Bank Conduct and Culture

Life Insurer Conduct and CultureFindings from an FMA and RBNZ review of conduct and culture in New Zealand life insurers

January 2019

Life Insurer Conduct and Culture

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Life Insurer Conduct and Culture

Contents

Executive summary 4

Purpose 4

Background 4

What we reviewed 5

Our view of life insurers’ conduct and culture 5

What we found 6

Next steps 7

Recommendations for life insurers 9

Overview of the life insurance market 11

Detailed findings 13

Delivering good customer outcomes 13

Conduct and culture governance 19

Conduct and culture risk management 23

Issueidentificationandremediation 25

Feedback from stakeholder groups 30

Regulatory gaps 31

Current regulatory environment 31

Reviewandrecommendations 31

Appendix: Background to the review 33

Risks to customers 33

What is conduct and culture? 34

Scope and methodology 35

Life insurers 36

Glossary 37

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Life Insurer Conduct and Culture

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Executivesummary

PurposeTheoverallobjectiveofthisreviewwastounderstandwhether there are widespread conduct and culture issuespresentinlifeinsurersinNewZealand,andtounderstandhowlifeinsurersidentifyandremediateissues.

Theconductoflifeinsurersdirectlyaffectscustomers,regardless of whether the insurers sell insurance directlyorthroughotherparties.Highstandardsofconductsupportthefair,sound,efficientandtransparentprovisionofinsurance,andconfidentparticipationintheinsurancemarketbyinsurers,intermediariesandcustomers.Poorconductisacontributingfactortopoorcustomeroutcomes,andcanresultinalossoftrustandconfidenceinthelifeinsuranceindustry.

Oneofthekeydriversofconductisculture.Cultureinfluenceshowmanagersandstaffbehaveonadailybasis.Aneffectiveorganisationalcultureisonethat consistently puts the customer at the centre of decision-making,productdesign,sales,adviceandclaimsprocesses,andallday-to-dayactivities.

NewZealand’stwomainregulatorsoffinancialmarketsaretheFinancialMarketsAuthority(FMA),whichfocusesonconductregulationofsomefinancialmarketparticipants,andtheReserveBankofNewZealand(RBNZ),whichfocusesonmaintainingasoundandefficientfinancialsystemthroughprudentialregulation.

Neitherregulatorhasanexplicitlegislativemandatefortheregulationofconductinrelationtolifeinsurance.However,standardsoflifeinsurerconductare implicit and important to the statutory purpose ofbothregulators.Therefore,wedecidedtoseekassurancefromNewZealandlifeinsurersthatthereare not widespread conduct and culture issues present intheirbusinesses.Ourworkalsosetouttoassessthematurityoflifeinsurers’systems,controlsandgovernancearoundconductrisk.

BackgroundInNovember2018theFMAandtheRBNZpublishedthe findingsofareviewofconductandcultureinNew Zealandretailbanks.ThisreviewwaspromptedbytheAustralianRoyalCommissionintoMisconductintheBanking,SuperannuationandFinancialServicesIndustry(ARC).TheARCwasaresponsetowidespreadmisconductincidentsinAustralia’sfinancialservicesindustryoverthepastdecade.OurconcernabouttheARC’simpactonconfidenceinNewZealand’sfinancialinstitutionsandthepotentialforcomplacencyintheindustryledtothebankreview.

This report is the second phase of our review of conductandcultureinthefinancialservicesindustry.We have chosen to review life insurers because:

• TheARChighlightedfailingsinthetreatmentoflifeinsurancecustomersinAustralia.

• SomelifeinsurersoperatinginNewZealandareAustralian-owned,includingsomebyAustralianbanks,whichraisesthequestionofwhetherthesamefailingshighlightedinAustraliaexisthere.

• The nature of life insurance means:

– productsarecomplex,highvalue,longtermandcanbedifficulttoreplaceorswitchbetween,which creates risks for customers

– poor customer outcomes arising from poor conductmayonlybediscoveredafteracustomerhas had an insurance policy for a long period of time,andinthedifficultcircumstancesthatgiverisetoaclaim.

• PreviousFMAreviews conducted between 2016 and2018inrelationtolifeinsurancehighlightedmethods of selling life insurance that create risks in relationtogoodcustomeroutcomes.

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Life Insurer Conduct and Culture

What we reviewedWe reviewed 16 life insurers1thatissue(ieunderwrite)lifeinsuranceproducts(seepage36).Inthisreport,wedonotattributefindingstoindividuallifeinsurers,because our focus is on the life insurance sector as a whole.

Our review took place between June and November 2018.Itwasbasedonanalysisofdocumentsprovidedbylifeinsurers,followedbyonsiteinterviewswithfrontlinestaff,managementandexecutives,aswellasasampleofdirectors.Welookedforclearevidencetosupport what we were told and compared this to the otherinformationsuppliedduringourreview.

We also sought insights from other insurance industry stakeholdersandfinancialadviserswhodistributelifeinsurance.

Our view of life insurers’ conduct and cultureOur review found extensive weaknesses in life insurers’ systemsandcontrols.Acrossthesector,governanceand management of conduct risks is weak and there is alackoffocusongoodcustomeroutcomes.Thereisaseriousriskoffurtherconductissuesarising.Insurersneed to act urgently and undergo major change to addresstheseweaknesses,astheyleavetheindustryvulnerabletomisconductandescalationofissues,as

1: During the review four life insurers were undergoing merger activity:AIAwithSovereign,andCignawithOnePath.Whereappropriateourinformationrequestsandinterviewswerecombined for these two pairs of life insurers to avoid unnecessary duplication.

seeninotherjurisdictions.

We also saw several instances of poor conduct and someexamplesofpotentialmisconduct(iebreachesofthelaw).SomeoftheissuesandthemesaresimilartothosehighlightedinAustralia,albeitonamuchsmallerscale.Althoughtheseconductandcultureissuesresultinginpoorcustomeroutcomesareserious,thenumberofinstancesidentifiedmeanswewouldnotcurrentlycategorisetheseissuesaswidespread.

However,giventheweaknessesweobservedinlifeinsurers’processesforidentifyingrisksandissues,andeffectivelymanagingthem,wecannotbeconfidentthatinsurersthemselvesareawareofallcurrentissues.

Remediationofconductissuesandrisksisalsogenerallyverypoor.Insurershavebeentooslowtorespondtotheissuestheyareawareof,andinsomecasesarenotsufficientlyremediatingthem.Ina few extreme cases they have shown disinterest in remediatingthematall.

Overall,ourviewisthatlifeinsurershavebeentoocomplacent when it comes to considering conduct risk,tooslowtomakechangesfollowingpreviousFMAreviews,andnotfocusedenoughondevelopingaculture that balances the interests of shareholders with thoseofcustomers.

ConsumertrustisparamounttotheeffectivefunctioningofthelifeinsuranceindustryinNewZealand.Weareconcernedthatthistrustcouldbeeroded unless life insurers – led by boards and senior management – transform the way they approach conductrisksandissues,andachieveacustomer-focusedculture.

279 interviews

life insurers reviewed1

29 financial advisers surveyed

with 296 life insurer staff, including

directors, managers and

frontline staff insurance sector stakeholders

Insights sought from

416

documents received

1000+

Life Insurer Conduct and Culture

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What we foundWe saw serious weaknesses in the approach of insurers toidentifying,managingandremediatingconductrisksandissues.Whilewefoundrelativelyfewinstancesofpotentialmisconduct,thelackofconsiderationgiventoinvestment in and maintenance of robust systems and processesiscausingpoorcustomeroutcomes.

The issues we found were compounded by the fact that insurers’productsareoftensoldbyintermediaries2.Some insurers appeared to believe they have no responsibility for customer outcomes that are influencedbytheconductoftheseintermediaries,andmakelittleefforttomaintainvisibilityofcustomeroutcomeswhereanintermediaryisinvolved.Insurersultimatelyneedtotakeresponsibilityforwhetherornot customers are experiencing good outcomes from theirproducts,regardlessofhowtheyaresold.

Delivering good customer outcomes

• We saw several instances of poor conduct and some examplesofpotentialmisconductthathaveresultedinpoorcustomeroutcomes(seepage28).

• Insituationswherethird-partyadvisersweresellinglifeinsurers’products(andreceivingcommissionsorotherincentives),afewlifeinsurerssawtheadviser–notthepolicy-holder–asthecustomer.

• There was limited evidence of products being designed and sold with good customer outcomes inmind,andverylittleinthewayofpoliciesforidentifyinganddealingwithpotentiallyvulnerablecustomers.

• Whilesomeinsurershadgoodpoliciesandpracticesfor regular ongoing contact with customers to assess ongoingsuitabilityorprovideinformationaboutpolicychanges,othersdidlittleornothinginthisarea.

2:Anintermediaryispersonorentitywhositsbetweenaninsurerandacustomer,andpromotesorfacilitatesaninsurancecontractbetweenthem.Intermediariesincludethird-partyadvisers,banks(includingbanksthatareinthesamegroupofcompaniesasaninsurer),otherinsurers,andorganisationsthatarrangegroupinsurancefortheiremployeesormembers.Someintermediariesworkforjustoneinsurer.Othersdistributeproductsofmultipleinsurers.

• Wesawevidenceofsalesincentivestructures(internalandexternal)creatingrisksofsalesbeingprioritisedovercustomeroutcomes,andofpoliciesbeing‘churned’,ie,customersbeingsoldnewpolicies that are not in their best interests so the salespersoncanearnacommission.

• Therewasclearevidenceofclaimsstaffhavingastrongfocusongoodcustomeroutcomes,butthisattitudewasnotalwaysreflectedacrosslifeinsuranceorganisationsasawhole.

Conduct and culture governance

• Few life insurers had given any serious thought toconductandculturepriortothisreview.Mostboards had not started to think about conduct risk in theirbusinesspriortoourreview.

• Wesawlittleevidencethatlifeinsurershadanalysedconduct,systemsandprocessesagainsttheARC,andtheexpectationssetoutintheFMAConductGuide(seepage34)priortoourreview.

• Boardsandseniormanagementwerenotsettingthetoneformanagingconductriskandprioritisinggoodcustomeroutcomes.

Moreinformationisavailableinthe‘Detailedfindings’section,wherewehaveorganisedourfindingsintothemesbasedonfourelementsofmanagingconductandculture.

Conduct and culture governance

Conduct and culture risk management

Delivering good customer outcomes

Issue identification and remediation

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Life Insurer Conduct and Culture

• Wenotedsomeissuesaroundindependence,autonomy and control with boards of life insurers that are part of a group such as bank insurers3 and foreign-ownedinsurers.Thisaffectstheirabilitytoidentifyandmanageconductandculturerisksrelatedtotheinsurancefunctionsofthebusinessorthelocalmarket.

• Where sales and advice were handled through intermediarydistributionchannels,therewasaserious lack of insurer oversight and responsibility forsalesandadvice,andcustomeroutcomes.

Conduct and culture risk management

• Reportingofconductriskwaslimited,oftenadhocandreactive,andfocusedon‘lag’(retrospective)indicatorsofconductrisksuchascomplaints.

• Overall,conductriskmanagementwasinsufficientlyintegratedacrossallpartsoflifeinsurers’businesses.Riskmanagementfunctionswereoftenthinlyresourced,withlittlefocusonconductandculturerisk.

• Formal whistleblower policies were not well understoodorutilised.Somepoliciesdidnothaveanonymous,confidentialorindependentchannelsforraisingmatters.

• Stafftrainingonproducts,andsalesandadviceprocesses was typically under-resourced and under-prioritised.Somelifeinsurerswerestartingtointroduceconducttrainingforstaff.Trainingforintermediariesappearedinadequateandpatchy,andtherewaslittleevidenceofguidancebeingprovidedonconductexpectations.

Issue identification and remediation

• Ourreviewidentified16specificremediationactivitiesthatwereinprogressorhadrecentlybeencompleted(seepage27forexamples).However,acrosstheindustry,therewasanacutelackofeffortorprocessesinplacetoidentify,monitorandmanageissuesrequiringremediation.Whereissueswereidentified,thiswasfrequentlyasaresultofcustomer complaints rather than the life insurer’s

3:Aninsurerownedbyabank(orinagroupofcompanieswithabank)anddistributingproductsthroughthebank.

ownmonitoringprocesses.Inafewcases,lifeinsurersweredisinterestedinremediatingknownissues,evenwheretherehadbeenapoorcustomeroutcome.

• Mostlifeinsurers’processesandsystemsforcustomercomplaints,incidentmanagementandanalysisofissuessufferedfromunder-investment,andwerepoorlyembeddedandinconsistentlyused.

Next stepsTheRBNZandFMAwillbeprovidingspecificfindingstoeachindividuallifeinsurer,alongwithourgeneralobservations,sotheycanunderstandwhatimprovementsareneeded.

By30June2019,eachinsurerwillneedto:

1. Developanactionplantoaddressourfeedback,andreporttheirprogresstous.Lifeinsurersneedtoprioritisethedevelopmentandimplementationoftheseplans.

2. Explainhowtheywillmeetourexpectationsregardingstaffincentivesandcommissionsforintermediaries.Wewillreportontheseresponses.

3. Complete the following exercises and report the results to us:

– AdetailedgapanalysisagainstthefinalARCreportandallfindingsrelevanttoinsuranceandthesalesandadviceprocessforinsurance.Thisanalysisshouldincludeidentificationoftherisks,issuesandimplicationsforthelifeinsurer’sbusiness.

