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FMA review prompts insurers to refund customers they over-charged and remove shonky products from the market; Poor performers unnamed and not prosecuted

Insurance
FMA review prompts insurers to refund customers they over-charged and remove shonky products from the market; Poor performers unnamed and not prosecuted
FMA Director of Banking and Insurance Clare Bolingford

Several insurers are withdrawing shonky products from the market and refunding thousands of customers they over-charged, following pressure from the Financial Markets Authority (FMA).

The FMA has just released scathing findings of a conduct and culture review into the fire and general insurance sector.

In mid-2019, the regulator asked providers of house, contents, vehicle, travel, commercial, liability and health insurance to review their operations.

It did so on the back of a more robust review of the life insurance sector, prompted by Australia’s high-profile Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Policyholders ripped off

Only two of the 42 general insurers in the FMA’s review met its expectations at a high level.

Twenty-two companies followed its instructions and specifically reviewed their products and policyholders’ portfolios. Of these, 18 had major issues.

The FMA said a number of insurers were selling poor-value or legacy products and weren’t monitoring how suitable these products were for customers as their circumstances changed.

The FMA found some insurers were charging customers more than the agreed premium, and weren’t applying multi-policy discounts and no-claims bonuses. Late payment fees were being unjustifiably charged and customer data was found to be inaccurate.

“The basic requirement that premiums are accurate, transparent, administered correctly and with value communicated to the customer has clearly not been met in a number of situations,” the FMA said.

“Several insurers now have large-scale remediation activity underway as a result of our reviews.”

The FMA couldn’t tell interest.co.nz roughly how much insurers were refunding customers in total.

Poorest performers unnamed and not prosecuted

The FMA concluded the sector isn’t ready for the conduct licensing regime that’s expected to take effect in early-2023, once the Financial Markets (Conduct of Institutions) Amendment Bill is passed.

FMA Director of Banking and Insurance Clare Bolingford told interest.co.nz she hoped the review would help prepare them.

She said performance was mixed across the range of business models, ownership structures, and product offerings represented by the 42 insurers in the review.

While the FMA didn’t name poorest performers, it credited IAG (the country’s largest general insurer, which owns the State, AMI, NZI and Lumley brands and underwrites insurance sold by a number of banks) and Medical Assurance Society for meeting its expectations.

Bolingford said the FMA was still collecting information from insurers and couldn’t yet say whether it would pursue prosecutions.

These would have to be done under existing legislation, like the Financial Markets Conduct Act, as the FMA doesn’t yet have the power to specifically prosecute for poor conduct.

It’s worth noting the review was a “desk-based” one, meaning the FMA’s findings are based on the information given to it by insurers. By contrast, the life insurance review involved the Reserve Bank, interviews and on-site visits.

Volume-based sales incentives particularly an issue for intermediaries

Looking further at the FMA’s findings, it noted there was room for improvement when it comes to commissions and sales incentives.

Of the 36 insurers that did as they were asked and provided explanations on the topic, 28 said they had removed, or had committed to removing, volume-based sales incentives for internal staff.

The FMA found sales incentives for intermediaries weren’t being addressed as proactively.

“Insurers need to take ultimate responsibility for whether or not customers are experiencing fair outcomes from their products, regardless of how they are sold,” the FMA said.

A tick-box exercise

More generally speaking, the FMA said: “The tone of some of the responses suggested that a number of insurers did not consider conduct and culture to be relevant to their organisation, treating the task as a tick-box exercise rather than an opportunity to genuinely evaluate their business.

“A number of insurers said they were comfortable that they did not have any conduct issues, despite not assessing their organisation in any meaningful way.

“At least three insurers appeared to only undertake the actions and exercises requested by the FMA in December 2020 when we followed up on our initial request…

“At least nine insurers recognised customer vulnerability as a key issue. Often this involved defining a vulnerable customer in the context of their business or carrying out workshops to gain insight from frontline staff to help develop a framework to address vulnerable customers. One insurer developed specific guidance for staff.

“Several intermediated insurers addressed the issue of vulnerability poorly, appearing to consider it not applicable in situations where they did not have direct contact with customers.”

Conduct risk ‘material’

On the issue of governance, the FMA said: “Boards must set the tone from the top, developing a culture that balances the interests of shareholders with those of customers, and establishing an appropriate risk appetite that acknowledges conduct risk is material.”

