moneyblog

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.

Reading the conduct review with an open mind

If you are still thinking about the impending review of the insurance sector by the FMA and RBNZ when you should be enjoying your Auckland Anniversary Day holiday (if you live in the region) you are probably doing this wrong. Take the day off, enjoy it, and promise yourself only this: to read the review with an open mind. That's probably the best approach, and requires very little preparation - in fact, quite the reverse.

Why the FMA and RBNZ life insurance sector report must be critical

Are you talking about the possible contents of the report on life insurance sector conduct due to come from the FMA and the RBNZ in the next week? This piece from Tamsyn Parker explores the possible contents of the report. Without guessing at specific comments, there is one thing we can be sure about: it will be a different view, and it will not be easy to swallow.

This is because the FMA and RBNZ have been challenged to come up with a different view, and so they must. 

That challenge could be identified as coming out of the Australian Royal Commission, but I think that would be too simplistic, and feeds a sense of confusion and possibly, even, a temptation to justify and point out the difference between the Australian and New Zealand environment.

For a long time - decades - major forces have been building up: consumerism, technology, complexity, and regulation. Combined they have been the driving force for innovation in our sector, and they still are. Complexity, sometimes driven by technology, and sometimes by the very regulation that seeks to manage it, is a fundamental feature and challenge. Our products seek to manage complexity, but they are complex as a result. The result is information asymmetry. In any sector where the asymmetry is large, there is great difficulty in ensuring continuously good customer outcomes.

The market-place likes to work on the principle of willing buyer deals with willing seller, and let the market determine what is good. But where the consumer has a lot less information than the provider oversight is required - or gradually, sometimes unwittingly, compromises and choices can be made that are not always in the best interests of the client. The role consumerism and regulation play in such cases is added oversight. In a wider sense, they are market forces just like the choices of individual consumers, and they arise because of the concerns of consumers. The interplay of these forces over the years has brought progress, challenges have been responded to by law and regulation, and changes in the market.

The challenge, and the reason why there must be a critical report from the regulators, is a natural consequence of the forces at work in our industry. It is simply time this happened. That is not to say that every challenge will be correct in every particular, but the broad requirement for such challenges is natural.

RBNZ spotlights insurance commissions

The RBNZ has included New Zealand Life Insurers in a brief section in its Financial Stability report, as reported on goodreturns. You can read the full report at this link. More worrying than the report content, was the comment by Adrian Orr that the life insurance sector should expect rougher treatment than the banks when the report on conduct comes out in January next year. Worrying, perhaps, but not unexpected, given the conduct issues highlighted in Australia.

General Insurance: RBNZ looks long-term and asks insurers about climate risks

The RBNZ has revealed plans to talk with insurers about climate risks. That is a good idea. Commencing a conversation about climate risks may enable pricing signals to more smoothly contribute to changes in policy necessary to avert climate change, and manage its effects. Dealing with this in a planned way helps avoid consumers and companies getting shocked: like suddenly having flood coverage removed for properties in low-lying areas.

Quoteable from Day Two of the FSC Conference

Adrian Orr – RBNZ

“Proud of my first on-the-record speech… which is why I am not going to read it, you can go and read it, and I will talk about something else”

Orr proceeded to talk about the global economy, some of the big issues, and the role of financial services companies. That included a powerfully succinct description of what almost every financial organisation does in some way:

“Identify a risk – ooh, look at that -  price a risk – ooh can’t afford that – and then allocates the risk – then the right person takes on the risk or manages it… without those we have gaps – unidentified risks, risks that are not properly priced, and therefore not efficiently managed. So, we get ups and downs, surprises, and shocks: like wars, crashes, and environmental issues like global warming.”

Orr’s big worry list included the reducing returns to labour, about concentrations of companies (fewer larger businesses) and those that have large intellectual property entitlements – hard to compete away and so on. He then moved on to a principal and agent concept discussion – as part of the thesis on the short-termism. Most people are focused on short-term incentives, and that creates externalities – like those listed above. He pointed out mis-pricing water resources and 'calling it the dairy industry'. Laurence Kubiak explained that more technically:

“We have great factor endowment for agriculture… but this is our problem zone for climate change – we rely on those industries”

All of that was the platform for moving to a conversation about conduct issues. Naomi Ballantyne supported the need for conduct regulation that set rules for

"some things that you have to demonstrate… including your value proposition for your longest held customer, how you look after your lowest paid employee… how we support people to speak up when they see conduct problems.”

Also adding:

“I don’t know how we regulate for long-termism, but I know that we can ask companies to report on more issues and over a long-term…”

This got spontaneous applause, but Adrian Orr felt it was not thunderous enough, and asked us to applaud again, and he proceeded to endorse the comments. Although later he did add that insurers shouldn’t be offering overseas trips as incentives. Taken together, Naomi Ballantyne’s comments, and Adrian Orr’s give four suggested corners to conduct regulation:

1. Look after legacy – that’s the value proposition for the longest held customer
2. Look after the lowly – that the support you offer to your lowest paid employee
3. Listen to conduct questions – wherever they come from, and often service staff and customers who ‘don’t understand’ the business may see more clearly than people soaked in the business
4. Incentives matter – and excessive incentives should not be used – as they have conduct implications

I am sure more can be added, for my money, these two would come in:

5. Be certain of suitability – don’t let people buy the wrong thing, but carefully allow room between conduct and financial advice – the two are different
6. Address information asymmetries

Financial Services Conduct and Culture Review

The FMA has released an interim update on the conduct and culture review. As this mostly concerns banks, I was not sure how interested I would be in the announcement. But it is worth a look. YOu can check out the summary at this link.

One item I would like to understand better is this comment:

   "Currently we consider it is appropriate to prioritise our work on banks and life insurers, we haven’t made any decision as to whether to expand that focus in the future."

If that is a risk-based assessment, then it would be nice to understand some of the thinking behind it. Non-bank lenders are the main missing element in the review. Historically they have been a significant component of consumer complaints. I would be as pleased as anyone else to find that all is well in the lending area. But an economy that has been expanding for a long period tends to find lending processes get looser, or more pro-lending, as the expansion gets older. This is then found out in the inevitable recession. That alone, in my mind, suggests that lending should be included.

But to return to life insurers. In the initial round of requests, there was just one insurer (AMP), in the second round of requests, most other major insurers were asked for information. A critical factor is the extent to which conduct risk extends through the sales process. In vertically integrated organisations, that means looking at the extent to which they are responsible for assessing suitability of product irrespective of whether they are giving financial advice, or just selling the insurance. For companies that use intermediaries, it will be most interesting to see the extent to which we need to take responsibility for the actions of advisers. This could have far-reaching consequences for the future of distribution. It also links in to the review of insurer conduct issues raised in the insurance contract law review paper released by MBIE. I think a good debate about the way we look at these distribution aspects will be key to the success of the conduct review.

In case you missed it: the link to the RBNZ comments on commission

RBNZ is looking into the conduct and culture in the banking and insurance industries and has made this statement: “Life insurance commissions are particularly high, which inevitably flows through into higher premiums.” The Bank also states that with possible technology advancements in the future there could be a 'profound impact on the insurance sector.' Click here to read more. 

There are definitely efficiency questions to be asked about life insurance in this country. It is always unwise to single out any one channel - as other distribution channels are similar costs. So commission alone, while part of the premium picture, is insufficient to explain the pricing of insurance as a whole.