– Asystematicreviewoftheinsurer’sexistinglifeproductsandpolicy-holderportfoliosinordertoproactivelyidentifyanyconductandculturerisksandissues.Thisshouldhighlightanyissuesthatrequirecustomerremediationanddocumenttherootcauseoftheissues.Thereviewshouldcoveratleastthepastfiveyears.Whereanyissuesidentifiedpre-datethisperiod,theyshouldbetraced back to their origin to determine the full extentoftheissue.

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Ifwearenotsatisfiedwiththelevelofurgencyappliedtoaddressingtheareasofconcernandtoremediatingidentifiedissues,wewilltakefurtheraction.

Inaddition,theRBNZwillfollowupwithindividualinsurers,inaccordancewithitsrisk-basedapproach,toestablishwhethertheweaknessesidentifiedinconductand culture governance and conduct risk management applyacrossotherriskareas.

AnyconductissuesthathaveresultedinpoorcustomeroutcomesandwarrantfurtherinvestigationandpotentialenforcementactionwillbefollowedupbytheFMA,RBNZortheCommerceCommission,dependingonwhichregulatorcantakeactionundertherelevantlegislation.

We also want to address the regulatory gaps around FMAandRBNZpowerstorespondtolifeinsurermisconductanditsdrivers.WearerecommendingthattheGovernmentlookatoptionsforaddressingthesegaps as part of its current review of insurance contract lawandconductregulation.SeeRegulatorygapsonpage31formoredetail.

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Life Insurer Conduct and Culture

Recommendationsforlifeinsurers

Allinsurersneedtomakesubstantialimprovementstohowtheyidentify,manage,remediateandreportonconductrisksandissues,todeliverconsistentlygoodcustomeroutcomes.Insurersneedtotakeourrecommendationsseriously,andproactivelyworktoachievematurityinthisarea.

Thefollowingrecommendationsapplytoallinsurersandshouldformthebasisoftheirplans.

The role of boards• Boardsneedtotakeresponsibilityforsetting

thetonefromthetop,improvingtheinsurer’sconductandculture,andarticulatinghowtheseare integrated into the business strategy and risk appetite.Thisincludeshavingaclearplanforchangethatsetstargets,assignsresponsibility,includesmilestonestoensureaccountability,andensuresinformationflowsdowntoallpartsoftheorganisation.Afocusongoodcustomeroutcomesshouldunderpinthiswork.

• Boardsneedtoclearlyarticulatetheirexpectationsforhowtomanageconductriskwithinthebusiness,includingwhoisresponsibleandwhatreportingisrequired.Forinsurerswithforeignownership,boards need to ensure policies and processes are appropriateforNewZealandstaffandcustomers.Boards of bank insurers need to ensure they operate independentlyandwithinfluencewithinthewiderbanking group to ensure good governance and conduct risk management within the life insurance arm.

• Boardsneedtohavesufficientinformationtosatisfythemselvesthatissuesarebeingadequatelyidentified,andtochallengeandholdseniormanagement to account on conduct and culture matters.

Oversight of intermediaries• Insurers need greater oversight of how

intermediaries are selling and managing their products.Whileinsurersandintermediariesboth

need to be responsible for ensuring customers experiencegoodoutcomes,itistheinsurerwhoisultimatelyaccountableforthis.

• Intermediaries need to receive comprehensive trainingoninsurer’sconductexpectations,andonallaspectsoftheinsurer’sproducts(includingcustomersuitability)beforetheycansellthem.Theyshouldalsobesubjecttoongoingaccreditationtoensureknowledgeismaintained.

• Insurers need a robust and transparent policy and processes for dealing with misconduct by intermediaries.

Product design, training and support• New products should be designed to provide good

customeroutcomes.Targetmarketsandintendedoutcomesforproductsneedtobeclearlyidentifiedandarticulated.Products(includingpolicywording)shouldbepresentedclearly,suchasthroughtheuseofplainEnglish.

• Products(includingdefinitionsofcoveredorexcludedconditions)shouldbereviewedonaregular basis to ensure they remain relevant and continuetoprovidetheintendedcoverandarefitforpurpose.

• Staffshouldreceiveongoingcomprehensivetrainingonallaspectsoftheproductstheysellandsupport,includingdesign,suitability,distribution,post-saleadviceandclaimshandling.

• Insurersneedacommunicationstrategythatsetsouthowoftenandinwhatcircumstancescustomersarecontacted.Insurersshouldhaveoversightofallcommunicationaboutproductsthattakesplacethroughintermediaries.

• Insurersneedtoproactivelyandregularlyencouragecustomers to consider their needs and whether their currentinsurancepolicyisstillsuitable,particularlywhere the customer’s circumstances might have changed.

Life Insurer Conduct and Culture

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Non-life insurersWhileweprioritisedlifeinsurersforreview,allinsurancesectorsshouldbeactivelyconsideringconductriskwithintheirbusiness.Giventhesimilaritiesbetweenlifeandnon-lifeinsurance,itispossiblethatthevulnerabilitiesidentifiedinthis report may exist across the broader insurance industry.Weexpectallinsurerstoassesstheirconductandculturegovernanceframeworks,andconsiderandactonallrelevantrecommendationsinthisreport.

Policies and processes• Risk management policies need to be appropriate

andincorporateallmaterialrisksinthebusiness,includingconsiderationofconductrisk.Policiesshouldsetoutrolesandresponsibilities,outlinesystems and processes to monitor and control materialrisks,andbesubjecttoregularreview.4

• Insurersmusthavearelevantcodeofconduct,andeducatestaffonwhatgoodconductandculturelookslike,focusingongoodcustomeroutcomes.Insurersshouldfostera‘no-blame,speak-up’environmenttoencouragestafftodiscloseconductissues,andwhistleblowerprocessesmustbeaccessible,confidentialandindependent.

• Insurersneedtodevelopclearpolicies,processesandtrainingforstaffforidentifyinganddealingwithvulnerablecustomers.

• Insurersneedtoprioritiseinvestmentinimprovinginternalsystems,processesandcontrols(includingreportingmechanisms),inordertoeffectivelymonitor and manage conduct risk within the limits articulatedintheriskappetitestatementsetbytheboard.

• Insurers need to have systems to review the adviceprovidedat,andafter,thepointofsale,andcustomeroutcomesovertime.

Identification and remediation of issues• Insurers need appropriate systems and processes

to record and resolve customer complaints and incidents.Thisincludesdefiningwhatcomplaintsandincidentsare,andtrainingstaffonhowtodealwiththesesituations.

• Insurersneedtoestablishformalremediationframeworks,policiesandprocesses,anddedicateappropriateandsufficientresourcestotheoperationofthem.Theyshouldemphasisethatissueidentificationandremediationneedstobeproactiveandundertakenwithoutunduedelay.

4:SeetheRBNZ’sGuidelines for Insurers

Incentives• Weexpectinsurerstoremoveorsubstantiallyrevise

incentiveslinkedtosalesforfrontlinesalespeopleand all layers of management within their organisation(nolaterthanthefirstperformanceyearafter31December2019).Wheresalesincentivesarenotremoved,insurersneedtoexplainhow they will strengthen their control systems to adequatelymitigateconflictsofinterestandriskstocustomers.

• We expect insurers to review their commission structures and volume bonuses for intermediaries – including structures with very high upfront commissions–toensuretheyareincentivisingintermediariestodelivergoodcustomeroutcomes.Inourview,highupfrontcommissionsarenotacceptable as they drive poor conduct and can result inpoorcustomeroutcomes.

• Weexpectinsurerstochangetheirqualifyingcriteriaforsoftcommissionstoensuretheymitigateconflictsofinterestandincentiviseadviserstoimprove customer outcomes rather than just reward themforthevolumeorvalueofproductssold.

• AuthorisedFinancialAdvisers(AFAs)arerequiredtodisclose all commissions to customers – we expect insurers to encourage all intermediaries to disclose thisinformation.

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Life Insurer Conduct and Culture

Overview of the life insurance market

Insurersprovideavaluableriskmanagementfunctionforbothindividualsandbusinesses.Theriskoflarge,potentiallyruinous,financiallossorexposuretosignificantfinancialvulnerabilitycanbesubstantiallyreducedbytakingoutinsurance.

Forthisreview,welookedatinsurerswhoprovidelifeinsurance,whichcommonlyincludesthefollowingproducts:

• Life–lifeinsurance,accidentaldeathcover,funeralcover

• Incomeprotection–disabilityincome,mortgagerepayment insurance

• Trauma–criticalillness,crisiscover,seriousconditioncover,serioustrauma

• TPD–totalandpermanentdisablement.

Indirect salesThroughanintermediary’sbranch,phone service or website

Comparison websitesAllowconsumerstocomparepricesorbuypolicies.Receivecommission from insurance companies

Group insuranceSomeorganisationsarrangegroup policies for employees or members directly with insurance companies

Financial adviser intermediariesReceive commission from insurance companies

Research providersSell research to help advisers compare policies and prices

Adviser associationsProvide services such as training and conferences to advisers

Lead generatorsSelllistsofpotentialcustomers to some advisers

Dealer groupsProvide services toadvisers,andreceive commission from insurers

Insurance companies

Consumers

How to buy life insurance in New Zealand

$$

Direct salesThroughaprovider’sownbranch,phone service or website

$ $

Life Insurer Conduct and Culture

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Comparison of life insurance commissions worldwideLife insurance commissions (% of gross premium revenue)

Den

mar

k

Latv

ia

Nor

way

Pola

nd

Swed

en

Luxe

mbo

urg

Port

ugal

Switzerland

Italy

Finl

and

Spai

n

Belg

ium

Chile

Ger

man

y

Uni

ted

Stat

es

Slov

enia

Australia

Irela

nd

Isra

el

Austria

Hun

gary

Mexico

New

Zealand

25%

20%

15%

10%

5%

0%

25%

20%

15%

10%

5%

0%

ThereareonlyafewlargeNewZealand-ownedprivatesectorlifeinsurers.Fortheyearto30June2018,foreign-owned life insurers comprised around 82% of thetotalprivatesectorlifeinsurancemarket,basedonannualpremiumincome.

NewZealand’slifeinsuranceindustrycomprisesadiversemixofinsurers,includingsmall‘member-focused’insurers,direct-to-consumerinsurers,insurersownedbybanks,andstandalone‘mainstream’insurers.Manyalsodistributegeneralorhealthinsurance,underwrittenbythemselvesorotherinsurers.

Insurers seeking to carry out insurance business in NewZealandarerequiredtobelicensedundertheInsurance(PrudentialSupervision)Act2010(IPSA).Existinginsurerswererequiredtobefullylicensedin2013.TheindustrybodyforlifeinsurersiscalledtheFinancialServicesCouncil(FSC).TenoftheinsurersinthisreviewareFSCmembers.

Generally,productsaredistributedviaRegisteredFinancialAdvisers(RFAs),AFAsorQualifyingFinancial

Entity(QFE)advisers,bankstaff,inbranches,online,bytelephoneorthroughaffiliatedpartnerships(egthroughemployers).

TheannualpremiumspaidbyNewZealandconsumersforlifeinsurancetotal$2.57billion5.Thereareapproximately 4 million life insurance policies in force inNewZealand.Lifeinsuranceproductsaregenerallylong term; they can be held for decades rather than years.

NewZealandhasaveryhighrateofcommissionsforadvisers–farhigherthanothercountries.Highratesofcommission have a detrimental impact on the premium affordabilityoflifeinsuranceforconsumers.

The graph below illustrates the impact of commission ongrosspremiums.NewZealand’shighrateofcommissions accounts for over 20% of gross premiums paidbyconsumers.

5:Source:FinancialServicesCouncilNZQuarterlyreturnfor traditionalandriskbusiness-productsummary

Source:OECD,RBNZQuarterlyInsurerSurvey.Note:Dataisfor2016.

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Life Insurer Conduct and Culture

Detailedfindings

Delivering good customer outcomes focuses on how the life insurer has embedded a customer-centricperspectiveinthedesignanddeliveryofitsproductsandservicestoensurecustomersexperienceappropriateoutcomes.

What we looked for

• Arethereproduct,design,adviceandsalesprocessesthatenablecustomerstoobtainproductsthataresuitable and easy to understand?

• Doincentiveandremunerationstructuresalignwithgoodcustomeroutcomes?

• Doestheinsurercommunicatewithcustomersinaclear,transparent,fair,timelyandconsistentway(includingatclaimtime)?

• Iscustomerfeedbackreceived,andarecustomeroutcomesmeasuredovertheshortterm,longtermandatclaimtime(thefullpolicylifecycle)?

• Is there ongoing review of customer needs in the post-sales environment?

• Is the behaviour of frontline sales teams consistent with the ‘tone from the top’?

Our findings

Overall,insurerswerenotdoingenoughtoachievegoodoutcomesforcustomers.Wefoundevidencethatinsurerswerenotadequatelyassessingproductsuitabilityduringtheproductlifecycle.Communicationwithcustomersappearedlimited,andcompliance-orientatedratherthanproactive.Whereintermediarieswereinvolved,therewereinadequatecheckstomakesuretheyactivelyensureongoingcustomerproductsuitability.Therewasnoeffectiveidentificationandmanagementofvulnerablecustomers.Itappearedthatsomepoor-valueproductsmaybebeingmis-sold.Incentivesofferedtosalesstaffandhighup-frontcommissionsand‘soft’commissionsofferedtointermediariesweretypicallyhighlyfocusedondrivingsales,whichincreasedtheriskofpoorconduct.

