29 June 2016

FMA releases report into insurance sales and advice: Insurance replacement business - who benefits?

Media release
MR No.2016 – 15
29 June 2016

The Financial Markets Authority is calling for cooperation from the life insurance industry and financial advisers to address the potential harms to consumers from the relatively high levels of switching of existing insurance policies.

The FMA today released its first report into sales practices within the life insurance industry. The report shows that of the $1.7bn New Zealanders spent on annual life insurance premiums in the year to 30 June 2014, a significant number of existing policyholders were switched between providers. This switching activity is called ‘replacement business.’

The report uses extensive data from 12 life insurance providers, gathered and analysed over the past 12 months. It focuses on replacement business sold through either authorised or registered financial advisers (AFAs and RFAs, respectively). The review focused on this distribution channel because advisers sold over 40% of the policies in force in June 2014; and because there is a higher risk of churn in this group, because they generally sell policies from more than one provider.

As a risk-based regulator, the FMA analysed providers’ data to discover whether there are high levels of replacement business, where this is occurring and what factors might be driving those levels.  Replacement activity carries the highest risk of potential so-called ‘churn’, where the switch is primarily done to benefit the adviser and not the consumer.

Good financial advice is an important feature of the life insurance sector. The FMA acknowledges there are many reasons for advisers to consider it is beneficial to their clients to recommend a change in life insurance policy.  However the high proportion of replacement business compared to new business in NZ - and its concentration among a sub-section of financial advisers indicates that the drivers of these behaviours and the impacts on consumers need to be examined.

The FMA report reflects that current remuneration structures used by the insurance providers present the risk of conflicts of interests that may harm consumers and could negatively affect the overall price, and therefore accessibility, of life insurance to New Zealanders.

The FMA is highlighting the risks associated with replacement business, both to ensure that providers and advisers properly consider the risks of potential conflicts of interest and to enable consumers to make more informed decisions when they are considering a recommendation from their adviser to replace their existing policy.

The FMA’s Director of Regulation, Liam Mason, said, “We saw that the majority of advisers do not have high levels of replacement business, regardless of the way they are paid for their services.

However, there is a clear link between high rates of replacement business in certain areas and high up-front commissions, or incentives for high sales volumes, such as overseas trips laid on by providers.”

The report’s findings include:

There are 8,200 RFAs and AFAs in New Zealand.  Of those, 3,700 advisers sold at least one life insurance policy that was active in 2014.

Among the 3,700 with at least one active policy, 1,100 had more than 100 active life policies on their books.

Of the 1,100 with more than 100 active life policies, 200 met the FMA’s criteria for a high estimated rate of replacement business.[i]

In June 2014, those 200 advisers:

  • had 65,000 active policies between them, involving about $110m in annual premiums
  • and earned almost 50% more from commissions on life insurance than other high-volume advisers.

On average, RFAs had higher rates of replacement business than AFAs. About two-thirds of the high-volume advisers, and 86% of the high-replacement advisers, were RFAs. Some RFAs replaced more than 35% of their life policies in one year.

The data compiled and the analysis undertaken has enabled the FMA to discuss these issues with providers and advisers.

“Following our report, FMA staff will be taking a closer look at the conduct of those advisers with the highest volumes of replacement business as the next stage of this work,” Mr Mason said.  “We will be examining the basis on which policies have been switched or replaced and the drivers for that activity – with a particular reference to incentives (of whatever form) provided by insurance providers.”

“As a conduct regulator, our focus across the entire financial services industry is to ensure that customers’ interests are always at the centre of a business operation.  So we will be paying particularly close attention to the behaviour of insurance advisers where it is unclear that the appropriate care, diligence and skill are being provided to their customers,” Mr Mason said.

The findings from the report have been provided to the Ministry of Business, Innovation and Employment to consider as part of its review of the Financial Advisers Act. The FAA review has been examining similar issues identified in this report including conflicts of interest, licensing and disclosure.

The FMA has also used data and insights from the report to provide tips and hints on its website to help consumers to make decisions, especially when they are considering recommendations to change their life insurance.

A full copy of the report may be found here.



In May 2015 the FMA requested four years of data from the 12 main insurance providers in New Zealand. The data was from April 2011 to March 2015 and included four types of cover: life, trauma, income protection, and total and permanent disability (TPD).

The methodology used to evaluate the data is available here.

According to providers, the overall number of life insurance policies held by New Zealanders grew at under 2% each year for the period of the FMA review, from 2011-2015. During that period the providers classified up to 13% of policies held with them as ‘new’. This indicates that most ‘new’ polices are likely to be replacement business where one policy is switched for another.


Andrew Park
09 967 1215
021 220 6770
[email protected]

[i] The FMA defines a ‘high’ rate as when:

  • at least 12% of an adviser’s policies lapsed, and the adviser writes at least 12% of policies as new business, within one year, or
  • at least 40 of an adviser’s policies lapsed in a single month and the adviser writes at least 40 new policies in the same month.