Culture and Conduct Review of Insurers

There was a hard choice for someone in designing the FMA and RBNZ’s report on culture and conduct. At some point they had to decide whether to specifically identify insurers associated with specific issues – or leave them anonymous. They chose to leave them anonymous – which was probably considered a good choice by most insurers, but it has created a problem. By listing all the sins of the insurance industry and not naming who does what the casual reader might think everyone is doing everything wrong – and that’s not the case.
Although our regulators were aiming for some publicity, I don’t think damage to the industry was intended. Quite the reverse, as their carefully worded report clearly states that there is no evidence of systemic issues.

Think of the car industry, some make inefficient cars, some make noisy cars, some make very expensive cars, some make ugly cars, some make cars that aren’t quite as safe as others. But no one makes inefficient, noisy, expensive, ugly, and unsafe cars.

So how does it break down?

The legacy book issues are mainly with older insurers. Commission issues apply to less than half of the policies sold in the industry. Service issues around things like renewals, or termination dates could be found anywhere – but are not universal. Problems around supervising advisers only apply to those that sell through them. Questions about how to ensure suitability when there is no adviser, apply to direct or bank insurers.

Add up all the problems and you’d think that the industry never listens to consumers, or surveys them, or responds to their concerns, or designs products with them in mind. Which is simply not true.

Lots of people work to ensure effective products with the consumer at the heart of the decision. But not all of them. Regulators are not established to hand out gold stars to the winners in the market – success is its own reward. Regulators are there to point out the problems, and there are problems.

Take non-underwritten insurance as an example.

The product is expensive, because there are no health questions asked. Anyone can buy it, even if you are dying when you apply. It is very useful for two specific types of buyers, the busy, and the sick. It is a poor solution for people who are not in those markets. Good conduct consists of making sure the product is appropriately sold.

Look at the busy segment. For someone so busy that they just want some cover and cannot take the time to get it properly underwritten this is like paying $5 for a bottle of water at the airport. Some people say, ‘what a rip off’ and walk on by. Others grab the cold drink, and accept they paid a premium for convenience.

The second market for this cover is the group of people who have just received a bad diagnosis and have not previously bought any life insurance. They want to cover the cost of their funeral, and the insurer and them are taking a bet.

The conduct problem comes up when someone in good health, with plenty of time and ability to get an underwritten product, gets sold an expensive non-underwritten one instead. I want a market where every consumer gets the right deal – but I don’t want to ban products like this because that would disadvantage the people it was designed to help.

A simplistic view is to label guaranteed issue product as ‘shonky’. in fact, it depends on what your needs are.

For the regulator to identify that there are conduct problems and recommend a conduct regulator is welcome, and is something the industry has been seeking.

I have participated in groups last year where insurers have discussed the value of an insurance conduct regulator and have made submissions as part of the insurance contract law review in favour of such a regulator being appointed – those are a matter of record – which is why I have little patience for people who accuse the industry of wilful wrongdoing, or trying to avoid these issues.

Go back further and you will find people in the insurance industry arguing for review of insurance law, much earlier. I recall people considering the law commission paper back in 2003 and 2004. At the time some joked that those parts of the Life Insurance Act 1908 that were not reformed in the 1970s were going to be updated on the centenary – 2008. What was considered a priority by government went into the draft insurance prudential supervision law, but many recommendations were not taken up. Those recommendations are the kind of change that the industry cannot lead, as they require new rules, and an empowered referee. It’s one reason why many insurers are cautiously welcoming the current report.

The management issues in the Conduct and Culture report are probably the most significant, and yet have received very little media attention. That’s because they are among the most difficult. For the insurer that had incorrectly priced some increase options, and not completed the remediation, that is not because they were rubbing their hands together with glee over the money – there were systems problems. Insurers owned up to those issues themselves as part of the review. Good. That’s another example of an industry co-operating with the regulator and seeking to do the right thing. The regulator makes a fair point when it describes the under-investment in systems. As a consumer I am glad the regulator checks and doesn’t leave it solely to the goodwill of the industry – I think most people drive safer because they are aware of people charged with enforcing the road rules.

The commission issue is one in which I have some struggles. Of course, I work with a lot of insurance advisers and that makes me partial to their arguments. I work with some excellent advisers, and I also see some very poor ones. That commission pays for access to advice there is little doubt. Some people would not get advice if it were not paid for by those high upfront commissions the report criticises. The report is absolutely correct in stating that it can drive bad behaviour – but the FMA’s own investigation into the issue of ‘churn’ found that surprisingly little of it actually happens. After trawling through five years of data for thousands of advisers only about two dozen were subject to any regulatory action. As with others in the industry, I was surprised it wasn’t more.
I want to share with you the views of one adviser I spent some time with recently. Alan Borthwick, an AFA based in Wellington, talked about a case that was replaced by another adviser, badly, and the client has a downgrade in cover as a result. He and his staff are now compiling a complaint about the adviser who didn’t follow current FMA guidance on replacement business. That is an enforcement issue. Borthwick says it makes him angry. “That guy is the reason I’m being tarred with the same brush. They are screwing it for the rest of us”.