Delivering good customer outcomes

Product suitability Our review found evidence that insurers were not adequatelyassessingproductsuitabilityduringtheproductlifecycle.

Wesawonlyafewinsurersthatspecificallysoughtcustomerinputthroughchannelssuchasfocusgroups.Informationaboutcustomerneedswasoftenacquiredthrough their intermediary channel and internal ‘customeradvocates’.Weexpectinsurerstocarefullyevaluatetheadequacyofcustomerinput(particularlyinrelationtovulnerablecustomers–seebelow)andwhethertheyneedtoobtainmoreinformationfromcustomersdirectly.

Highratesofclaimsbeingdeclinedandlowratesof

claims being made can indicate that products are unsuitableandmaybebeingmis-sold.Insurershavethisinformation(andotherinformationavailablefromclaims),butonthewholedidnotappeartofullyutiliseitwhenreviewingproducts,developingnewproductsordeterminingwhotheyaresuitablefor.

For products sold without advice we observed a lack ofadequatesystemsandcontrolstopreventorlimitsales to customers for whom the product may be unsuitable.Fortheveryfewinsurersthatsellinsurancedirectlyonline,onlysomeappearedtohaveprocessesto help customers determine product suitability for themselves.Forinsurersthatmaketelephonesalesthereoftenappearedtobelimitedornoprocessestoconsidercustomerneedsandsuitability.Whena

Life Insurer Conduct and Culture

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productissoldwithoutadvice,thereisanincreasedriskofthecustomermakinganunsuitablepurchase,asthepolicydocumentisoftenlongandcomplex,anddoesn’taidunderstanding.

Insuranceproductscanbecomplex,andthebenefitsorlimitationsofthepoliciesareoftennotwell-understoodbycustomers.Insurersneedtodobettertopresenttheirproducts(includingpolicywording)clearlyinplainEnglish.Somearesimplifyingthelanguagetheyuse,butoverallprogressisslow.Ourviewisthatpolicywordingshouldbereviewedonaregularbasis,toensurethepolicyisunderstandableandcontinuestoprovidecoveraspromoted.Reviewsshouldincludeconsiderationofwhetherdefinitionsofcoveredorexcludedmedicalconditionscontinuetoberelevantandalignwithgenerallyacceptedscientificandmedicalconditions.Wethinkinsurersshouldworktoimproveconsistencyandclarityarounddefinitions.

Generally,theproductreviewprocessappearedtobedeficient.Insurerstendedtofocusonnewproductsandnewcustomersratherthanreviewingexistingproducts.Wefoundevidenceofonlyafewinsurersproactivelymonitoringwhetheraproductisbeingsoldtothetargetaudienceitisdesignedfor.

Ourminimumexpectationsarethatinsurers:

• ensure that customer suitability is considered in product development

• have systems and controls to monitor and ensure thatdistributionandperformanceofproductsisinline with the product design and customer suitability

• ensure that customers understand their policy and have processes in place to ensure ongoing suitability

• train and monitor intermediaries to reduce the risk ofunsuitableproductsbeingsoldtocustomers.

Legacy or closed products Legacy products are products that are no longer offeredtonewcustomers,butcontinueforcustomerswhoalreadyholdthem.

Overall,weheardevidencethatinsurers’staffandintermediarieslackunderstandingoflegacyproducts,duetoinsufficienttrainingandguidance.Insurersrely

heavilyonarelativelysmallnumberoflong-tenurestaffmembers’experiencewiththeseproducts.Thereisa risk to the insurer and its legacy product customers ifthesestaffmembersleave.Insurersneedtobettermitigatethisrisk.

Some insurers’ systems for legacy products were outdated,withmanyrelyingonmanualsystemsandprocesses.Alackofinvestmentinsystemsandtrainingappearedparticularlyacuteforlegacyproductsandneedstobeaddressed.Ourexpectationisthatlegacycustomersshouldnotbegivenlessattentionthannewer customers or treated in a way that risks poorer outcomesforthem.

Vulnerable customers Treatment of vulnerable customers was a focus of theARC,butweonlyfoundclearevidenceofoneinsurerproactivelyidentifyingpotentiallyvulnerablecustomers.

Our review found that insurers lacked:

• policies,processesandtrainingforstaffandintermediaries dealing with vulnerable customers

• understandingofwhatcouldconstituteavulnerablecustomer

• oversightofintermediaryinteractionswithvulnerablepeople.

Weexpectinsurerstoidentifypotentiallyvulnerablecustomers,andhavepolicies,processesandtrainingforstaffandintermediariesaboutdealingwithvulnerable customers and ensuring they experience goodoutcomes.

Ongoing customer communicationsForinsurersdistributingproductsthroughintermediaries,communicationwithcustomerswasinconsistentandlargelylefttointermediaries.Afewinsurersdistributingthroughthird-partyadviserssaiddirectcommunicationwouldbeinappropriate,asthecustomer‘belongs’totheadviser.Insurershadminimaloversightofintermediaries’interactionswithcustomers.Thereisverylittlemonitoringorqualityassurancecheckingoftheadviceprovidedby

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Life Insurer Conduct and Culture

third-partyadvisersandothercommunicationsfromintermediaries.

Involvement of an intermediary does not discharge an insurer’s responsibility for good customer outcomes.Insurersandintermediariesbothneedtobe responsible for ensuring customers experience goodoutcomes,butitistheinsurerwhoisultimatelyaccountableforthis.

Inoneexample,aninsurersentthecustomerapolicyrenewalletter,butdidnotincludedetailsofenhancementstothepolicy.Thisinformationwasgiventothethird-partyadviser,buttherewasnoobligationfortheadvisertopassontheinformationtothecustomer,andnooversightofwhetherornottheydid – leaving the customer possibly unaware of the new benefitsoftheirpolicy.

Weconsiderinsurerstohavearesponsibilitytosatisfythemselves that customers are receiving all relevant informationabouttheirpolicies,includinganychanges,and are given appropriate opportunity to review theircoverorproduct.Insurersusingintermediariesneed to be clear with the intermediary about who will communicatewhatinformationtocustomers.Insurersalso need appropriate checks in place to ensure that communicationoccurs.

Insurers should think about the best way to encourage customerstoconsidertheirongoingneeds,andwhethertheircurrentinsurancepolicyisstillsuitable.Thiswillvarybasedonthenatureoftheproduct,the customer’s circumstances and whether or not theproductwassoldwithadvice.Annualorperiodiccommunicationsremindcustomerstheyhavecover,and are an opportunity to check in with customers and encourage them to consider the ongoing suitability of theproduct.Alackofcommunicationwithcustomerspresentsahighriskofpoorcustomeroutcomes.

Customer-focused cultureWe noted a generally good customer focus in frontline claimsteamsandsomecontactcentres.Manystaffinterviewed appeared to have a strong desire to ‘do right’bycustomers.Ourimpressionwasthatinsurersaregenerallylookingtoensurefairclaimsoutcomes.In

someinstanceswesawexampleswherestafflookedattheintentionorpurposeoftheproductwhendealingwithborderlineorambiguousclaims,ratherthantakingastrictliteralinterpretationofthecontract.Thissamecustomerfocuswasnotalwaysreflectedacrossinsurers’organisationsasawhole.

Asagoodexampleofcustomerfocus,someinsurersinsomecasesapply(or‘passback’)newproductenhancementstoproductsalreadysold,suchasupdatingmedicaldefinitions,sotheproductcontinuestoprovideitsintendedcover.

Aviewexpressedbyafewinsurers,publiclyandininternaldocuments,isthatthethird-partyadviseristhe‘customer’.Whileadvisersareakeypartofsomeinsurers’businessmodels,andofferavaluableservicetocustomers,this‘adviser-centric’philosophyprioritisestheneedsandoutcomesofadvisersoverthoseofcustomers.Itcanalsoraisethequestionofwhetherproductsaredesignedforcustomers,ortosuitadvisers’salesstrategies.Anadviser-centricphilosophycanalsomakeitdifficulttoholdadviserstoaccountforpoorbehaviour.

Insurers need to be clear that policy-holders are their customers,andpromoteaculturethatputscustomersatthecentreofdecision-making,productdesign,sales,adviceandclaimsprocesses,andallday-to-dayactivities.

Customer feedback and measuring customer outcomes Insurers heavily relied on ‘lag’ indicators such as customercomplaintsandsatisfactionsurveysasindicatorsofconductandcustomeroutcomes.Ourviewisthattheseindicatorsareinsufficient.Customersatisfactionsurveysmeasureshort-termsatisfactionratherthanoutcomes–acustomermaybesatisfiedwiththeirpurchaseintheshortterm,butwon’tknowuntiltheyneedtomakeaclaimwhetherthepolicyprovidestheexpectedvalueorbenefits.Insurerstended to believe that a low number of complaints indicatedgoodconduct,butthishadlimitedvaliditygiven their complaints management systems and processeswereineffectiveatidentifying,recording,and

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analysingcomplaints.ThisisdiscussedfurtherunderIssueidentificationandremediation(seepage25).

Insurersshouldalsouse‘lead’indicators.Thesecanprovideinsightsonpotentialoutcomesandidentifyemergingtrends.Leadindicatorscanincludeanalysisof:

• who is buying the product compared to who it wasdesignedfor(weonlyfoundevidenceofafewinsurersperformingthistypeofanalysis)

• highpremiumincomerelativetoamountspaidorpayable under claims

• reasonsfornon-renewalorcancellationofpoliciesbycustomers.

Allinsurersneedtobetterutilisecustomerfeedbacktoinformcontinuousimprovementofservice,policiesandprocesses.Feedbackfromcomplaintsandincidentsshouldbeheardandactedupon.Insurersneedtoperform root-cause analysis of issues and complaints tomitigatetheriskofissuesreoccurring.Insurersalsoneedtocontinuallyreviewproductstoaddressissuesandimprovecustomeroutcomes.

Poor-value products Ourreviewhighlightedthatcertainproductsoftenprovidedpoorvalue,andconsequentlypooroutcomesforcustomers,becauseoflimitedbenefits,andmisunderstandingofcoverageandeligibility.Suchproducts include:

• accidental death cover

• specifiedinjurycover

• funeral cover

• ‘guaranteed acceptance’ products6

• loanorcreditcardrepaymentprotectioninsurance(paymentprotection).

While these products may be suitable for some customersinalimitedrangeofcases,evidencethatthey have a higher risk of poor value includes:

6: Products for which the customer’s personal or medical informationisnotaskedpriortopurchase–acceptanceisguaranteed.Theinsurerdoesnotconsiderwhether(ortowhatextent)theproductprovidescoverforthecustomer–thisisdeterminedwhenthepersonmakesaclaim.

• Thelossratio(foraproduct,claimsdividedbytotalpremiums)isextremelylow,orconsiderablybelowtheprojectedratio.Someinsurershadbeenawareofextremelylowlossratiosoncertainproductsforsometimebuthaddonelittletoaddressthis.

• Highratesofclaimsbeingdeclined.

We saw clear evidence of poor outcomes for customers fromsomepoor-valueproducts(seeexamplesonpage28).Weareconcernedthatnon-underwrittenproductsare being sold to customers without them fully understandingtheirlimitations.Enhanceddisclosureand training needs to be provided to improve transparencyandensuresuitablecustomeroutcomes.

Acommentmadebysomeinsurerswhendiscussingproducts with a higher risk of poor value was “some insuranceisbetterthannoinsurance”.Giventheevidence of poor customer outcomes for some of these products,wedonotbelievethispositionisalwaysvalid.Ifthereisajustificationforsellingtheseproducts,weexpectittobesupportedbystrongsystems,processesand controls for ensuring the products are only sold to thetargetcustomers,theparticularrisks,issuesandlimitationsarefullydisclosed,andthereisevidencetheproductsmeetcustomerexpectations.Weexpectinsurerstobeabletojustifytherationalefortheirproductsintermsofgoodcustomeroutcomes,andto remove or change products that consistently fail to providegoodoutcomesorvalueforcustomers.

Itisalsoimportanttonotethattheissuesidentifiedwith poor-value products are not limited to life insurers.Althoughthisreviewfocusedonlifeinsurance,weareawarethatasignificantproportionofpaymentprotectioninsuranceproductsareissuedbynon-lifeinsurers.Weexpectallinsurerstoidentifywhichproducts may be poor value for customers and considertherecommendationsfromthisreport.

Replacement business policies and processes Replacement business is when a customer replaces onelifeinsuranceproductwithanother.Salesincentivesandhighup-frontcommissionscanmotivateintermediariesto‘churn’policies,ie,sellreplacement

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Life Insurer Conduct and Culture

products that are not in the best interests of the customer.Risksforcustomersfromchurnincludetheincreasedlikelihoodofexclusionsorlimitationsassociated with changes in health that have occurred sincetheoriginalpolicywastakenout.

OfwiderconcernisthepossibilitythatNewZealandersarepayingtoomuchforlifeinsurance,becauseinsurers are spending too much on commissions to intermediariesduetochurn.InareportpublishedinMay2016,theNZInstituteofEconomicResearch7 calculated that life insurers are spending around $430 millionayearoncommissions.Thereportsuggestedthatifthiswerereducedbyhalf,premiumscouldbecutbyupto12%.

