moneyblog

RBNZ on IFRS17

Some RBNZ resources on IFRS17 see page 23 of the RBNZ Statement of Intent and Reserve Bank Governor, Adrian Orr's recent speech.

RBNZ: Insurance sector must evolve in line with increased public expectations and changing risks

Adrian Orr, Governor from RBNZ delivered a speech at the Insurance Council of New Zealand Conference today about building confidence and reducing risks in the insurance sector. You can read his full speech here.

Here are some key points that I really enjoyed:

• There are significant information-asymmetries between an insurance provider and their customer, and the risks of providing poor or outdated information run in both directions. ‘Who is good for what, and when?’.
• ...often there is a long period of time after a customer-relationship has been established. In very difficult circumstances, a customer may find that they do not have the coverage they believed would be available to them. And, on the other side of the ledger, insurers rely on accurate information from customers about their own circumstances.
• Orderly and well-articulated changes in insurance and pricing strategies are needed, so that all participants in the financial sector – and wider economy - can adapt their behaviour without creating unintended outcomes.
• How a firm monitors and addresses conduct and culture issues will be a part of our ongoing ‘business as usual’ supervision with all insurers. We will also monitor insurers to make sure their planned actions are implemented effectively.
• The public is demanding that both insurers and regulators play a part in providing greater confidence in the health and conduct of the sector. The Reserve Bank’s insurance agenda for the coming year (or years) is thus very full.

The section on three disciplines, which is too big to quote, is also well worth a look.

I liked the comment about changes in insurance and pricing strategies. I think that this is probably about the more visible marketplace - general insurance - and the role it has in affecting decisions that people make about where they live and the buildings in which they live, and also what buildings get built and where. But it could equally well apply to the marketplace for income protection too, which is in a product design and pricing crisis that has some similar features to insuring buildings in earthquake and flood prone areas. Both life and property insurers have efficiency challenges. The point about information asymmetries cannot be made strongly enough and needs to be remembered in the insurance contract law review process. It is a comfort to insurers (and should be to consumers as well, although they don't tend to be) that officials are signalling that they understand these fundamental concepts. 

 

FSC - YouTube channel

Click on the image below to be taken to the FSC YouTube channel

 

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. 

AMP Life sale hits issues - updated

Release from AMP, 15 July 2019:

AMP Limited today advises that the transaction for the sale of AMP Life to Resolution Life is highly unlikely to proceed on the current terms.

This is due to the challenges in meeting the condition precedent for Reserve Bank of New Zealand (RBNZ) approval.

The failure to meet this condition precedent is exceptionally disappointing as the sale of AMP Life is a foundational element of AMP’s strategy.

Capital position and interim dividend expectations

While the 1H 19 accounts are yet to be finalised, AMP expects to report a Level 3 eligible capital surplus above minimum regulatory requirements and in line with Board limits for target capital surplus.

Given the uncertainty around the AMP Life transaction, the AMP Board expects to continue its prudent approach to capital management and anticipates that an interim dividend will not be paid for 1H 19.

Click here to read the full press release: Download 15 July - AMP Life sale and interim dividend update

The release is comprehensive and well worth a read. Probably AMP and Resolution made what was a reasonable assumption at the time that the exemptions AMP enjoyed would be extended to Resolution. The tougher line being held by RB is also logical, given the increased scrutiny being placed on the sector and recent events. I expect that some sort of accommodation, perhaps to share the costs of the requirements of the RB, can be struck with Resolution Life. The whole situation speaks loudly of regulators and being more prepared to exercise their supervisory powers. 

Susan Edmunds story on this, at goodreturns.co.nz 

Tamsyn Parker has a story on this too, at NZHerald.co.nz 

Rising insurance premiums

RBNZ has warned that rising insurance premiums could hit property values in their latest Financial Stability Report. RBNZ Governor Adrian Orr said, our financial system is resilient to current risks – but risks remain elevated. In the case of the risks associated with climate change, like average world temperatures, they are slowly rising. Insurance premiums could play a valuable role as a price signal in making the risks, and their costs, real to more people. Click here to view the report. 

Image from the RBNZ report.

The Moniac

This is a picture of a Moniac (along with my son Jacob), a hydraulic computer, modelling an economy at a high level. It is a New Zealand cultural and scientific artifact, invented by Bill Phillips. Phillips was a New Zealand economist, but if you read his biography, you discover that before that, he was an adventurer. It is well worth reading about Bill, who was trained largely by observation and had a brilliant, critical mind, unusually coupled with a an inventor's belief in the possible.

This photograph was taken at the science museum in London. But you don't have to travel so far to visit this icon, as there is also one in the Reserve Bank building, in the small museum on the ground floor, which is open to the public. If you have some time between appointments next time you are there I recommend popping in. 

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.

 

Richard Klipin interviewed on FMA and RBNZ Conduct and Culture Report

Richard Klipin has been interviewed by Jenée Tibshraeny at interest.co.nz. The interview and the associated article are well worth a look.

Seeing how the report contents are tackled by media underlines the difficulty in looking at the report from the point of view of someone outside the industry. Think of it like this, one car manufacturer makes ugly cars, another inefficient cars, a third, expensive cars, and a fourth makes cars that aren't as quite safe as the others. But no one makes cars that are ugly, inefficient, expensive, and unsafe. Yet that is how it looks because one report talks anonymously about problems with the whole industry.

 

FMA and RBNZ report on life insurance sector

While I will do a thorough review of the document and its implications for clients in due course, I thought it worth mentioning some of the questions people have asked about the report. They are not my view, but a good reflection of the, sometimes contradictory, views of people in the industry:

• Well, that's better than expected
• More products should have been listed as cause for concern (along with...)
• Less products should have been listed as cause for concern (concern for product scope to be set)
• So, are commissions to be banned? (based on the NZ Herald's take on the report, not the report content, obviously)
• Will advisers have to go to eight different training course run by insurers on how to sell their products? (considering one vision of an attempt to direct on suitability)
• If insurers are responsible for suitability doesn't that push them into the advice space? (a valid concern, detail is available in recent reports)
• The FMA's big data trawl found very few advisers aggressively replacing business
• I've chosen my last supper - my personal favourite, from an adviser who actually has very little to worry about

My feeling is that there is a lot to address, and that I think most insurers are not that surprised at much of the content. As a fairly high-level document, there are some significant questions. A lot of concerns were based on an absence of evidence of good management, rather then evidence of bad management or bad intent. But the concern, and the link to the Hayne report, is whether a culture of focus - in this case, on sales, perhaps - rather than good outcomes could dominate in decisions about value for customer.

Anyway, more details for clients, coming soon.