It’s the idea that commission is not paying for anything valuable that upsets him, and me. The assumption is that it is just dead money for the consumer. But many advisers are giving good value. Borthwick’s model is one of full financial planning, including a complete claims management service. Much of that work is paid for by those high up-front risk commissions. It won’t be that way if they are cut. Because the cost of financial advice won’t fall just because we decide to pay less for it, it will mean more fees, which will mean, for lots of people, less advice – because often the people that need help most of all are in a mess financially and don’t have a thousand dollars spare to pay for advice.

Insurers are, in effect, the default funder of advice – allowing consumers to pay off the cost of their advice over time. The terms are very generous, compared to consumer credit. Of course, there are ways that this can be managed if commissions change – but it will have an impact on advice provision, and it isn’t all going to be good.

More compelling on the commission issues was the chart of the cost as a proportion of premium. Some consumers, with poor advisers, may be getting not much for that money. Because that money is paid to the insurer, who pays it on to the adviser, it is reasonable to ask what they are doing to ensure some value is being received for it.
But the issue of legacy products is very, very, complicated. Again, from a consumer perspective, if I have an old mobile phone plan, and a new one is being offered which is better and cheaper, I am justifiably unhappy about being left on the old one…

…but insurance is different to mobile phones. Risk pools exist, and the effect of the move may not just be felt on my plan alone – but also on the premium rates of others that are in the risk pool. Nevertheless, the concept of monitoring product suitability throughout life is an important one which insurers must address. It’s one of the most valuable parts of the report. It even has application wider than ‘just’ financial services. It should be applied to lots of modern services from gym memberships to internet access. The world over, complex subscription products are being designed without enough thought for consumers that can struggle to assess their value. I note that the Ministry of Business Innovation and Employment is consulting on unfair practices right now. While journalists are right to ask insurers why they haven’t dealt with these issues sooner, and call it complacency, we aren’t exactly alone in being where we are, right now.

I also want to comment on the FSC response to the report. Some unkind comments were made about Richard Klipin’s handling of the questions asked by journalists recently – check the comments log on many of the stories. It’s not fair. The FSC has done an enormous amount of work on these issues, and their role is very valuable.

Commission is one issue where the Financial Services Council has tried to work in the past. It gets flack for not having “fixed” this before, but competitors acting to fix a price (the commission paid to advisers) would be a breach of competition law. We must all take care to avoid such behaviour.

The second point the FSC likes to make is that it has worked on the FSC Code for two years, which was then launched in September last year. Although its effects have not been fully realised it is an important piece of collective action – and, crucially, does not breach competition law. What it enables is insurers to take important steps to invest and develop services without worrying too much that someone will breach the rules and undercut them.

Having said that, there are wider issues for corporate conduct, and consumers and the Minister, should consider them as a whole. Whether the contracts are complex consumer credit, gym memberships, mobile-phone plans, or the terms and conditions for a social media giant based in the USA… they have certain features in common that make them prone to the kinds of conduct issues we have seen identified by the FMA. In what environment is poor conduct more likely? When several of these factors combine:

  • Complex services
  • ‘Set-and-forget’ services
  • Information asymmetry
  • Subscription or regular payments
  • Hard to compare features
  • Distant call-centre sales process / faceless bureaucracy
  • Reduced competition

I see and hear a great deal of willingness to address them from the insurance sector.


FMA on explaining fees to customers

The FMA has this media release explaining the link, identified from their recent customer survey, between trust and how well fees are understood. The short version is that consumers trust you more if they feel the products are suitable and can understand what they are paying. This makes me laugh. As I am in the midst of the holiday season surrounded by people who are not in the financial services industry I don't have far to go to get a reality check. With most services, consumers don't even suspect that it should be hard to understand what they are paying...

Insurance and fee-based remuneration

The International Association of Insurance Supervisors feels that commission is probably an integral part of insurance advice. Like most of the people I know, I think the same way. But fee-based remuneration is bound to get a bit of attention due to the new, draft Financial Advice Code. I shall write more on that later today. But quite a few advisers already see a role for fees as a part of a balanced remuneration strategy. If you would like to explore that world, please drop me a line. I am aiming to get a few of us together for lunch and ideas sharing.

Fee-only advice

Fascinating conversation with a financial adviser at the recent national adviser conference in Rotorua. A father and son team have been doing fee-only risk advice for years as part of a broadly-based financial advice practice. The fact that their practice is broadly based may actually make it easier. They do reasonable volumes and find that it gives them significant freedom: for example, they can work with many older clients with many health conditions, and because they are charging a fee they can give advice on existing policies free of many conflicts of interest. Although I continue to subscribe to the view that commission is is a necessary part of insurance distribution (along with the International Association of Insurance Supervisors) there is room for more fee-only advice in the mix.

