moneyblog

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.

FMA on banks: 'going to the edge of the law'

Newsroom has this article, with a nice, dynamic photo of Rob Everett, Financial Markets Authority CEO, talking about how Banks are going to the edge of the law. The article also introduced my favourite phrase, from Adrian Orr, Governor of the Reserve Bank, called an 'essay writing competition'. If that's the case it is also a very serious form of competition. Not only are the resources consumed in preparing the essay very large - and I know many of the people involved, and they are very, very busy right now - but the stakes are high. As has been seen in Australia, failing to be completely honest and clear with your regulator can have terrible consequences: look at AMP's experience there.

FMA and RBNZ Letter to New Zealand Banks

You need to read the full text of the FMA and RBNZ's letter to New Zealand Banks. It's at this link.

RBNZ Insurance Statistics

The Reserve Bank of New Zealand has had some coverage for its insurance statistics recently. It is well worth familiarising yourself with the detail of how the statistics work, as they cover the entire insurance sector (fire and general, as well as life and health) and there are some aspects of the data that are separate, and some that are combined, making it tricky to make clear statements about either individually. You can find the technical note here, and the statistics homepage at this link.

50 Years of Decimal Currency

The Reserve Bank of New Zealand news release (below) announces about the anniversary of decimal currency, and also talks about the small museum at the RBNZ office in Wellington. It is a quick visit (and free) and very good - if you're interested, of course. 

Date 10 July 2017

50 years of decimal currency

Today signals 50 years of decimal currency in New Zealand and the Bank is marking the anniversary with a new display in its Museum and Education Centre.

This coincides with a new Bulletin article titled “A litmus test for society: Reserve Bank decimal note designs 1967-2017” which traverses New Zealand’s currency as it showcases national and cultural identity. It is accompanied by a downloadable timeline poster showing all seven series of Reserve Bank notes released since 1934.

Reserve Bank Governor Graeme Wheeler said “This milestone is a great opportunity to reflect on a point in time and see how our banking has evolved and how our money has changed over the years.

“Despite the growth in electronic payment systems, cash in circulation continues to grow and I expect cash, as a means of exchange, to be around for a long time yet. However, we do need to understand more about what drives our use of cash and this is the theme of some research the Bank will soon undertake.” 

Highlights of the Museum and Education Centre display include:

• a screen display of the original television and radio advertisements and jingle featuring ‘Mr Dollar’, the character created to bring the decimal currency into New Zealand households
• footage of the first distribution of currency to the banks prior to launch day
• education and publicity material including a Dollar Scholar certificate and quiz
• early coin designs
• artist’s preliminary layout for the $100 banknote
• the story of the Bahamas Mule, a minting error of the 2 cent coin.

“Reading through the material and watching the footage you get an understanding of how different our operations were run back then,” said Mr Wheeler.  

The Museum and Education Centre is open to the public from Monday to Friday - 9.30am – 4.00pm.

More information

• Bulletin article: “A litmus test for society: Reserve Bank decimal note designs 1967-2017”
• Mr Dollar video
• Currency timeline poster

You had one job...

Essentially the Insurance Prudential Supervision Regime says insurers have one job when it comes to disclosing to customers. Jenée Tibshraeny has written this article on interest.co.nz discussing "how a light touch approach to regulating insurers doesn't work while companies consider disclosing key financial information a box ticking rather than a consumer protection exercise"

Of course, insurers have many other jobs besides this: offering great cover, numerous disclosures to consumers under other laws, and making sure that the actual solvency position is managed, not just reported appropriately. Nevertheless, I was surprised to find that the RBNZ report could be, given that this is a relatively simple disclosure, lengthy and fascinating. 

RBNZ Thematic Review on Insurer Disclosure

The RBNZ has published a report reviewing insurer disclosures. Disclosure of the financial stability and claims paying ability ratings, along with references to solvency information, are straightforward, limited, and simple. For just the rating information, the process of disclosure is nothing like as complex as, for example, that required of an AFA. Yet it can be done well, poorly, or not at all. Insurer managers may wish to read this - but I think some advisers should read this too, especially if you run a business where call-centres or websites are your main channel. You may be required by your agency terms with the insurer to make the disclosures on their behalf during your sales process. This report contains examples of what the RBNZ considers good practice, and examples it considers inadequate. Link.