FMA identify poor value product, and more daily news

The FMA released their findings on the value of credit card repayment insurance (CCRI). The FMA has concluded that CCRI is a poor value product for all customers. As a result of the findings, the FMA is now urging over 200,000 New Zealanders to evaluate if they still need this insurance. The conclusion was based on factors including that there is a limited level of underwriting completed and that customer’s medical and occupational circumstances aren’t assessed. Additionally, the FMA found:

  • Providers’ insufficiently checked customers’ suitability for CCRI, failed to take account of individual circumstances and relied on customers ‘self-assessment’ of their suitability
  • Providers had poor communications with CCRI customers
  • Consumer understanding of CCRI’s features and benefits was poor, with some not realising it was optional
  • Providers revealed a number of processes, systems and administrative failings, including incorrect premium charging
  • CCRI benefits reduced significantly when a consumer reached age 65, with many of the benefits - the policy definitions which can trigger a claim - no longer applicable, yet consumers premiums were not decreased to reflect this.

Click here to read more

“The Financial Markets Authority (FMA) - Te Mana Tātai Hokohoko - is urging an estimated 200,000 New Zealanders who have credit card repayment insurance (CCRI) to check if they still need the product, after a review found it to be poor value.

CCRI is a form of insurance which covers some, or all, of a customer’s outstanding credit card repayments in certain circumstances, including in the event of a customer’s bankruptcy, redundancy, injury, illness or death.

The FMA review, published today, has confirmed that CCRI is a poor value product for customers.

This is based on several factors including the limited level of underwriting completed by providers when they issue a CCRI policy. The underwriting process involves an assessment and calculation of the amount of risk the insurer is taking on for the person buying insurance. With the CCRI product, providers do not assess a customer’s medical and occupational circumstances. These factors mean numerous exclusions and prescriptive conditions are applied when someone makes a claim on the policy, so customers may not receive the benefits they expect.

The FMA report also found providers treated CCRI as a low-touch product, with customers receiving little communication or engagement. Therefore, many customers did not make claims. Because claims are being declined due to numerous exclusions or customers simply not making claims, this has resulted in providers experiencing low claims loss ratios and accruing significant  profits. The amount paid out in claims to customers is low compared to the insurance premium collected by providers.

The loss ratio for CCRI was reported as low as 10%, meaning around 10c is paid in claims for every $1 received in premiums. This compares, on average, to loss ratios of 80% for health insurers and 47% for life insurers.

CCRI withdrawn but still earning $20 million

The Joint Reserve Bank of New Zealand and FMA report into conduct and culture of the life insurance industry highlighted concerns about CCRI in 2019 and since then insurers have stopped selling it to new customers. The FMA remained focused on this product given an estimated 200,000 New Zealanders still hold in-force policies, with insurers earning around $20 million in premiums annually.

“We found underwriters and distributors are not displaying sufficient levels of customer care in their suitability assessments and communications with customers,” the report said. Product suitability assessments are a critical part of customer care, where a customer’s personal circumstances should be checked to ensure the product meets their needs and financial position.

James Greig, FMA Director of Supervision, said: “New Zealanders should check if they have CCRI and ask themselves whether they still need it. We encourage customers to contact their provider to check if this product is still suitable for them. Some providers indicated their sales process for CCRI had involved customers ‘self-assessing’ whether the product was right for them, based on product terms and conditions, and disclosure documents. This is unacceptable.”

Mr Greig noted the Financial Markets (Conduct of Institutions) Amendment Bill before Parliament will introduce obligations and duties for insurers to put customers first. “Insurers need to focus on managing conduct risk to ensure customers’ interests are prioritised,” he said. “This is an essential requirement of the new legislation, so insurers need to invest in the systems and processes to meet these obligations and show they are putting customers’ first.”

The FMA found:

  • Providers’ insufficiently checked customers’ suitability for CCRI, failed to take account of individual circumstances and relied on customers ‘self-assessment’ of their suitability
  • Providers had poor communications with CCRI customers
  • Consumer understanding of CCRI’s features and benefits was poor, with some not realising it was optional
  • Providers revealed a number of processes, systems and administrative failings, including incorrect premium charging
  • CCRI benefits reduced significantly when a consumer reached age 65, with many of the benefits - the policy definitions which can trigger a claim - no longer applicable, yet consumers premiums were not decreased to reflect this.

Inquiries ongoing, remediation underway

The issues uncovered in this review are concerning and the FMA’s inquiries remain ongoing.