FromthisreviewandpreviousFMAreviews8,itwasevidentthatthemajorityofinsurershadinadequateprocesses in place to:

• ensurecustomersareadequatelyadvisedoftheserisks

• monitorconductinrelationtoreplacementbusiness.

The forms used to document the replacement process forcustomerswerecompliance-oriented,toprotecttheinsurerratherthantoinformcustomersofrisks.Mostinsurersdidnotindependentlyidentifywhichsaleswerereplacementbusiness,andmostdidnotassess whether replacement actually provided good customeroutcomes.Overall,thereappearedtobereluctancebyinsurerstoinvestigateandaddressissuesandrisksarisingfromreplacementbusiness.

Remuneration and incentives Regardless of the way life insurance products are sold (seeOverviewofthelifeinsurancemarketonpage11),howpeopleorentitiesinvolvedinthesalesprocessareincentivisedinfluencesthewaytheyactandtellsthemwhatbehaviourisvalued.Incentiveslinkedtosalestellstaffandintermediariesthatasaleisagood

7:Thereport,ResettingLifeInsurance,wascommissionedbySovereignAssurance.

8:TwoFMAreportsdiscussreplacementbusinessinmoredetail:Replacinglifeinsurance–whobenefits?,June2016;andQFE insuranceproviders’replacementbusinesspractices,July2018

outcome.Thiscreatesaconflictofinterestbetweenthestaffmemberorintermediary(ontheonehand),andthecustomer(ontheother)becauseasaleisnotalwaysinthebestinterestsofthecustomer.Insurersneedtomanagethisconflictofinteresttoensuregoodcustomeroutcomes.

Aspartoftheiractionplans(seeNextstepsonpage7),insurersmustexplainhowtheywillmeettheexpectationssetoutbelowregardingincentivesandcommissions.

Staff incentives

Anumberofinsurersofferincentivesforstaffthatarebasedonmeetinganumberortotalvalueofsales.Forsomeinsurers,meetingsalestargetsisakeyperformanceindicatorforfrontlinestaffandtheirmanagers,andinsomecasesextendstoseniormanagement.

Salestargetscanresultinstaffpursuingsalesinordertoavoidnegativeemploymentconsequences.Criticismfrom managers about sales performance can create pressuretosell.Atoneinsurer,20%ofsalesstaffwereon performance improvement plans and receiving additionalcoachingbecausetheywerenotmeetingsalestargets.Atthisinsurer,therewerevisibleleaderboardsshowingeachperson’snumberofsales,addingtothepressureonstafftosell.

It is for insurers to determine the most appropriate way todesignandcontrolincentivestructurestosustaingoodcustomeroutcomes.Removinganyincentiveslinked to sales measures9isasignificantsteptowardsthisgoal.However,itmaynotbesufficient–thepressure that senior managers put on more junior managersandstafftosellcanbeverypowerful,andinsurers need to carefully review the structural design ofallincentives.Weexpectmoreproactiveoversightby boards and senior management in the management ofrisksassociatedwithincentives.

Some insurers had started to think about the sales focusoftheirincentivestructures,andsomehad

9:Wedefinesalesmeasuresasmeasuresthatareachievedbyretailcustomersalesorreferrals,whetheratanindividualorateamlevel.Thisincludessales/referralsnumbers,andsalesvalue.

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taken steps to reduce or altogether remove sales-basedincentives.Whilethesechangesbyindividualinsurersareapositivestep,theyarenotenoughtocreate a sustainable culture of good conduct across the industry.Weexpectalllifeinsurerstoreviseanysalesincentivestructuresforsalespeopleandthroughalllayersofmanagement.Lifeinsurersneedtoimplementchangestoincentiveschemesnolaterthanthefirstperformanceyearbeginningafter31December2019.

Anylifeinsurerthatdoesnot,by30June2019,committoremovingincentiveslinkedtosalesmeasureswillberequiredtoexplainhowtheywillstrengthentheircontrolssufficientlytoaddresstherisksofpoorconductthatarisewithsuchincentives.Wealsoexpectlife insurers to manage the risks associated with these changes,aschangestoincentivesmayhaveunintendedconsequences.Aslifeinsurersdevelopindicatorsofgoodcustomeroutcomes,weexpectthemtoconsiderincorporatingtheseintostaffincentives.

Intermediaries – commissions and incentives

Thesameincentive-relatedrisksandconflictsarepresent where insurers who distribute products through intermediaries pay commissions to the intermediaries.Thisincludesbankinsurerswhopaycommissionstobanksthatdistributetheirproducts.

Differentratesofcommissionarepaidfordifferentproducts–sometimesdifferentproductsofferedbythesame insurer – increasing the risk that intermediaries actintheirownbestinterests,ratherthanthoseofthecustomer.Largeup-frontcommissionsatthetimeofsale can commonly range from approximately 170% to 210%offirst-yearannualpremiums.

Intermediariescanalsoreceive‘soft’commissionssuchasgifts,businesssupport,educationalandtrainingprogrammes,sharesandoverseastrips.Softcommissionsareusuallyarewardformeetingsalestargets.Inasurveyof29financialadvisersconductedaspartofthisreview,themajorityrespondedthattheirpreferredprovideroffersthemincentivesbasedonnumberofsales.For27oftheadvisers,theirpreferredproviderofferedoverseastrips.

In a 2018 report,theFMAexpressedconcernthatlifeinsurersweredesigningincentivesthatpotentiallyset

advisersuptofailincomplyingwiththeirobligationsundertheFinancialAdvisersAct200810 to treat customerswithcare,diligenceandskill.Ifpassedinitscurrentform,theFinancialServicesLegislationAmendmentBillwouldrequirealladviserstogiveprioritytoclientinterests.Weconsidermanycurrentsoftcommissionswillbeunjustifiableinlightofthisrequirement.

TheFMAhaspreviouslystronglyencouragedallinsurerstoconsiderthenatureandvalueofthesoftcommissionstheyprovidetointermediaries,toensurethatthismethodofremunerationsupportsafocusongoodcustomeroutcomes.Insurershaverecentlyresponded to this pressure and our further concerns raisedduringthisreview.Thishasseenthelastoftheinsurersthathavetodateofferedoverseastripsannouncingthattheywillstopofferingoverseastrips,eitherwithimmediateeffectorinthenextyear.Afewinsurers were a step ahead of the others advising us earlierin2018,butthemajorityonlymadethedecisionandadvisedusthroughthisreviewprocess.

Wehaveyettoseeanyinsurerconfirmandannounceanintentiontochangethequalifyingcriteriaforsoftcommissionssothatintermediariesareincentivisedtoimprove customer outcomes rather than merely to sell products.Wethinkthischangeneedstooccur.

We also expect life insurers to review their commission structuresforintermediaries,includingtheveryhigh upfront commissions compared to ongoing or ‘trail’commissions.Insurersneedtoensuretheyareappropriatelyincentivisingthegoodconductofintermediaries and the delivery of good customer outcomes.Wewouldliketoseeadvisersincentivisedfor providing ongoing service and advice to customers about product suitability and for maintaining good customeroutcomes.

AFAsarerequiredtodiscloseallcommissionstocustomers – we expect insurers to encourage all intermediariestodisclosethisinformationtotheircustomers.

10:Seesection33oftheAct.

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Life Insurer Conduct and Culture

Conductandculturegovernanceistheprinciples,practicesandprocessesthatdeterminehowthelifeinsurer’sboardofdirectors(board)andseniormanagementoverseethemanagementofconductandculturerisksandissues.

What we looked for

• Do the board and senior management have a strong focus on conduct and culture risk?

• Isthereahighlevelofboardandseniormanagementengagementandaccountabilityviariskappetitestatements,andregularcomprehensivereporting?

• Istheboardaccountableforthecultureoftheorganisation,includingensuringithasacustomerfocusandstaffarecomfortableescalatingissues?

• Does the board consider the impact of the insurer’s strategy on its customers?

• Istheboardaccountableforincentiveandremunerationstructures?

• Arethereappropriatemanagementstructuresandcommitteesinplacetooverseeconductandculturerisks?

• Aretherepoliciesandproceduresformonitoringwhetherpooradvicehasbeengiven,orwhetherinsurance products sold are providing good outcomes?

Our findings

Fewinsurershadgivenanyseriousthoughttoconductandculturepriortothisreview,oranalysedtheirsystems,processesandpoliciesagainstexistingindustryguidance.Boardsandseniormanagementwerenottakingresponsibilityformanagingconductriskorfosteringacustomer-centricculture,andtherewaslimitedinformationaboutthisflowingdowntofrontlinestaff.Reportingtoboardsaboutconductriskswaslimited,andboardswerenotclearlyarticulatingwhatinformationtheyrequiredfromthebusiness.Thelackofoversightandcontrolsofsalesandcustomeroutcomes,particularlythroughintermediaries,wasespeciallyconcerning.

Conduct and culture governance

Governance of conduct and culture riskOverall,wefoundalackofgovernanceofconductandculturerisk.Forsomeinsurerswefoundlittleevidencethatboardswereadequatelyperformingtheirgovernancefunction.Oftheboardsthathadalreadyconsideredconductandculture,manyhaddonesoonlyrecently,andthisseemedtobeveryreactiveandnotprioritised.Insomecases,boardsandseniormanagementappearedtobetakingactiononlybecauseofthisreview.

InlateSeptember2018,theFinancialServicesCouncil(FSC)releaseda code of conduct to promote good conduct and a strong customer-focused culture amongstitsmembers.Itcameintoforceon1January2019.TenoftheinsurersinthisreviewareFSCmembers11.However,theymadelittlereferencetothe

11:AIA,AMPFinancialServices,AsteronLifeLtd,BNZInvestmentsandInsurance,CIGNALifeInsuranceNZLtd,FidelityLifeAssuranceCoLtd,PartnersLife,PinnacleLife,SovereignLtd,WestpacBank

FSCcodeduringthereview,andwesawlittleevidenceof them analysing whether their conduct risk systems andprocesseswouldbecompliantby1January2019.

Forinsurerswithforeignownershipandbankinsurers,evidence varied across the insurers that the board was performingitsfunctionswithsufficientindependencefromtheparent/groupandwithaclearfocusonthegovernanceoftheinsureritself.

RBNZhaspreviouslysignalledtotheindustrythatitwantstoseeimprovementinthequalityofgovernance.Its Governance Guidelineoutlinesthecharacteristicsexpectedfromsoundboards.Forgovernancetobeeffective,itmustbekeptseparatefromownership,byhavingindependentdirectorstoprovideobjectivityandimpartiality.Atthetimeoflicensingthelifeinsurers,RBNZacceptedproxiesforindependencewhere,forexample,‘dual-hatting’directorsinagroupmaystillbeviewed as independent if also a director of a parent or sistercompany.However,inRBNZ’s2015 report on risk governanceitwasnotedthat,whilesubsidiariesare

Life Insurer Conduct and Culture

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receivingsupportfromoverseasowners,RBNZwouldliketoseethestrengthoflocalboardsgrow.Thiscanbe helped by increasing independence and diversity on localinsuranceboards.

Inourreview,theexpectedlevelofgenuinedirectorindependence was not always present and we saw instancesofalackofempowermentandchallenge,andweaklocalagendas.Thiswasevidencedbyinsurerswith foreign ownership being overly reliant on policies and processes used in the home country of the parent.Thesewerenotalwayssuitableforthelocalmarket,andcanresultinfragmentedgovernanceandaccountabilityforconductandculturerisk.

Formostinsurersthereappearedtobeinsufficientinvestmentinandresourcingofeffectivesystemsandprocesses,whichincreasedtheriskstogoodcustomeroutcomes.Whereinsurershadbeenfocusingongrowthandexpansion,theriskswereexacerbatedbythediversionofalready-stretchedresources.

We expect boards to take ownership of conduct risk,includingallocatingsufficientresourcestothedevelopmentofeffectivepoliciesandprocesses(including,whererelevant,thattheyaretailoredtolocalrequirements).Someboardsneedtotakethefundamentalfirststepofunderstandingwhatconductandculturegovernanceis,andwhattherisksarefortheirbusiness.

Boardsneedtobemoreeffectiveinsettingthetoneandexpectationsaroundconductandculture,andensuring that good customer outcomes and good conductarecentraltothebusinessstrategy.Thereisnoone-size-fits-allapproach,butweexpectboardstoensure conduct governance is considered at a board andsub-committeelevel,andtohaveeffectivetwo-waycommunicationchannelsandclearexpectationsforseniormanagement.

Awareness of conduct issuesInsurers were too slow to analyse their conduct against theFMA’sConductGuide(seepage34).Onlythreeoftheinsurershaddonesopriortoourreview,despitethis being encouraged when the guide was published inFebruary2017.Nearlyhalfhavesubsequently

undertakensomeformofreview.

Similarly,justunderhalfoftheinsurershadsubsequentlyundertakenanyformofgapanalysisagainsttheissueshighlightedbytheARC(andinvestigationsreferredtointheAustralianSecuritiesandInvestmentsCommission(ASIC)CommInsure report12).Thissuggestsinsurersarebeingcomplacentin developing an understanding of the risks facing their industry.

