By Andrew Hooker*
The recent report by the Financial Markets Authority and Reserve Bank into the conduct and culture of New Zealand life insurers reads like a summary of the cases sitting in my filing cabinet.
The report rightly identifies the culture in the life insurance industry in New Zealand of focussing on sales rather than properly advising and informing the customer.
For far too long the New Zealand life insurance industry has focused on remuneration to incentivise huge sales. Too often, employees of life insurance companies have their performance measured largely on how many policies they sell, or how much premium they bring in, with little or no regard to the quality of the business or the customers’ satisfaction.
When challenged, the insurance companies, in our experience, simply blame the financial advisor or intermediary for “miss-selling” the product. This completely ignores the fact that people such as insurance intermediaries will always behave as they are incentivised to behave. If the insurance industry builds its remuneration models around massive commissions purely for producing sales, then of course that is going to be the focus of the sales force, internal or external.
The insurance companies drive this behaviour and need to own the outcome. To undertake an industry change of culture insurance companies need to focus on their customer's needs not on market share. This will start with undertaking a proper underwriting of the risk prior to selling the policy. A life insurance policy may be worth $1 million or even more. What other product worth this much could be purchased online without speaking to anyone?
Customers need to be taken through an exhaustive process to understand the risks and benefits of their cover. This will also allow the insurer to understand their risk and tailor a product to suit the customer. One of the most common issues is the industry’s dirty little secret – “churn”. This is an industry term that refers to the practice of replacing existing policies with either the same insurer or a different insurance company.
So, if a customer has a perfectly good policy of some description be it life, income protection, or whatever, they will be convinced that they need to replace that policy with a new one and the seller will receive another full commission – sometimes over 200% of the first year’s premium. The report quite rightly identified that the documentation required by the insurance companies when replacing existing insurance policies is more designed around protecting the insurance company’s interest than properly informing the client.
Again, the insurance industry is driving this behaviour and need to take responsibility for the outcomes. We see endless cases where people who clearly should never have changed their insurance policy, have been convinced to buy a replacement one, only to find out when they go to make a claim that their policy is invalid due to some kind of misstatement or non-disclosure. This would be easily the most common issue that comes across my desk when advising people on declined insurance claims.
Again, when this happens, the insurance companies pull the ladder up on the seller that they have incentivised with this behaviour. They blame the insurance advisor and walk away from their responsibility. The truth is that, if the insurance company had done its job properly, and properly underwritten the application, by obtaining all medical information, the policy would never have been transferred and the client would not have changed policy. The culture is driven by a sales sales sales attitude.
Relationship managers employed by insurance companies are incentivised to meet sales targets that are, according to the report, more often than not based solely on sales figures, with little or no regard for the quality of business or customer satisfaction. If the insurance companies are going to incentivise their staff along these lines then of course that is going to trickle all the way down to the client.
Another relevant issue identified by the report is policies like funeral cover, accidental death, or specified injury policies. The report charitably refers to these as “poor-value products”. The author of the report comments that whilst these products may be suitable for some customers in a limited range of cases, the evidence is that they have a higher risk of poor value including very low loss ratios, and high rates of claims being declined.
Clearly the evidence is that these products produce massive profits for the insurance companies because of the very low loss ratios and high rate of claims being declined. For instance, one case related to a tetraplegic client who was sold a “no questions asked” life insurance policy. However, the policy excluded cover should the death be related, in any way, to the tetraplegia. After an inquiry the insurance agreed that if the insured suffered any medical event it would almost certainly be linked to their tetraplegia.
The insurer also agreed that the insurance was likely to only respond to an accidental death, a fact not explained to the insured during the three minute phone call in which the client was sold the policy. The other significant area of comment is referred to in the report as “Complaint and Incident Management Systems”. In plain English this is what insurance companies often refer to as their internal review process or complaint management systems. Our experience is that, once a decision has been made on the claim, it is very difficult to have that overturned at any level in the organisation.
We have found almost exclusively throughout the life insurance industry a culture of backing up the claims decision at almost any cost, and the review process almost never produces any change in a decision. We have had a number of cases where we have spent months forcing the insurance company through their internal review process so that we can then take formal proceedings for the wrongful decline, only to find that the insurance company almost straight away capitulates and accepts the claim.
What this tells us in our experience is that insurance companies on these occasions have stuck to their story only to back down when they knew that some independent party was going to judge them. The concept of internal review processes has been around for a few years in the insurance industry, however in our experience it is largely a waste of time. The report has identified the issues around these processes and they definitely need to be addressed.
When commenting on the report, Finance Minister Grant Robertson stated that the Government intended to pass regulations. If this is the case, then it is to be welcomed. Whilst the insurance industry engages in hand wringing and promises about changing their practice, our experience is that nothing will change until the Government forces them to do so. Some very careful legislation around incentivisation and complaints management will go a long way to addressing this problem and we will be watching carefully to make sure this happens.
*Andrew Hooker is the managing director of Shine Lawyers NZ, and practices as a specialist insurance lawyer in Auckland. He also runs an insurance information website - www.claimshelp.co.nz