Some providers have remediated, or are remediating, customers affected by any of these issues. The FMA will continue to engage with providers to ensure this activity progresses and is prioritised.

The review was carried out to better understand the suitability of CCRI for consumers and followed the 2019 Life Insurer Conduct and Culture review, which found certain insurance products provided poor value.

Sixteen underwriters and distributors participated in the review, which involved gathering qualitative and quantitative data between October – December 2020. This included gross written premium, claims ratios, dates CCRI was offered, suitability of processes, product reviews and any known issues.

The FMA received 13 consolidated responses from underwriters and distributors, with some of them related entities or part of a parent organisation.”

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Outrage over funeral cover scheme closure, and more daily news

It was announced that New Zealand Credit Union (NZCU) was set to close down its Credicare scheme. This was going to leave over 2,00 people without funeral cover. Members were set to be credited $50. After outrage from members, NZCU announced that the Credicare scheme has been extended until January 2022 when NZCU will decide the future of Credicare. 

“More than 2,000 people are likely to be left with hefty funeral bills as the New Zealand Credit Union (NZCU) looks to close down its Credicare scheme, which provides funeral insurance plans.

Around 2,650 people are part of the scheme, most of them South Islanders. Some of the clients had been paying into the scheme for many years, expecting their families to receive around $10,000 when they died, according to a report by TVNZ’s Fair Go.

In June, NZCU announced that it would shut down Credicare, to the shock and dismay of customers, especially those who had invested significant amounts of money.

As part of the closure, NZCU offered members a credit of $50 in their accounts. However, some customers said they had paid thousands of dollars since the scheme began in early 1990s. The closure will also make it very difficult or costly for elderly customers to obtain further funeral insurance.

Meronea Dawson, a member that had paid into Credicare for more than 20 years, could not help but feel betrayed.

“I feel like a friend of mine shat on me,” Dawson told Fair Go.

Following the backlash, NZCU said it will extend the Credicare scheme until January 2022, when it will make known its decision about the scheme’s future.

“We acknowledge that we could have approached the proposed closure of Credicare in a different way and we are sorry that our recent communication has caused concern and distress for some Credicare members,” said NZCU chief executive Gavin Earle. “We have listened to the feedback and are committed to working together with Credicare members to determine its future.” Click here to read more

Insurers and advisers that regularly work with customers will recognise the misconception represented by the word 'invested': these people believe that they are saving up for a claim. That belief means that they do not understand the product they own - which is a large part of the reason it is not working the way they thought it would. We know that insurance is a low-involvement category. Very often, even if a client has the cover properly explained to them, they forget - because it simply isn't important information for them. Insurance is boring for most consumers, and the new and confusing thing they just been told stands no chance against a long-held belief. That is one of the reasons that we cannot expect clients to maintain their own insurance programmes. It must be done for them, either by the insurer, or a good adviser. 

In other news

Fidelity Life: The Fidelity Life team, including Business Managers can be contacted as usual via phone and email 

Partners Life: Partners Life to monitor the COVID-19 lockdown situation closely over the next few days to work through what this might mean for affordability support options for clients, underwriting and new business pipelines

RBNZ: Official Cash Rate on hold at 0.25 percent

 


Australia: Consumer credit insurance harmful to consumers

In a recent review of the sale of consumer credit insurance in Australia by ASIC has found "unacceptable sales practices, poor product design and significant remediation costs in CCI sold by major banks and lenders." 

ASIC’s review found that:

  • CCI is extremely poor value for money – for CCI sold with credit cards, consumers received only 11 cents in claims for every dollar paid in premiums. Across all CCI products sold by lenders, only 19 cents was recovered in claims for every premium dollar which consumers paid.
  • CCI sales practices caused consumers harm:
    • consumers were sold CCI despite the fact they were ineligible to claim under their policy
    • telephone sales staff used high-pressure selling and other unfair sales practices when selling CCI, and
    • consumers were given non-compliant personal advice to buy unsuitable policies.
  • Consumers were incorrectly charged for CCI, including being charged ongoing CCI premiums even though they no longer had a loan.
  • Many lenders did not have consumer-focused processes to help consumers in hardship make a claim under their CCI policy.

I think it worthwhile highlighting the issue of consumer harm and the costs of remediation: 

  • ASIC’s work has led to a significant remediation program expected to exceed $100 million paid to over 300,000 consumers. To date, over $51 million has been paid to over 186,000 consumers. ASIC’s work to secure further compensation will continue.

It is important to highlight that with a change in stance at regulators harm can result in hard liabilities. To read the summary click here to read more in the report itself, click here.