Conduct and culture reporting Therewasalackofadequatereportingtoboardsonconductandcultureissues.Manyboardsdidnotappeartobereceivingenoughinformationtoknowwhether,orhow,conductandcultureriskswerebeingmanaged.Examplesofissuesthatwerenotreportedtoboards include:

• lowstaffengagementrates

• poor behaviour by advisers that impacted customer outcomes

• highratesofclaimsbeingdeclined.

Reportingonconductandculturerisksandissuesvariedacrossinsurers.Inseveralinsurersitwasnotoccurringorwasstillindevelopment;inothersitwasnotregularenough,generallyfocusedonidentifyingissues that had already occurred rather than tracking trendsthatmayindicatefutureissues,anddidnotcontainenoughdetail.

There was a general lack of established metrics for conductrisk.Quantifiabledatawaslargelylimitedtocustomersatisfactionsurveyresultsorcomplaints(seeCustomer feedback and measuring customer outcomes onpage15).Withsomeexceptions,boardsdidnotproactivelyseekfurtherinformationaboutconductandculturerisks.

Weexpectboardstodeterminewhatinformationisrequiredfromseniormanagementtoenablethemtoeffectivelyoverseeconductandculturerisk,require

12:CommInsurehadtraumapolicieswithmedicaldefinitionsthatwereoutofdatewithprevailingmedicalpractice,specificallyforheartattackandsevererheumatoidarthritis.ASICreportissuedMarch2017.

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Life Insurer Conduct and Culture

seniormanagementtoprovideitregularly,andthentestandchallengeitwhennecessary.Somedirectorsnoteditwaschallengingtogetinformation–seniormanagement should be open with the board and give themtheinformationtheyneed.

Some senior managers commented that their access totheboardwasrestricted.Insurersinitiallytoldusthey had high levels of board engagement – but when interviewed,someseniormanagersandexecutivestalkedaboutalackofboardvisibilityandengagement.

Messaging on conduct and cultureAtmostinsurers,consistentandstrongmessagesonconduct and culture were not being shared by senior managers.Wherethismessagingdidexist,itwasnotcascadingthroughtoallpartsoftheorganisation.NorwastheremuchinthewayofevidenceofspecificcommunicationtostaffabouttheARCissuesandthepotentialimpactfortheinsurerandtheirbusiness.

SpecificcommunicationbyinsurerstointermediariesontheARCwasnotevidenced,andfewinsurershadclearlycommunicatedtheirconductexpectationstointermediaries.

Sales oversight and controls Where insurers distributed their products to customers throughintermediaries,theinsurersdidnothaveadequateprocessesformonitoringorevaluating:

• who intermediaries were selling their products to

• whether the products were suitable for these customers

• anyadviceprovidedaspartofthesale,andtestingwhether that advice was causing poor customer outcomes.

We found a few examples of poor conduct by intermediariesthatwereinadequatelydealtwithbyinsurers.Oneexamplewasaninsureraddressingfraudulentbehaviourbyprovidingtraining,whenthesituationobjectivelywarrantedsuspensionoftheagencyagreementuntilacompletefilereviewwasundertaken.

Some insurers stated that the conduct of intermediarieswasnottheirresponsibility.Thisextendedtosomebankinsurerssuggestingitwastheresponsibilityofthebank,nottheinsurer,tomonitorbankstaffsellinginsurance.Whilethis‘outsourcing’of conduct risk management might make sense from acommercialperspective,weexpectthebankinsurer(includingitsboard)tohavesufficientoversight,includingreceivinginformationaboutissuesandrisksspecifictothesaleofthebankinsurer’sproducts,andgivingappropriateattentiontohowtheyareaddressed.

WeagreewiththeInternationalAssociationofInsurance Supervisors’ view that:

• the insurer has a responsibility for good conduct throughout the insurance lifecycle

• where there is more than one party involved in distributionofproducts,goodconductinrelationtodistributionisasharedresponsibilityoftheinsurerand the intermediary13.

Aninsurancecontractisbetweentheinsurerandthecustomer(policy-holder).Therefore,insurersneedtomakearealefforttodeterminewhethercustomersarereceivinggoodoutcomesfromtheirproducts.Insurersshouldhaveadequatemechanismstomonitorthesalesandadviceprocessesofintermediaries,tominimisetherisks of their products being mis-sold and customers experiencingpooroutcomes.Astheyaretheinterfacebetweencustomersandinsurers,intermediaries’goodconductiscriticalinbuildingandjustifyingpublictrustandconfidenceinthelifeinsurancesector.

AfewinsurersstatedthattheFinancialServicesLegislationAmendmentBill,whichproposesthatallfinancialadviceproviderswouldbelicensedandsubjecttoacodeofconduct,wouldresolveissuesrelatedtotheconductofthird-partyadvisers,andanyoversight by them of advisers’ behaviour or processes wasnotnecessary.However,ourstronglyheldviewisthatincreasedregulationofthird-partyadviserswouldnot discharge insurers’ responsibility for customer outcomes.Weexpectinsurerstohaveaninterestinand oversight of intermediaries’ conduct when selling

13: Insurance Core Principle 19: Conduct of Business – IntroductoryGuidancesections19.0.8to19.0.10.

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theirproductsontheirbehalf,toensuregoodcustomeroutcomes.

Qualifying financial entities (QFEs)

LifeinsurerswhoareQFEsoranassociatedentityofaQFE(eightoftheinsurerswereviewedareQFEsoranassociatedentityofaQFE)needtodomoretomeettheirobligations.Inone-thirdoftheQFEinsurerswereviewed,wedidnotobservesuitablecontrols in place to monitor sales outcomes and ensure customersuitability.AQFEtakesfullresponsibilityforthefinancialadviceprovidedbyitsemployeesornominatedrepresentativesatalltimesandisfurther responsible for ensuring compliance with each employee’sornominatedrepresentative’sfinancialadviserobligations.TheFMAmonitorsQFEsandwilladdressinadequaciesidentifiedinthisreviewthroughtheindividualfeedbackletterstoinsurers,andwillseekconfirmationintheiractionplansofthespecificstepstheywilltaketoaddressanyconcerns.

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Life Insurer Conduct and Culture

Conductandcultureriskmanagementistheframeworks,practicesandprocessesthelifeinsurerhasinplacetomanageconductandculturerisksandissuesonaday-to-daybasis.

What we looked for

• Aretherewell-definedrolesthatareresponsibleforproactivelyidentifyingconductandculturerisks,andassessing and managing these risks?

• Doestheinsurerhavecapable,well-trainedstaffwhohavegoodcustomeroutcomesfrontofmind?

• Doesthecultureoftheinsurersupportstafftospeakupandescalateconductandcultureissuestomanagement and the board?

• Isthereaneffectivewhistleblowerpolicy?

• Do policies and procedures have a customer focus?

• Doestheinsurerhaveafullyfunctioning‘threelinesofdefence’(orequivalent)structure?

• Istheinsurerabletoidentifyandmanageconflictsofinterest?

Our findings

Conductriskmanagementacrossinsurerswasgenerallyimmature.Insurersdidnothaveeffectiveandrobustsystemstoproactivelyidentifyconductriskissues.Initialandongoingtrainingprovidedtostaffandintermediarieswasinadequate.Whistleblowerpolicieslackedvisibility,werenotwellunderstoodandinsomecaseswerenotindependentandconfidential.

Conduct and culture risk management

Conduct and culture risk managementOverall,riskmanagementofconductandculturewasimmature,andinsurershadonlyrecentlystartedtoconsiderconductrisk.Manyinsurersappearedtoequategoodconductwithgoodcompliance,ratherthan recognising it as an integral part of their business andfactoringitintotheirstrategyandproductdesign,salesandafter-salescustomercommunications.

Responsibility for conduct risk management generally satwithriskandcompliancefunctions,andfellwithinthemandateofauditandriskcommittees.Whilethesefunctionsandcommitteescanplayanimportantandindependentsupervisoryrole,theycannothavesoleresponsibility.Toachievegoodcustomeroutcomes,responsibility for conduct risk management needs to be integratedacrossallpartsoftheinsurer’sbusiness.

The three lines of defence14 framework lacked robustnessinrelationtoconductriskformostinsurers,andwaspoorlyimplementedandunder-resourced.

14:‘Threelinesofdefence’isamodelthatinsurersandotherentitiesusetostructuretheirriskandcomplianceassuranceandoversightfunctions.Thefirstlineofdefenceistheteamsanddepartments,whichcarryouttheinsurer’sbusiness;theyareresponsibleformanagingtherisksassociatedwiththoseactivities.Thesecondlineofdefenceisoversightfunctions(suchasriskandcomplianceteams),whichsetdirection,definepoliciesandprocedures,andprovideguidanceandchallengethefirstline.Thethirdlineofdefenceisindependentoversight(suchasaudit)oftheassuranceprovidedbybusinessoperationsandoversightfunctions.

Therewasinsufficientconsiderationofconductriskandcustomeroutcomes.Thefirstlinewasheavilyreliedontomanagerisk,butlackedunderstandingofconductrisk.Therewasnotenoughtrainingonhowtoidentifyandmanageconductrisk.

Mostinsurershadriskandcomplianceteamsoperatingasasecondline.However,theywereoftenunder-resourcedandrelativelysmall,indicatinginsufficientattentionandprioritisation.Theyweregenerallyviewedas‘inhibitors’ratherthan‘enablers’.Atoneinsurer,acomplianceofficerhadresponsibilityforover30branches.Similarly,qualityassuranceteamswereoftenunder-resourced,meaningtheycouldnotcarryoutenoughcheckstoadequatelydetectissues.

Inmanyoftheinsurers,thethirdline–independentauditofconductrisk–wasnotsufficientlyrobust.Auditlargelyfocusedoncompliance.Wewerealsoadvisedof instances where the third line may not have been operatingwithsufficientindependence.

Life Insurer Conduct and Culture

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Wefoundexamplesofpoorconflictofinterestmanagement.Forexample,atmostinsurers,complaints about intermediaries were dealt with by the insurer’s business development managers or sales managers,whoalsomanagetherelationshipwiththeadvisers.Thiscreatesaconflict,asthemanagersgenerallyreceiveincentivesbasedonthenumberofsalesmadebytheadviserstheymanage.Thiswas exacerbated where there was a lack of formal processesformanagingthesecomplaints,andalackofrecordingandreportingofanyoutcomes.

Training programmes Allinsurershaddifferentapproachestotraining,includingon-the-jobtraining,e-learning,inductionprogrammesandotherfacilitatedcourses.However,training(includingproducttraining)providedtostaffand intermediaries by insurers appeared inconsistent andinadequate.

Manyinternalsalesstaffcommentedtheydidnotreceiveenoughproducttraining.Wewereadvisedofinstancesofbothinternalstaffandintermediariessellingoradvisingwithinsufficientknowledgeofaproduct and the types of customer it is designed for.Thisincreasestherisksofmis-sellingandpoorcustomeroutcomes.Wesawlittleevidenceofinsurersvalidatingeitherinitialorongoingstaffproductknowledge,andonlysomeinsurershadformalaccreditationprocessestoassessandrecordintermediaries’productknowledge.

Onapositivenote,wedidseeevidencethatsomeinsurers had started to provide conduct training forinternalstaff.However,thiswasstillnewanditseffectivenesshadyettobemeasured.Wewereadvisedof only a few insurers providing conduct training for intermediaries.

Overall,therewasalackofattention,priorityandresourcesgiventotraining.Weexpectinsurerstoreviewtheirtrainingprogrammes,toensuretheyappropriatelysupportstaffandintermediariesinthedeliveryofgoodcustomeroutcomes.

Whistleblower policiesWhereinsurershadwhistleblowerpolicies,theyweregenerallynotwellknown,understoodorusedbystaff.Two insurers did not have whistleblower policies in place.

Acommonthemewasalackofvisibility,andinsomeinstances,staffwerenotawarethatapolicyexisted.Manystaffdidnotknowwhatthepolicywas,didnotunderstandit,ordidnotknowwheretofindit.Someofthepoliciesdidnothaveanonymous,confidential,orindependentchannelsforraisingmatters.

Useofwhistleblowermechanismswasrare,includingwherethepolicieswerewidelyknown.Thissuggestswhistleblowerpoliciesarenotparticularlyeffectiveinencouragingstafftospeakupaboutissuestheymayencounteronaday-to-daybasis.Insurersneedto do more to raise awareness and understanding of the types of issues that could be reported through whistleblowermechanisms,whichshouldincludeconcernsaboutconductandculture.

Staffacrossmost(butnotall)insurerssaidtheywerecomfortableraisingissues,includingthoseregardingmisconduct,withtheirdirectmanager,otherseniormanagementorhumanresources.Whilethisisnotareplacementforaneffectivewhistleblowerpolicy,itispositivethatmostinsurersappearedtosupportstaffto speak up and escalate conduct and culture issues to management.

Codes of conductMost(butnotall)oftheinsurershadarelevantstaffcodeofconductinplace.Withsomeexceptions,thesewerelargelyonlyreferredtowhenstaffstartedtheirjobs.Asaresult,stafflackedawarenessoftheconductstandardsexpectedofthem,andtherewaslittleunderstandingofhowtoapplycodeofconductstandardstoday-to-daybusinessoperations.

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Life Insurer Conduct and Culture

Issueidentificationandremediationishowthelifeinsureridentifiesandmanagesconductandculturerisksandissues.