United States: Transition from Commission to Fee-only

Hat tip to Tony Vidler for the reference to this piece (from his newsletter) - an article about a commission insurance agent of Northwestern Mutual in Kentucky who started a new business as a fee-only retirement income adviser. It is interesting because the process is richly described, including some of the financial details, and the steps through the process.

There are limitations, though, and anyone contemplating a transition process will need to undertake a lot more investigation and planning. Aside from the obvious difference in jurisdiction, there are other variations: the introduction talks about making the transition in only a few months, yet the founder is yet to pay himself a salary. The transition was not like-for-like advice - I would be interested to see a successful example of a transition to fee-only insurance advice. But well worth a read. 

Your Dentist Can Charge a Fee, Why Not You?

My dentist is, actually, a lovely person. She's from the deep south and enjoys telling a yarn and enjoying a good laugh. I'd laugh with her every time if my mouth wasn't incapacitated, with various drills, clips, clamps, and the numbness from anaesthetic. My sense of humour is dulled slightly by pain, too. 

What's more, my dentist can charge fees. Quite large ones at times. She charges them mostly before I'm even in pain - I go for check ups, scans, and so on. She spots a problem and tells me that she needs to fix something - and that will be painful, and expensive. Yet still she can charge fees. 

Mainly she asks, and I pay them. There don't seem to be a lot of really clever marketing tricks going on. Her service is great, convenient (right next to my office), and I know it has to be done. I have checked around and I go back there. I think dental treatment and insurance have some things in common. I noticed as I wrote this that I almost never speak about my dental care. It is a grudge buy, it is money I spend largely to avoid a future problem, the benefits are largely invisible, I don't think about it much in between visits, and it's painful. All could be said about insurance advice. 

Maybe, if you want advice about charging fees I should get my dentist, Shelley, to write about it. But I know if I suggested it, she'd just laugh. 


Should you buy the insurance with the ticket? the parcel? the new electronics? Rarely, it seems

This article from gets under the hood of many short-term travel, parcel, and warranty insurance products. You should read it. I have several colleagues in this industry who are convinced of the value of 'micro-insurance' of this type to re-start the engine of growth in the industry. But not if the policies are all this bad. The other thing that struck me was the use of long documents almost designed to have the consumer skip over them. Take this example: 

"[in the]...terms and conditions 40 items are exempt, including electrical goods, antiques, jewellery, food and anything made from metals, ceramics or glass. It means barely any items will be insured under the policy. Its website does ask for details of what will be included in the parcel, but it won’t stop the customer buying a policy if they list an item that’s excluded"

Well, that simply is not good enough. The reputation of the insurance industry will remain low and continue to fall with sales practices such as that. 

Disappointed in the FSC “Review of Retail Life Insurance Advice”

On the weekend I got to read the ‘Review of Retail Life Insurance Advice’ report prepared for the Financial Services Council (FSC). Prepared by MJW, the report does not, in my opinion, meet the goal of reviewing the conflicts of interest in the sale of life insurance across channels.

Like AIA, Asteron Life, and Partners Life, and the PAA, I feel that the report does not present a balanced view. It seems a decision was taken early in the development of the report to focus on one aspect of one channel: commission paid to RFAs. Average commissions are, in fact, substantially lower than the example given, when you look at it top–down from company accounts or bottom up from the mix of business advisers actually sell. That selection means the higher margins in vertically integrated channels which must logically also be a conflict, were ignored, for reasons unexplained.

I was disappointed that a report which is supposed to review advice shared no data or discussion on what constitutes good advice or bad. A comparison of premiums and policy features between commission-bearing channels and those that pay no commission would have been a useful test of whether commission-paid advisers add value. Such a comparison would show that advisers do add value.

Likewise absent was any example of actual customer harm. The report also ignores problems which have been identified around customer confusion over labels. Others have already labelled this single focus as bias. It also appears contrary to the idea of being ‘customer-centric.’ A comparison like this would focus us on exactly what kinds of switching needs to be regulated.

The report focuses on one piece of data: switching rates. In passing it notes that not all switching is bad, but doesn’t offer any definition of a ‘good switch’ or a ‘bad switch’. Many switches help customers save money or get better policies. 

Evidence which could have been included on a comparison of channels was either not considered, or left out.  These gaps make it difficult to do any cost/benefit assessment of the recommendations.

I like Rod Severn’s comments from the PAA:

"Some good recommendations, but let down by unbalanced view of replacement business and the value of advice."

Like Rod, I agree with some of the recommendations. Here’s your digest of links to commentary on the report:

Goodreturns "Philip Macalister scores the report a 'D'

Goodreturns: 'the report that tore the FSC apart'

Also goodreturns: 'Report slams life insurance conflicts of interest'

Another goodreturns 'Advisers replacing policies are doing their jobs'

All by Susan Edmunds

The New Zealand Herald: 'Conflicts of interest shown in insurance commission report' by Tamsyn Parker

Investment News New Zealand: 'Seven Ways to Improve Life' by David Chaplin

The PAA Response, and their table of commentary on the actual recommendations

MJW and FSC media release statement: Link