40 papers submitted for publication. There is a data-pattern analysis technique they use to detect this and although they find the odd mistake they believe "nine times out of 10 people have clearly made their data up or changed their data. A lot of articles that we might have published before are now not going into the journal.” Click here to read more. 

I am going to file this under 'we are all subject to conflicts' and point out that even when the conflict is not about money - it may be solely about prestige, or pride, or just winning an argument - it can influence behaviour. Everyone is subject to these kinds of pressures - and what's interesting is that the people submitting articles to Klein's journal probably did not think they were doing anything wrong, or perhaps, not very wrong. Sometimes you hear people talk about what everyone 'everyone knows'. Then they get a set of data that doesn't fit the pattern, and they could think 'that can't be right' and instead of holding on to the question, they moved a data point or two...

Which is a caution to us all, to look at the data, not look for how the data supports the story we are already telling ourselves. 


Conduct issues example: Mobile trader 'signed up mental health unit patients to unreasonable phone contracts'

This article on Stuff relates to the general unfair contract law changes proposed, not just the changes likely to arise from financial services conduct review going on.

As I read it I found myself wondering: don't we already have laws against this kind of idiotic behaviour? Remember this case highlighted by the Hayne Commission: insurance sold to an intellectually handicapped young man. I always thought that none of us want this to happen, and if some fool from a call centre has done this to hit a target it was always - sooner or later - going to get discovered and reversed. 

But on the other hand, has this kind of behaviour got more common? If so, then why?

Setting aside people with more severe limitations, we may all be cognitively stressed at times, and can be vulnerable to a pushy sales pitch which is exploiting some fundamental information asymmetry. I suspect that this is more common with any service (not just financial) when several of these factors combine:

  • Complex services
  • Information asymmetry
  • Subscription or regular payments
  • Hard to compare features
  • Presence of a sales incentive
  • Distant call-centre sales process
  • Reduced or limited competition
  • Infrequent purchase events, for ‘set-and-forget’ services

So, the Government has announced its intention to do the following:

  • Prohibit unconscionable conduct in connection with the supply or acquisition of goods and services
  • Extend the existing protections against unfair contract terms in standard form consumer contract terms to also apply to standard form business contracts with a value below $250,000.

That's probably understandable if this is become more widespread because more and more services have features like those above. You can find more information about the decisions here: https://www.mbie.govt.nz/business-and-employment/consumer-protection/review-of-consumer-law/protecting-businesses-and-consumers-from-unfair-commercial-practices/

Note, that is quite separate (but related to) the work going on that is specific to financial services. This is the context which is helpful to consider when you are looking at draft law (soon, we hope) of COFI, Insurance Contract Law, and considering the expanded remit of the FMA.


Summary of proposed new conduct regime for financial institutions

A series of announcements today provide us with the expected update on the proposed new conduct regime for financial institutions. Here are the important links. Summary is below.

https://www.fma.govt.nz/news-and-resources/media-releases/fma-welcomes-government-announcement-on-expanded-remit/

https://www.beehive.govt.nz/release/new-financial-conduct-regime-makes-banks-and-insurers-treat-their-customers-fairly

https://www.mbie.govt.nz/business-and-employment/business/financial-markets-regulation/conduct-of-financial-institutions-review/

In summary, the regime will involve the following:

  • Create a licensing regime for banks, insurers and non-bank deposit takers (such as credit unions) regarding their general conduct. These institutions will be licensed by the Financial Markets Authority.
  • Require licensed institutions to meet a fair treatment standard (for example, to pay due regard to the needs and interests of customers and treat them fairly)
  • Require licensed institutions to implement, effective policies, processes, systems and controls to meet the fair treatment standard. Regulations will specify what these policies, processes, systems and controls must include.
  • Outline what obligations financial institutions have in relation to remuneration and any other sales incentives, and how they must manage the risks those incentives create.
  • Prohibit sales incentives based on volume or value targets (e.g. soft commissions such as overseas trips, bonuses for selling a certain number of financial products, leader boards, and performance management based on the volume of sales). This prohibition will apply to banks, insurers, non-bank deposit takers and their intermediaries.
  • Make licensed entities accountable for sales to consumers by the entities contracted intermediaries who are not financial advice providers (non-adviser intermediaries include car dealers, retailers selling add-on finance and insurance, and travel agents or airlines selling travel insurance).