What we looked for

• Arethereappropriate,timelyprocessesinplacetoidentifyconductandculturerisksandissues?

• Isthereevidencethatissuesrequiringremediationaredealtwithappropriatelyandinatimelymanner?

• Areremediationprocessesclearandunderstoodbyallparties?

• Doestheinsurercarryoutproperroot-causeanalysisofcomplaints,andappropriaterecordingandescalationofissues?

• Isthereevidencethatbroaderconsequencesidentifiedinrootcauseanalysisareassessedandinfluencetheinsurer’sremediationframework?

• Isthereevidencethatremediationactivitiesareachievinggoodcustomeroutcomes?

Our findings

Themajorityofinsurersdidnothaveformalremediationpoliciesorprocessesinplace.Insurersdidnotseemtoappreciatetheimportanceofremediationpractices,andtherewaslittleurgencyorproactiveefforttoremediateissues.Whereinsurerssawthatthingshadgonewrong,theyweregenerallynotactivelylookingtouncoverthefullextentoftheimpactoridentifytheunderlyingcauses.

Thislackofattentionandprioritysuggestsacomplacentattitudeandadisregardforcustomers’bestinterests.

Acrosstheindustry,therewasanacutelackofprocessesinplacetoidentify,monitorandmanageissuesrequiringremediation.Therefore,itishighlypossibletherearemoreissuesthatinsurershavenotidentified.Mostinsurerscommentedthattheywereconfidenttherewasnoevidenceofwidespreadpoorconductissuesandpoorcustomeroutcomes.Wequestionthis,especiallyasourreviewidentifiedseveralexamplesofpoorcustomeroutcomes.

Issue identification and remediation

How insurers identify issues Mostinsurerswereoverlyreliantoncustomercomplaintstoidentifyissues.Complaintsaloneareaninadequateindicator,ascustomersmaynotcomplain,ormaybeunawareofissuesthataffectthem.Also,ascomplaintsoccurafterthefact,theyareineffectiveatpreventingorminimisingproblems,andpoorcustomeroutcomesmayhavealreadyoccurred.Forthemajorityofinsurersthereweremajorflawsinidentifyingandrecordingcomplaints.

The majority of insurers did not have comprehensive processestosystematicallyandproactivelyidentifypotentialoremergingissuesthroughthelifecycleofaproduct.Veryfewinsurershadinitiatedasystematicreviewoftheirproductandpolicy-holderportfoliosinordertoproactivelyidentifyconductandculturerisks

andissuesthatmightrequireremediation.Forinsurersusingintermediaries,therewasalackofproactivemonitoring of the conduct of these intermediaries whenadvisingorselling,orreviewingcustomers’needs.

Complaint and incident management systemsOur review showed that while the majority of insurers had complaints and incident management frameworks andprocesses,thesewerenotoperatingeffectively.Complaintandincidentreportingwasgenerallypoor,andwesawevidencethatnotallcomplaints,incidentsandissueswerebeingcapturedandreportedon.

Within most insurers there was uncertainty about how toidentifyanddistinguishbetweencomplaintsand

Life Insurer Conduct and Culture

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incidents,howthesetypesofissuesaredefined,andhowtheyshouldberecorded.Forexample:

• Mostinsurershadnotprovidedstaffwithcleardefinitionsof‘complaint’and‘incident’.

• Someinsurershadmultiplesystems(oneinsurerhadatleastfive)wherecomplaintsorincidentscouldberecorded,andtherewasuncertaintyastowhichsystemshouldbeused.

• Oneinsurertoldusthatsubscriptioncostsprohibitedsystemaccessbeinggrantedtoallstaff.

Mostinsurersempoweredfrontlinestafformanagerstoresolvecomplaintsthemselves,withoutescalation,andwithincertainparameters.However,thesecomplaintswereoftennotbeingrecorded.Someinsurershadadefinitionofcomplaintsthatexcludedcomplaintsresolvedwithoutescalation(ie,byfrontlinestaff).Ourviewisthatwhiletheabilitytoresolvecomplaintsatthefrontlineisagoodthing,thisactivitystillneedstoberecordedtocontributetotheoverallviewofconductissuesandcustomeroutcomes.

Systems and processes were poorly implemented or inconsistentlyusedacrossmostinsurers,potentiallyduetodeficienciesintrainingorsupervision.Insomecases,seniormanagementdidnotappeartoappreciatestaffmembers’lackofunderstandingoruseoftheprocessesorsystems.

Acommonobservationmadebyfrontlinestaffwasthataftertheyescalatedanissuetheydidnothearanythingfurtheraboutit.Thislackoffeedbackmeantstaffwereunabletolearnfromhowthematterwastreated,whichcouldhelptoidentifyandminimisesimilarissuesinthefuture,andstaffcouldbedeterredfromcontinuingtoescalateissues.

Thesedeficienciesmeantinsurersdidnothavereliableandcompleteinformationonthevolumeornatureofcomplaintsandincidents,andthereforenoclearpictureofpossibleandpotentialissues,andtheimpactoncustomeroutcomes.Thiscompromisesinsurers’abilitytoidentifytrendsandthemes,anddetermineandaddresstherootcausesofissues.

We expect all insurers to have appropriate systems and processestorecordandresolvecustomercomplaints.

Thisincludesdefiningwhatacomplaintisandtrainingstaffonhowtodealwithcomplaints.Thereisnocommondefinitionacrosstheinsuranceindustryofwhatconstitutesacomplaint.Thishinderstheabilityto form a consistent industry-wide view of the issues thatcausecomplaintsandhowwidespreadtheseare.Wewouldliketoseetheindustry,perhapsthroughtheFSC,achieveconsistencyinthisarea,raisingcustomerawarenessofcomplaintanddisputeresolutionprocesses,andencouragingtheuseofinsightsfromcomplaintstoimprovecustomeroutcomes.

Root cause analysis, systemic assessment and trend analysis Wearenotconfidentthatinsurersareawareofallcurrentissuesintheirbusinesses.Mostdidnotproactivelyundertakeproperrootcauseanalysisofcomplaints to understand the underlying causes and determinehowwidespreadissuesare.Therewasalsoalackoftrendanalysistoidentifyrecurringcomplaintsandissues.Thisincreasedtheriskthatthefullextentof issues would not be uncovered and other impacted customerswouldnotbeidentified.

Forthefewinsurersthatattemptedthisanalysis(ortriedtoidentifytrends),theirabilitytodosowashindered by the lack of robust systems to capture all complaintsandincidents.

There was also a lost opportunity to determine how to preventreoccurrence,whichwasexacerbatedbythelackoffeedbacktofrontlinestaff.

Insurers need to have systems and processes to proactivelyidentify(fromarangeofsources)issuesthatmayrequireremediation.Insurersneedtostoprelyingsolelyonlagindicators,anduseleadindicatorstoprovideinsightsandpositiveassuranceaboutcustomeroutcomes.Itisalsoimperativethatinsurerslearn from previous instances of poor conduct or misconduct.Boardsshouldseekpositiveassurancesfrommanagementaboutcustomeroutcomes,andnot just rely on the absence of reported issues as a measureofeffectivenessoftheinsurer’sconductandculture.

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Life Insurer Conduct and Culture

Treatment of issuesVeryfewinsurershadcomprehensiveframeworks,policies or processes in place to remediate issues (whethertheyoriginatefromcomplaintsorincidents).Insurers generally considered complaints as and when theyarose.Therewaslittleevidenceofproactiveconsiderationofwhethertherewerewiderimplicationsthatrequiredfurtherinvestigation,orefforttoidentifyotheraffectedcustomersandprovideremediation.

There was also some evidence that insurers who use intermediaries did not share the responsibility with theintermediariestoidentify,addressandremediateissues.

Forsomeinsurers,therehasbeenasignificantamountoftimebetweenidentifyinganissueandconcludingtheremediationactivity.Weexpectinsurerstoproactivelyseektoidentifyissuesinasystematicandmethodicalway,andprioritiseremediation.

Issues being remediatedWelookedatissuesthatinsurershadidentifiedandwerecurrently,orhadrecentlycompleted,remediating.Insurersself-identifiedfewissues,andthere was limited evidence of them undertaking remediationwork.Weareconcernedbythisfinding.Ourviewisthatthisislikelytoreflecttheineffectivenessofthecomplaintsandincidentmanagementsystemsandprocesses(whichwesawclearevidenceof)ratherthanalackofissues.Wearenot convinced that insurers had made enough of an efforttouncoverissuesorunderstandhowtheymayarise.Overthecourseofourreviewweidentifiedotherissuesthatinsurershadnotyetremediated.

Mostactivitiesthatinsurersclassifiedas‘remediation’intheirinitialresponseswereinternalprojectssuchasproduct reviews or system upgrades that either were not related to the life insurance business or did not haveadirectcustomerimpact.

Ourreviewidentified16specificactivitiesacross10insurersthatwewouldclassifyas‘remediation’.Thesewereinprogressorhadrecentlybeencompleted,andhadadirectcustomerimpact–ie,mayresultin

the refund of overpaid premiums or a change to the customer’scoverorbenefits.

Eightoftheseactivitieswereidentifiedintheindividualinsurers’originalresponsestoourrequestforinformationandtheremainingactivitieswereidentifiedduringouronsitemonitoringvisits.

Twoofthese16activitieshadbeenfullyquantified,with a total of 92 customers and approximately $31,000inremediationinvolved.Forafurthereightoftheseremediationactivities,insurershadidentifiedthenumberofaffectedcustomersonly(thisrangedfrom3to223).Theremainingsixactivitieswereyettobequantifiedbyinsurers.

While some of these issues had only recently been uncovered,insurershadknownaboutothersforayearor longer and the lack of detail provided appeared toreflectagenerallackofurgencyandattentionbytheinsurers.For12oftheseissues,insurershadnotconfirmedtheirplanandtimeframetoremediate.Wewill be following up on these issues with the individual insurersinourfeedbackletters.

Someexamplesofremediationunderwayare:

• One insurer recently undertook a data cleansing exercisethatidentifiedavarietyofdatadiscrepanciessuchasincorrectdatesofbirth(allofwhichwereduetomanualerrors)thatresultedincustomersbeingoverchargedpremiums.Worktorefundthe30affectedcustomerswaswellunderway.

• Oneinsurerwasgoingthroughremediationactivitieswith a third-party distributor where they had identifiedmisconductintheformofintermediariesmaking misleading statements to customers aboutpremiumpaymentdirectdebits.Anauditidentifiedaround90affectedcustomers.Theagency agreement had since been terminated and the insurer was closely liaising with the distributor toensureallaffectedcustomerswerecontacted.Affectedcustomerswhowishedtocanceltheirpolicywerebeingrefundedthepremiumspaid.

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The majority of issues appeared to have been caused bysystemandprocessweaknesses,orprocessingerrors–withsomerelatedtomanualprocesses.Itisof concern that there is a heavy reliance on manual processes,whicharemoredifficulttooverseeandmorelikelytoresultinerrorsandomissions.

Where we did see evidence of issues related to poor conductandpotentialmisconduct,thesewerelargely(withacoupleofexceptions)drivenbypoorcompanypolicies,notputtingcustomerinterestsfirstandneglectingtoconsidercustomeroutcomes,ratherthantheconductofindividualstaff.Therewere,however,examplesofpoorcustomeroutcomesthatrelatetoboththespecificpoorconductandpotentialmisconductofintermediaries.

Examples of poor conductFrom our review we became aware of a number of instances of poor conduct and some cases of potentialmisconductthatresultedinpoorcustomeroutcomes.Someoftheseexamplesareincludedintheremediationactivitiesnotedabove,butothershadyettoberemediated.Examplesinclude:

• neglectingtoeffectivelynotifypolicy-holdersofincreases to their premiums

• old policies not cancelled when customers transferredtoanewpolicy,andpremiumsstillbeingcharged for the old policy

• sellingofcreditinsurancetopotentiallyineligiblecustomers

• annualinflationratenotappliedcorrectlytocoverand premiums

• premiumscontinuingtobechargedafterthepolicyenddate.

Thefollowingexamplesareworthnoting:

• One insurer’s life product had been sold to foreign customers who were ineligible for the insurance cover(ascoverisonlyprovidedtoNewZealandresidents)andthereforewouldneverbeabletomakeaclaim.

• Oneinsurersentmail-outscontaininginformation

that – for some customers – the insurer knew to beincorrect.Theinsurerhadtakennostepstoadvise these customers they had been provided withincorrectinformation(customersweretoldofbenefitenhancements,buttheinsurerconsideredthesecustomerswerenotentitledtothem).Theinsurerhadtakennostepstopreventincorrectinformationbeingprovidedinfuturecorrespondence.Wewereadvisedthis‘error’wasduetoITsystemconstraints,butthiswasequallyan example of both a lack of investment in systems andafailuretoaddressaknownissue.Evidenceprovided suggested that the insurer may not honour thebenefitenhancementsnotifiedandhasdeclinedclaimsfromaffectedcustomersonthebasisthattheywerenoteligible.