Insurers included in the review

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30 Comments

Which two passed?

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'it credited IAG (the country’s largest general insurer) and Medical Assurance Society for meeting its expectations.'

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My understanding is that IAG is a number of brands including State, AMI, NZI (all biggies) and NAC, and that it underwrites products through a number of banks including BNZ, ASB, Westpac and Co-operative Bank . . . what most would see as a number of "insurers" and assume that all of these are included.
Is this correct?

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Correct. Australian owned IAG and Suncorp are the insurers behind most of the domestic brands we are familiar with. Many of these bands are simply 'white label' fronts for products and services underwritten by these two biggies: with some variations in ownership eg AA insurance which is a JV between Suncorp and the AA. MAS is a small player, FMG is largely niche rural and effectively the front of house label for its reinsurer backers. Tower provides some competition but suffers from lack of scale in a business where spread of risk and access to big data are key determinants and is also up against the reinsurance buying power of these Aussie competitors and their ability to set the cost at which they allocate this RI capacity to their NZ subsidiaries. These issues present significant barriers to NZ entry as youi and others discovered. We effectively have only two insurers who are price makers and NZ suffers from this lack of competition through insurer inefficiency. Because they can get away with it. This investigation also revealed the Aussies underinvest in their NZ arms, implying this non compliance is one of the outcomes. This despite their NZ businesses generally generating returns superior to their Oz businesses. They'd not get away with it in Aussie.

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Middleman
Thanks

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Thank God these insurers were named so consumers can choose insurers who they feel are ethically inclined, because not naming them would certainly suggest that there is no retail consequences for said behaviour and nor should there be.

Oh, wait.

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In regard decisions to prosecute or not, I would be happy if we saw a statement along the lines of "Due to the immediate resignations of CEO Joe Bloggs, HR Director Jane Doe, and CFO Bean Counter, we have decided not to prosecute ABC Insurance Ltd"

Now that would be a proper deterrent to shonky behavior.

It's not the company that does the dodgy stuff, but certain managers. And in just about every example I have witnessed it is someone chasing their bonus.

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Hmmmm
At least we know IAG passed, so that's something

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Names surpressed to protect the guilty. You can see who has control here.

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IAG and MAS named as good. The bads we will not be told.

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Yep so rightly expect widespread migration to them

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I wish I could say I'm shocked. Currently fighting a 37.5% increase on home insurance for a Wellington property (on rock, on a hill) that already had a 258% rise after the 2016 quake. It's at the point where we're dialing back the excess and dropping cover to keep the charge under control.

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This will be in part due to insurers moving away from using premiums from less risky places to subsidise premiums of high risk places. It's manifestly unfair for Northland insurance customers to pay the same premiums as Wellington customers despite Wellington customers having higher risk in practically all areas than Northland. Hill properties have higher risk of landslide (rock slides too) due to heavy rain plus the risk from earthquakes.

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Correct, and I will note that increased insurance premiums as a result have already prompted vague hints of government action around.... something, but it strongly suggested the risk pricing would be spread if the outcomes were too punitive to Wellingtonians.

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Following the CHCH and Kaikoura EQs insurers now have sophisticated data and models enabling them to forecast with much improved accuracy what the big one in wellie will cost and to break that down by suburb and construction type. How does more accurately allocating the cost of that risk become 'punitive'?. In fairness to all buyers of insurance, premium rates should represent actual risk as proportionately as possible. Rejecting this approach as punitive would see remote rural homeowners enjoying a cross subsidy from city dwellers, Toyota Camry drivers paying a loading to lighten the burden on Audi owners etc. Socialisation of the cost of risk as happens through EQC discourages mitigation, reducing societal resilience.

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Fully aware of this, yes, although my property is definitely not in a precarious position - by "on a hill" I mean it's elevated so not prone to inundation, not on poles hanging over a gorge. Insurance is becoming more granular, but only insofar as it meets the insurer's needs, not those of the insured party.

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Yip. Better in the old days of less differentiated data for those with notional higher risk factors. Improved granularity of data now working against you. Compounded by the approach insurers are these days taking to underwriting; mostly generic system driven. They now often don't have the local knowledge based ability to make meaningful distinction between average and better risk profiles of superficially similar houses and locations despite their experience in ChCh and elsewhere teaching them that damage outcomes can be very different.

