17 September 2019

FMA and RBNZ disappointed with insurers’ response to conduct and culture review

Media release
MR No. 2019 - 48
17 September 2019

The Reserve Bank of New Zealand (RBNZ) and Financial Markets Authority (FMA) today released their findings on life insurers’ responses to the joint Conduct and Culture Review.

Overall, the regulators were disappointed by the responses. Significant work is still needed to address the issues of weak governance and ineffective management of conduct risk identified in the regulators’ report earlier this year.

Rob Everett, FMA Chief Executive, said: “While we’re disappointed, we’re not surprised as the responses confirm what we found in our original review. It’s clear that progress has been slow and not as far-reaching as required. Some providers have started work to identify the customer and conduct issues they face, others have not provided any detail on this.”

Sixteen life insurers were asked to provide work plans outlining the steps they will take to improve their existing processes and address the regulators’ findings and recommendations.

There was wide variance in the comprehensiveness and maturity of the plans provided.

Adrian Orr, Reserve Bank Governor, said: “We’re disappointed the industry’s response has been underwhelming. The sector has failed to demonstrate the necessary urgency and prioritisation, around investment in systems, to provide effective governance and monitoring of conduct risk.”

There was also a wide variance in the quality and depth of the systematic review of policyholders and products. Some did not complete this exercise and others did not provide data on the number of policyholders affected or the estimated cost of remediation activities. Insurers that completed the exercise identified at least 75,000 customer issues requiring remediation, with a value of at least $1.4 million. Some of the new issues identified included:

  • Overcharging of premiums and benefits not being updated due to system errors, human errors and under-reporting of deaths
  • Poor customer conversations overlooking eligibility criteria and poor post-sale communications, which lead to declined claims and underpayment of benefits
  • Poor value products were identified, where premiums charged were not fair value for the cover provided.

Sales incentives and commissions

The FMA and RBNZ committed to report back on staff incentives and commissions for intermediaries. Previous reports by the FMA reflected the concerns with conflicted conduct associated with high up-front commissions and other forms of incentives, (like overseas trips) paid to advisers.

Although some insurers have committed to removing sales incentives for employees and their managers, not all committed to removing or altering indirect sales incentives.

Those providers that have removed sales incentives for employees don’t typically use external advisers to distribute products. Providers using external advisers told the regulators that changing long-held business arrangements and distribution models is difficult and will take time to implement.

Mr Everett said: “We’re ready to work with life insurers to ensure they prioritise their focus on serving the needs of their customers, while at the same time balancing the need to remunerate advisers for the important work they do to help these customers. But we do not think high up-front commissions create confidence that insurers and advisers are acting in the best interests of customers.”

Mr Orr said, “Good governance within insurance firms requires the effective management of conflicts of interest. We need to see much better systems and controls in place to manage the inherent conflicts where advisers or sales staff are offered incentives to sell or replace insurance policies.”

Next steps

Those companies that have not undertaken comprehensive systematic reviews of policyholders and products have been asked to complete further reviews of their systems to identify issues, and to develop mature plans to respond and remediate any of their findings. These plans must be completed by December 2019.

The FMA and RBNZ will continue to monitor how the insurers are responding to recommendations and implementing their work plans. Life insurers are currently not legally required to become more customer-focused and the FMA and RBNZ found that the sector has a weak appetite for change.

Deficiencies in some of the plans received, and some insurers’ lack of commitment to implementing the regulators’ recommendations, further demonstrates the need for additional obligations to be included in the regulation of conduct of life insurers.


Louise Nicholson 
Director, ECIC
027 495 9366
Brendan Manning
Senior External Communications Adviser
021 923 217