• Oneinsurerhadaone-offsystemerrorthatresultedinanexcessiveconsumerpriceindexincrease(upto30times)beingappliedtothesuminsured,withacorrespondingincreaseincustomers’premiums.The223affectedcustomerswerechargedandhadbeenpayingtheincorrectpremiums.Thisissueoccurred(andwasdiscovered)in2015.Initiallytheinsurerdidnotproactivelycontactthesepolicy-holders,andreliedoncustomersmakingcontact.While customers who received larger increases were quicktocontacttheinsurertohavethiscorrected,many with smaller increases had not made contact andwerecontinuingtopaythehigherpremium.Threeyearsaftertheevent,theinsurerhadyettoremediate111ofthecustomers.

• Oneinsurerwasonlyremediatingcustomersifthey complained about the high premiums for theirfuneralinsurance.Thepremiumsbecomeincreasinglyhardforcustomerstoaffordastheyageand in many cases the total amount of premiums paidwasmorethanthesuminsured.Thesepoliciesdo not have a surrender value and if the policy is cancelled the premiums paid are not refunded backtothecustomer.Theinsurerhadareactiveremediationguidelineinplaceforfrontlinestafftodeal with any complaints from customers about not beingabletoaffordthepremiums.Thiswasofferedonacase-by-casebasis(dependingontheageofthecustomer and how much their premiums exceed the

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Life Insurer Conduct and Culture

suminsured),creatinga‘two-tier’premiumscalebetween customers who complain and those who do not.

• Oneinsurerrequiredadditionaltrainingofintermediaries for their guaranteed acceptance life insuranceproduct,yetthistraininghadnotbeenprovidedtoallintermediariessellingtheproduct.Asaresult,intermediarieswhowerenotadequatelytrained in this specialised product run the risk of misinformingcustomers.Thiswasevidencedbytheextremely high rate of claims being declined for this product.

AnyconductissuesthatresultedinpoorcustomeroutcomesandwarrantfurtherinvestigationandpotentialenforcementactionwillbefollowedupbytheFMA,RBNZortheCommerceCommission,dependingonwhichregulatorcantakeactionundertherelevantlegislation.

Assessment against ARC issuesThereisconcernthatsomeoftheissuesidentifiedbytheARCmayalsobeoccurring(orhavethepotentialtooccur)inNewZealand.SomelifeinsurersoperatinginNewZealandareAustralian-owned,includingsomebyAustralianbanks.Theyarelikelytohavesomecommonalitiesintheirinternalgovernance,policiesandprocedures.

InsurersexpressedconfidencethattheissuesidentifiedbytheARCandotherreportsfromAustralia(suchasFinancialOmbudsmanreportsintoclaimshandling)areunlikelytobeoccurringinNewZealand–oriftheyareoccurring,theyarelesswidespreadandarelikelytobeidentifiedmorequickly.

Weconsiderthisconfidenceismisplaced.Overall,insurers did not know enough about what issues mayexistintheirbusiness,andtherewasinsufficienteffortmadetodiscoverthem.Therewasalsoalackofanalysisoftheirsystems,processesandcontrolsagainstmattershighlightedbytheARCandrelatedinvestigations(suchastheinvestigationintoCommInsure).Justfewerthanhalfoftheinsurerswereviewed had undertaken some form of analysis by the endofourreview.Afewoftheinsurerswerequickto

differentiatetheirbusinessfromtheAustralianmarketbasedonasinglepointofdifference(egtheARCexamplesoffeesfornoservice,targetingvulnerablecustomers,ortheissuesassociatedwithaverticalintegratedbusinessmodeldidnotapplytothem).Basedonthis,theyappearedtoconcludethefindingswerenotrelevanttotheirbusiness.ThispointstoapotentiallackofappreciationamongNewZealandinsurersofthepossibledriversoftheissuesidentifiedinAustraliaorthebroaderimplicationsoftheissuesbeinghighlightedbytheARCfortheirbusiness.

Weexpectallinsurerstoproactivelyreviewtheworkofregulatorsandrelatedinternationalexamplestohelpidentifypotentialconductandcultureissueshere.This includes examining the key themes and issues arisingfromtheARC,anddeterminingwhethertherearesimilarissuespresentorpossibleinNewZealand.Wewillcontinuetoreviewtheirprogressaspartofourongoingmonitoringoftheinsurancesector.

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AspartofthisreviewwesoughtinsightsfromfourexternalstakeholdergroupsthathaveaninterestintheconductandcultureofNewZealandlifeinsurers:

• ConsumerNZ

• FinancialServicesCouncil–Anindustrygroupsthatrepresents10oftheinsurerswereviewed

• Disputeresolutionschemesthathavelifeinsurancesellersoradvisers(orboth)asmembers:

– FinancialServicesComplaintsLimited,

– Insurance and Financial Services Ombudsman

StakeholdersnotedthatthelandscapeandexpectationsaroundconductandculturehavechangedbecauseoftheARC,andthisreview.Theyalsorecognisedthegapsintheframeworkfortheregulationofinsuranceconduct.

Stakeholderstoldusthereiswidevariationinapproachestoaddressingconductrisksacrossinsurersandwithinadviserpractices,andagreedthereisaneedtoraisestandardsacrosstheboard.Theybelievetheindustryrecognisesthisneed,withallFSCmembershavingsigneduptotheFSC’sprinciples-basedcodeofconduct.Thecodeincludesastandardthatrequiresmemberstomanageconflictsofinterest.Stakeholdersbelievetheconflictsofinterestcreatedbysalesincentivesandsoftcommissionsneedtobebettermanaged.

Disputeresolutionwasraisedasanissue.Thequalityofinsurers’internaldisputeresolutionvariessignificantlyacrosstheindustry.Thereisalowcustomerawarenessofdisputeresolutionservicesandcomplaintsprocesses.Poorrecord-keepingbysomeadvisersofthesalesandadviceprocesswasnotedasaproblemthatisoftenuncoveredwhencomplaintsaremade.

Therewasconsensuswithourfindingthatthelackofinsureraccountabilityandoversightofthesellingoftheirproductsthroughintermediariescreatesrisksandshouldbeaddressed.

Wealsoheardthatthecustomer’sdutyofdisclosureisnotwellexplainedorunderstood.Insurerscoulddobetterexplainingthedisclosureduty.Thisisthemostfrequentproblembetweencustomersandinsurers.

Stakeholderswereconcernedaboutthecomplexityofsomeinsuranceproductsandpolicies,andnotedthatalackofcustomerunderstandinggeneratesmanycomplaints.Customer-focused,plainEnglishtermsandconditionswouldalsobeanimprovement.

Feedback from stakeholder groups

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Life Insurer Conduct and Culture

Financial Services Legislation Amendment BillTheFinancialServicesLegislationAmendmentBilliscurrentlybeforeParliament.TheBillwillstrengthentheregulatoryframeworkfortheprovisionoffinancialadviceinNewZealand,includingadviceoninsuranceproducts.Itwillenhanceconductandcompetencystandardsandisaimedatimprovingaccesstoadvice.

However,theseimprovementswillnotchangetheregulationofinsuranceproductsthataresoldwithoutfinancialadvice,norwilltheyintroduceanyconductrequirementsforproductproviders.

Regulatory gaps

Current regulatory environment TheRBNZ,theFMAandtheCommerceCommissionregulatepartsofthewiderinsuranceindustry.

TheRBNZlicensesandregulatesinsurersfromaprudentialperspective,withthepurposeofpromotingthemaintenanceofasoundandefficientinsurancesectorandpromotingpublicconfidenceintheinsurancesector.UndertheInsurance(PrudentialSupervision)Act2010(IPSA),insurersmustbesubjecttoandcomplywithariskmanagementprogramme,amongstotherrequirements.

Insurerconductisonlyregulatedindirectly,throughtheregulationoffinancialadvice.TheFMAauthorisesandmonitorsAFAs,andapprovesandmonitorsQFEswhomayprovideadviceinrelationtolifeinsurance.TheFMAalsoenforcestheprohibitionondeceptiveormisleadingconductinrelationtofinancialproductsandservices15whichincludeslifeinsuranceproducts.

TheCommerceCommissionenforcessomelegislativeprovisionsrelatingtothesaleofcredit-relatedinsurance16.

The Courts have found that a mutual duty of utmost goodfaithisimpliedineveryinsurancecontract.Both insurers and customers are therefore expected to act in good faith towards one another at all points throughoutthelifecycleofaninsurancepolicy.

WhiletheRBNZ,theFMAandtheCommerceCommissionregulatepartsoftheinsurancesector,noregulator has oversight of insurers’ and intermediaries’ conductovertheentireinsurancepolicylifecycle.Inparticular,therearecurrentlynospecificconductrequirementsorobligationsoninsuranceproductproviders.Thereisalsoinconsistencyintheprotectionsavailable for products sold with and without advice andnooverarchingobligationtoprotectorenhancecustomerinterests.TheseconductregulationgapswerenotedbytheInternationalMonetaryFund(IMF)

15:UnderPart2oftheFinancialMarketsConductAct2013

16:UndertheCreditContractsandConsumerFinanceAct2003.Credit-related insurance is insurance connected to a consumer creditcontractorconsumerlease.

in its assessmentofNewZealand’sfinancialsystem in April2017.

Regardlessofthesegapsintheregulationofinsuranceconduct,weconsiderthatinsurersshouldhaveagenuinefocusonimprovingcustomeroutcomes,ratherthansimplydoingtheminimumrequiredtocomplywiththelaw.Theresponsibilitytomakechangerestswiththeinsurers.However,closingtheregulatorygapswouldgiveustheabilitytomonitorimprovements,andprovideoptionsforenforcementwhereweseenon-compliance.

TheGovernmenthasincludedconsiderationofconductregulationofinsuranceaspartoftheMinistryofBusiness,InnovationandEmployment’s(MBIE)currentreviewofinsurancecontractlaw.MBIEhascompletedinitialconsultationontheirreview.TheMinisterofCommerceandConsumerAffairshasindicatedfuturedeliberationswillincludethefindingsfromthisreview.

Review and recommendations Fromaprudentialperspective,thisreviewhasnotidentifiedanynotableregulatorygaps.However,itdoessuggesttherewouldbebenefitinprogressingsome of the enhancements being considered in the currentRBNZreviewofIPSA,induecourse.TheIMF’sFinancialSectorAssessmentProgrammealsoincludedseveralrecommendationsfortheRBNZandtheFMA,

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whichhaveimplicationsforconductregulation.ThesearebeingconsideredaspartofMBIE’sreviewofinsurancecontractlaw,andwhererelevant,mayalsobeconsideredaspartoftheIPSAreview.

ProposedchangestoIPSAthatmayhaveadirectimpactonconductregulationincludeareviewofoverseasinsurers,whichwillconsiderthetreatmentofforeignbranchandsubsidiaryoperationstobalanceoverseasparticipationintheNewZealandmarketwithNewZealandpolicy-holders’andwidereconomicinterests.Therewillalsobeareviewoftheexistingstatutoryfundsframework.Thiswillconsiderwhetherthe framework should be expanded and whether thecurrentexemptionsremainappropriate.GeneraldisclosureandFinancialStrengthRatingsdisclosureswillalsoformpartoftheIPSAreview.

Fromaconductperspective,weconsidertheregulatorygapsnotedbytheIMFhavecontributedto the general lack of maturity in the life insurance sector’sunderstanding,governance,managementandremediationofconductrisk,andthesubsequentculturalweaknesses.Theyhavealsocontributedtoinsurers’ lack of oversight and responsibility related to intermediaries,andagenerallackoffocusoncustomeroutcomes.

In our review of conduct and culture in the retail bankingsector,weoutlinedsomeareaswherethe government may wish to consider addressing

regulatorygaps,toincentivisebankstodevelopandmaintainappropriatemanagementofconductrisk.

Giventhesimilaritiesinthenatureofthefindings,thedriversofriskandthebenefitsofhavingconsistentframeworksacrossregulatedpopulations,weconsidertheseareasmaybeequallyrelevanttolifeinsurance.Assuch,thegovernmentmaywishtoconsiderthefollowing:

• Establishingbasicdutiesonlifeinsurerstoprotectandenhancecustomerinterestsandoutcomes,regardlessofthedistributionchannel.

• Requiringlifeinsurerstohaveadequatesystemsandcontrolstogovern,manageconductrisk,andremediateissues,inalldistributionchannels,andthroughthelifeinsuranceproductlifecycle.

• Reviewingwhethertheregulatorshavesufficientsupervision and enforcement powers and resources toensurelifeinsurersmeettheseobligations,includingrequiringbetterinformationonconductissuesorrisks,andtheoptionofpenaltiestoincentiviseappropriatebehaviour.

• Clarifying accountability and individual responsibility formanagementofmisconduct,includingthepotentialfordirectliabilityforseniormanagers.

Weappreciatethatfurtherpolicyworkwillberequiredtofullyexplorealloptions.

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Life Insurer Conduct and Culture

Appendix:Backgroundtothereview

Globallyoverthepastdecade,therehavebeensignificantconcernsaboutweaknessesinlifeinsurers’governanceandriskmanagementframeworks,andinappropriate behaviour in the industry that has ledtopoorcustomeroutcomes.InresponsetoaseriesofknownmisconductincidentsbyAustralianfinancialserviceproviders,theARCwasestablishedinDecember2017.SomeexamplesofthetypesofmisconductidentifiedbytheARCrelevanttolifeinsurance include:

• incentivesforsalesstaffandadvisersconflictingwithgood customer outcomes

• lackofabilitytoreviewanddetectpoorfinancialadvice provided to customers

• misappropriationofclientfundsandforgedcustomer signatures

• limitingthescopeofservicesprovidedtominimiseregulatoryrequirements

• failuretomaintainandkeepappropriaterecords,hinderingtheabilitytomonitorcustomeroutcomes.