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Once your mortgage free you no longer need home insurance. It comes down to many factors when you do your own risk assessment, location, age of the build, height above sea level etc. Life is about risks, if you try and insure everything your going to be broke. Home contents is the biggest ripoff, insure just the house.

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Westport homeowners currently dumping their sodden carpets and furniture might have a different view.

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Insurance companies for house and contents need a common T&Cs template imposed on them to which they can add but not reduce. Cuts out some poorly worded clauses that gives insurance companies an opportunity to reject claims knowing they have the muscle to fight it in court. Could include EQC in this. Hang on they are part of the govt so we know how they have managed to wriggle out of claims.

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I recently saw an example of a man in his late 80's, in a rest home with diminished capacity still being charged the earth for accidental death insurance. Yes, there is some responsibility on his family/attorneys but there must come a point where the insurance company says, 'hey, there is absolutely no need for this policy to be in place'

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You mean like when ISPs keep you on a slow plan at the same price as a fast plan because you didn't ask for the upgrade?

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Bloody hell...
Confirms again, if needed, that kiwis are getting fleeced left, right and centre.

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There should be a conduct review on distinctly shady behaviour from clients too, from experience I suggest the following all too common points:

1. Non-Disclosure, Incomplete Disclosure, and Downright lies.
2. Failure or refusal to read (or pretend to misunderstand) policy wordings and supporting documentation.
3. Fraudulent claims, or time wasted trying to claim outside policy wordings and timeframe.
4. Attempting to claim for betterment (i.e. claiming for more than the value lost).
5. Next version release iPhone claims (oh dear I seem to have lost my mobile just as the new model comes out).
6. Non-payment of premiums.
7. Expecting Advisers to work for free.
8. Placing policies to obtain a certificate of insurance to get a property, mortgage, client, or contract, then cancelling immediately afterwards and demanding a refund.
9. Threats of spurious service complaints to disputes resolution providers - threats which are never carried out, but are required by law to be addressed formally by the adviser or insurer regardless of merit, at their cost.
10. Insulting, aggressive, violent, racist, or otherwise bigoted language and behaviour directed at staff where none is warranted or justified.

The cost of insurance is probably 50% admin and staff time. Clients could ‘save a bundle on their insurance’ just by improving their own behaviours. Insurance people don’t expect to be loved, insurance is nearly always a grudge purchase, but in nearly all cases people are relieved they had insurance when something really bad happens (although they are very rarely grateful to their providers to receive payments many hundreds of times larger than they ever paid for their cover).

So no, I’m not surprised that Insurers don’t think they generally have a conduct problem; compared to their clients, they’re saints.

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Funny, most people have got "but everyone else does it" out of their system by the time they are toddlers as a defence for being pulled up on something.

Now I guess I know which industry the ones who don't end up in.

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Somebloke. For some strange reason the outrageous and often downright fraudulent behaviour you describe that is more common, especially at claims time, than most realise, isn't as attractive to media as stories about the nasty insurers ripping off policyholders. But insurers failing to comply with FMA requirements is either incompetence or outright arrogance and must be called out.

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So much frothing and indignation.

It would be interesting to know what part of the FMA was actually the failure points. Ie actual material breaches and shady practices, or were some companies just better than others at implementing pointless online training and compliance videos. Some companies are better than others at rolling out pointless bureaucracy

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Agree on the lack of detail. But even so compliance for its own sake is a fact of corporate life, even if mindless. The Aussie insurers are arrogantly giving our regulator the middle finger.

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Yes, I dont believe I argued against regulation or code of conduct, and I agree anyone that has actually broken any rules needs to be fixed. I just like to hear some balance in the discussion. The discussion has been going on since 2008. Those that haven't followed the story closely since then won't be aware of how much financial services regulation has evolved. Building of trust should be a two way street, and I dont think the FMA has given good press here to encourage useful dialogue. The real cowboys left the building some time ago.

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I'm with MAS already. Haven't had much to do with them so far. Pay my policies (slightly more expensive than Tower) and that's mostly it.

They still offer full replacement cover on your house in the event of a natural disaster. You can also do agreed-sum if you want to, presumably the premium might be a bit cheaper, but I don't see the point in opening yourself to that risk, which is what insurance is all about covering after all.

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