FMA-RBNZ report update part of the process towards new conduct law

The FMA-RBNZ update on the review of conduct in the life insurance sector requires further discussion and commentary - but for now it obviously deserves at least this link to the full media release

Areas of particular note include: 

  • The treatment of existing customers - references to 75,000 issues must relate to them. 
  • Sales incentives and commissions - in particular the comment in this review about high up-front commissions.

Legal and regulatory uncertainty is headwind, as are concerns about what levels of commissions are likely to be acceptable.That explains, if not excuses, some insurers' challenges in responding to these issues. I will write more for subscribers to the quarterly life and health sector review. 


Conduct future contrasts

Insitutions have been given their own version of the contrast between the clarity (but inflexibility) of a prescriptive regime compared to the flexibility  (but lack of clarity) of a priniciples-based approach in Rob Everett's speech to the FSC conference on Wednesday. Philip Macalister has good coverage of this, including the quote from Everett, CEO of the FMA, at this link. .

I invite you to make a further contrast with the case of Southern Response Earthquake Services Limited versus Dodds. You can read the details at this link. Papa draws attention to the desire to work with clear rules, rather than a broad duty, with this time, the government being on the rules-based side of the argument.

My personal preference is for a principles-based regime, provided it stays that way, and regulators and insurers stick to principles - and don't gradually develop a shadow rule book which means we end up with the worst of both worlds. 


General insurance: Tower set to reduce disclosure obligations

Tower is set to minimise disclosure obligations placed on customers according this piece by Susan Edmunds in Stuff.co.nz. Richard Harding, Chief Executive, has said that Tower has decided to remove the wider duty of disclosure from its sales and claims processes before the end of 2019. Crossley Gates, insurance law specialist, has stated that Tower's move was likely to be required within the insurance industry. Click here to read more.

 


Can you spot a good client outcome when you see one?

Some consumers might struggle with the idea that you pay for insurance for a couple of decades, receive no claim payment, and this is a good client outcome. When I look at the range of conditions covered in my trauma policy, I am pretty keen on that result myself.

But it is, perhaps, easy to think of 'getting nothing' from your insurance. When in practice, the client got something the moment they signed up: relief from the worry about how their family or business would cope in the event of disaster. Then later, gratefully cancelling a policy after having paid premium all those years, knowing that, you won in the best way possible. That's a good outcome in my books, but of course, not everyone agrees.

An adviser shared with me a series of emails between him and an insurer which showed that in this case it was the insurer who found it hard to spot a good client outcome. A couple of large trauma cases were cancelled by some people who were getting on in years and no longer needed the cover. They had the cover in force for about 20 years, and were paying very substantial premiums. It was time to stop. The insurer saw the impact on the adviser's persistency rate and thought the worst, and started to investigate the adviser for what they suspected might have been a case of churning the client. This is a good example of over-reliance on one metric: persistency. It also over-determines the value of retaining cover. I'm a big fan of insurance, but there are occasions when it is right to cancel it, clients can outgrow their cover, by age and financial situation. I felt this case was one where the insurer should probably have celebrated a job well done over the years - for them, for the client, and by the adviser. 


IAG hands over life insurance business

IAG handed over 50,000 life insurance clients with State insurance to Aon. State said in a letter sent to customers that they were focused on the general insurance and are no longer selling life insurance. Click here to read more.

Handing them over to an advice business means that they can be relieved of ongoing servicing obligations. This is a good example of a market exit which acknowledges the needs of customers in the medium term. It also shows ways in which conduct obligations - and possibly the current conduct discussions - can provide a positive wind-shift in favour of advice-giving businesses. In the past, corporate conversations have often been framed in the context of the risk of advice-giving.