TheFMAandRBNZareconcernedabouttheimpactthat the evidence of widespread misconduct in AustraliacouldhaveonconfidenceinNewZealand’sfinancialinstitutions.Equally,weareconcernedaboutthe risk of complacency in the industry with respect to theseconductandcultureissues.Rightly,thelevelofpublicconcerninAustraliahasraisedpublicquestionsandspeculationaboutwhethertherearesimilarissuesinNewZealand.

Risks to customersInsurershavemultiplestakeholders:customers,shareholders,employees,intermediariesandthepublic.Insurersneedtobeawareof,andresponsiveto,theircustomers’needsandunderstandingofinsurance,andtailortheirconductaccordingly.

Customers have a responsibility to act in their own interestandmakegooddecisions.However,ourviewis that insurers should think about how their conduct supportscustomers,includingbyprovidingthemwiththenecessaryinformationandunderstandingtoexercisethatresponsibilityproperly.Allcustomers,

regardlessoftheirlevelofknowledge,areentitledtoexpectgoodconductfromtheirinsurer.

Deliveringfinancialservicescomeswithchallengesandrisks,particularlyduetoinformationasymmetryandconflictsofinterest.Informationasymmetryoccurswhenonepartyholdsmoreinformationthananotherparty,andcanusethatinformationtotheiradvantage.Thisisparticularlytruewithinsuranceproducts,where customers are typically reliant on the provider providinginformationsothattheyunderstandtheproducts.

Anotherinformationasymmetryexistsforlifeinsurance.Thecustomeratthetimeofsalewillknowmoreabouttheirhealththantheinsurer.Iftheydonotdiscloseinformationtheinsurerconsidersrelevant,the insurer can cancel the contract when the customer makesaclaim.

Conflictsofinterestcanarisefromhowstaffandintermediariesareincentivised.Iftheyareincentivisedtoprioritisesellingcertainproductsorreachingsalestargets over addressing customers’ needs there is a conflictofinterest.Theymayrecommendorsellaproductthatisnotsuitedtothecustomer’sneeds.

Itisdifficultforcustomersandinsurerstoknowatthepoint of sale if a product will be suitable to meet their needsinthelongerterm.Additionally,anyharmcausedbypoorproductdesign,orbyinappropriatesalesoradvice,maynotbecomeapparentuntilyearslater(perhapswhenaclaimismade),ifatall.Poorconductormisconductbyinsurerscanhaveasignificantimpacton customer outcomes: customers may have insurance theydonotneedorcannotafford;customersmayhaveinsurance that does not give them the cover that meets theirneeds(coverthattheythoughttheyhad).

When an insurer does not demonstrate good conduct andculture,theircustomersfacearangeofrisks,suchas:

• Theinsurerprioritisesitsowninterestsoverthoseofthecustomer.

• The customer is not treated with professional standardsofcare.

• The cost of the insurer’s product or service is not reasonable,andmayreducethereturnorbenefit

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customersgetfromit,tothepointwherethecustomer’sneedisnotmet.

• Thepurpose,benefitsandrisksoftheservicesandproducts,andtheirsuitabilitytodifferenttypesofcustomers,arenotcleartocustomers.

• Customersdonotunderstandhowstaffperformancebenefitsoranyarrangementswithrelatedpartiesimpacttheproductorservicetheyarereceivingfromtheirinsurer,andmakepoorfinancialchoicesasaresult.

• Customerclaims,feedbackandcomplaintsarenotdealtwithappropriately,resultinginadverseconsequencesforcustomers.

What is conduct and culture?Atitsmostbasiclevel,conductishowpeoplebehave.Standards,systems,processesandcontrolsareallnecessary,buttheyarepredictableandcanbeexploitedbyinappropriatebehaviour.

Fromourperspective,culturereferstothesharedbehaviours,valuesandnormsoftheindividualsandgroupswithinanorganisation.Aninsurer’scultureisoneofthekeydriversofitsconduct.Italsodetermineshowpeopleidentify,understand,discussandactontherisksthattheorganisationfaces.

What does ‘good’ conduct and culture look like?

Whenwethinkaboutwhat‘good’lookslike,wearelooking at insurer behaviour from the point of view of customers.Therefore,goodconductaimstoachievegoodoutcomesforcustomers(policy-holders).Agoodoutcome is where the cover provided by the insurance isunderstoodbythecustomer,andmeetstheirneedsandreasonableexpectations.

Ahealthycultureisonewherestaffareencouragedand expected to behave in a way that improves customeroutcomes.

Settingandembeddingcorporatevaluesistheroleofboardsandmanagement,notregulators.However,there are broadly applicable principles that should underpinthecultureofallinsurers.

The2017publication“AguidetotheFMA’sviewof conduct”(FMAConductGuide)containsguidancerelevanttoallfinancialserviceproviders(eventhosenotlicensedbytheFMA),includingthisprofileofgoodconduct.

Weexpectfinancialserviceproviders,includinginsurers,tohavecomparedtheirconducttotheprinciplesintheFMAConductGuideandtakenactionwhere their conduct falls short of what is set out in the guide.Thisexpectationwaswidelycommunicatedatthetimetheguidewaspublished.

ACT IN THE CUSTOMER’S INTEREST

PARTICIPANTS HELD ACCOUNTABLE

GOOD CONDUCT

qualitybehaviours

professionalstandard of care

fair dealing

governance, risk management

CONTROL

demonstration, evidence, disclosure, assurance

COMMUNICATION

customer & business strategy alignment

CONFLICT

knowledge, experience, competence

CAPABILITY

leadership, behaviour

CULTURE

board & executive management

ACCOUNTABILITY

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Life Insurer Conduct and Culture

Scope and methodologyTheoverallobjectiveofthisreviewwastounderstandwhether there are widespread conduct and culture issuespresentinlifeinsurersinNewZealand.Thisreportis‘thematic’innature;thatis,ourfindingsaredescribedinrelationtogeneralthemesrelevanttoourobjectiveofthereview.

On16May2018,theRBNZGovernorandtheFMAChiefExecutivemetwiththeboardoftheFinancialServicesCouncil.AtthemeetingtheFMAandRBNZreiterated the view that the nature and extent of the issueswithinfinancialservicesinAustraliaandtheobviouscross-overintermsofentities,peopleandpracticesintoNewZealanddemandsastrongresponsefromtheindustryhere,andfromtheregulators.

Followingthemeeting,theRBNZandtheFMA,withthesupportoftheCommerceCommission,wrotetotheChiefExecutivesof16lifeinsurersinMay2018.Theletterwaspublished.Itstated:

“Ourobjectiveinthisexerciseistounderstandwhat work you have undertaken to review your operationstopromptlyidentifyandaddressanyconductandcultureissues.Weexpectyouto show us what you have done in order to be comfortable that there are no material conduct issues within your business … The purpose of this exercise is for us to understand how you have obtained assurance that misconduct of the type highlightedinAustraliaisnottakingplacehere.”

Responseswerereceivedfromall16insurers.Weassessedtheinformationprovided,seekinganswerstothefollowingquestions:

• What conduct and culture risks and issues are presentinNewZealandlifeinsurers?

• Whatgovernance,frameworks,processesandcontrols are in place to achieve good conduct and culture,andtoeffectivelymanageandremediateany conduct and culture issues or risks?

• Arethereareaswithintheframeworkforregulationof life insurers where we consider there are regulatoryorsupervisorygapsorinefficiencies?

• Whatareourrecommendationstodealwiththesegapsorinefficiencies?

Weundertookfurthermonitoringactivitywiththeinsurerstovalidatetheinformationprovided.Aspartofthiswereceivedadditionaldocumentsfromtheinsurers,andinterviewedstaff,includingfrontlinestaff,management,seniorexecutivesandsomedirectors.

Additionally,wesoughtinsightsfromfourexternalstakeholders that have an interest in the conduct and cultureofNewZealandlifeinsurers(seepage30).Wealsoconductedasurveyoffinancialadviserswhodistributelifeinsurance.

Limitations of our review

Weundertookthereviewoverafive-monthperiodusingexistingresourcesoftheRBNZandFMA.Ourreview was limited to the documents provided by insurersandinformationfrominterviews.Wedidnotseekinformationdirectlyfromcustomers,butwhereappropriatewedidconsiderinformationthatcustomershadprovidedtoFMAviaenquiriesorcomplaints.

Life Insurer Conduct and Culture

36

Insurer Ultimate parent Country of parent

AIAInternationalLimited(tradingasAIANewZealand)

AIAGroupLimited HongKong

AmericanIncomeLifeInsuranceCompany TorchmarkCorporation USA

AMPLifeLimited AMPLimited Australia

AsteronLifeLimited Suncorp Group Limited Australia

BNZLifeInsuranceLimited(BNZBank) NationalAustraliaBankLimited Australia

CignaLifeInsuranceNewZealandLimited CignaCorporation USA

Co-operativeLifeLimited(Co-operativeBank) TheCo-operativeBankLimited NewZealand

FidelityLifeAssuranceCompanyLimited FidelityLifeAssuranceCompanyLimited NewZealand

KiwiInsuranceLimited(KiwiBank) KiwiGroupHoldingsLimited NewZealand

MedicalLifeAssuranceSocietyLimited MedicalAssuranceSocietyNewZealandLimited

NewZealand

OnePathLife(NZ)Limited(previouslyownedbyANZBank)

CignaCorporation EntitycombinedwithCigna30November2018

USA

Partners Life Limited PartnersGroupHoldingsLimited NewZealand

Pinnacle Life Limited Pinnacle Life Limited NewZealand

SouthsureAssuranceLimited(SBSBank) Southland Building Society NewZealand

SovereignAssuranceCompanyLimited AIAGroupLimited HongKong

WestpacLifeNZLimited(WestpacBank) WestpacBankingCorporation Australia

Life insurers ThereviewfocusedonNewZealandinsurersthatissue(ieunderwrite)lifeinsuranceproducts.Someinsuranceproviders sell life insurance products that they do not issue–sometimesundertheirownbranding.Theyarenot the actual life insurer entering into the contract

withthepersonbeinginsured.Theseinsuranceprovidersareexcludedfromthisreview.

Our review involved the insurers detailed in the table below.Theseinsurersvaryintermsoftheirsize–from less than $15 million to over $700 million annual incomefrompremiums.

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Life Insurer Conduct and Culture

Glossary

Term Definition

AccidentalDeathBenefit Abenefitpayableasaresultofdeathbyaccident(ienon-naturalcauses).

Adviser(Financialadviser) Providesfinancialadvicetoconsumers.IncludesAFAs,RFAsandQFEAdvisers.

AFA(AuthorisedFinancialAdviser) AnindividualfinancialadviserauthorisedbytheFMAtoprovidepersonalisedadviceonmosttypesoffinancialproducts,includinginsurance.Canalsobelicensedtoprovideinvestmentplanningservices.

Annualpremium Theamountofmoneypaidannuallytotheinsurerforinsurancecover.

Bank insurer Aninsurertypicallyownedbyabank(orinagroupofcompanieswithabank)anddistributingproductsthroughthebank.

IMF(InternationalMonetaryFund) Aninternationalorganisationwhichworkstosecurefinancialstability,facilitateinternationaltradeandpromotehighemploymentandsustainableeconomicgrowth.

Insurer Theinsurancecompanythathasunderwrittenandissuedthepolicy.

Intermediary Apersonorentitywhositsbetweenaninsurerandacustomer,andpromotesorfacilitatesaninsurancecontractbetweenthem.Intermediariesincludethird-partyadvisers,banks(includingbanksthatareinthesamegroupofcompaniesasaninsurer),otherinsurers,andorganisationsthatarrangegroupinsurancefortheiremployeesormembers.Someintermediariesworkforjustoneinsurer.Othersdistributeproductsofmultipleinsurers.

InternationalAssociationofInsuranceSupervisors(IAIS)

Avoluntarymembership-drivenstandards-settingorganisationofinsurancesupervisorsandregulatorsfromover190jurisdictionsinmorethan140countries.

Non-life insurers Forthepurposesofthisreport,non-lifeinsurersreferstofireandgeneralinsurers,andhealthinsurers.

RFA(RegisteredFinancialAdviser) AnindividualadviserwhoisregisteredontheFinancialServiceProvidersRegisterbutwhoisnotauthorisedbytheFMA.Cangivepersonalisedadviceonmostinsuranceproductsincludinglifeandhealthinsurance,andnon-personalisedKiwiSaveradvice.TheyarenotpermittedtogiveadviceonmorecomplexfinancialproductssuchasKiwiSaver,bonds,shares,managedfundsandderivatives.

Trauma insurance Abenefitpayabletotheinsuredupondiagnosisofoneofarangeofspecifiedillnessesorconditions,egcancerorstroke.

QFE(QualifyingFinancialEntity) AbusinesstowhichtheFMAhasgrantedQFEstatus.Thebusinesstakesresponsibilityforthefinancialadviceprovidedbyitsemployeesandnominatedrepresentatives,withoutthosepeoplehavingtoregisterindividuallyasadvisers.

Underwriting Thetaskofassessinganddeterminingtheriskofprovidinginsurancecover.