Lobbying heats up on best ways to fix banks and life insurers

Wednesday, 30 January 2019

Cut the needless jargon, force car insurers to work with price comparison websites, and shake-up the customer complaints schemes.

A growing list of demands for change is building in the wake of the Government's decision to fast-track laws putting legal duties on life insurers and banks to prioritise customers' interests.

Following the publication of top level reports on how banks and insurers treat their customers, jointly authored by the Reserve Bank and the Financial Markets Authority, Prime Minister Jacinda Ardern said new laws would be introduced to Parliament later this year.

In January, Prime Minister Jacinda Ardern promised to fast-track laws to protect the NZ public from banks and insurers.

Now lobbyists, businesses and interest groups are beginning to promote the changes they want to see, and industry groups are fighting a rear-guard action in a bid to prevent the changes from damaging their interests.

* Life insurers: Consumers not being told what they need to know

* Complacent insurers provide poor value, report finds

* Banks given deadline to end high-pressure sales incentives**

MAKE INSURERS SPEAK PLAINLY

Aaron Gilbert from AUT business school wants anti-consumer complexity stripped from the life insurance industry.

'Life insurance, like many financial products, is at its heart a very simple product,' he said.

'You pay regular premiums to an insurer who promises in return to pay you an agreed sum should you die while you are covered. Given the simplicity of the service, why are policy documents an average of 6000 words? And why are they written in language that readability tests describe as incomprehensible?'

'The upshot is we are unlikely to read the policy document in great detail, and we are more likely to look for advice.

'We are also less likely to shop around if it means wading through long documents, with the knock-on effect of reducing competition between insurers. This is compounded by the differences in layout and details between each document.'

'The result is that we cannot trust our decision-making ability and must instead rely on others. Those who have misaligned incentives from our own.'

His solution: 'Simplify the products, require documents to be written such that most, not just the few, can read them, and encourage comparability between providers. A little sunshine and a lot of competition will fix many problems.'

AUT Associate Professor of Finance Aaron Gilbert is calling for complexity to be stripped from insurance.

COUGH UP THE DATA

The Reserve Bank/FMA review was of life insurers, but general insurers providing house, car and contents insurance will be included the planned new laws.

Michael Speight, founder of the insurance comparison website Comparebear, said the Government should force general insurers to work with comparison websites to create a more transparent, efficient market, in which people can shop around easily.

That was done with the electricity sector in a bid to increase competition in the household power market, and the same could be done in the general insurance market.

'It's long overdue,' Speight said.

Trade Me's head of insurance Jaime Monaghan agrees.

'I would love to add general insurance to our comparison site,' she said. 'I think there's a high demand for it, and a need for it from a consumer perspective.'

But two of the big three insurers- Vero and IAG- aren't keen on price comparison sites, and have blocked their development by refusing to give them access to their pricing models.

Wellington-based technology entrepreneurs Michael Speight and Denis Tyurkov are plotting to crack open the car insurance market.

'The problem is there are three key players in the New Zealand market, and if I can't get them on board, you don't have anything to compare.'

MAKING COMPLAINTS MATTER

Consumer NZ said major problems in the life industry insurance were leading to consumers being sold poor-value products and paying higher premiums.

Its chief executive Sue Chetwin said the FMA)and Reserve Bank had found 'extensive weaknesses' in the life insurers' systems, and a lack of focus on good customer outcomes.

She said major changes were needed to improve consumer protection, including a shake-up of complaints schemes for the industry.

Consumer NZ CEO Sue Chetwin's has been working to highlight poor value insurance products.

'The review shows insurers are doing an appalling job at addressing problems in the industry. The protections so far put in place for consumers aren't working and we can't rely on the industry to put its own house in order,' she said.

BOARD INACTION

Laws putting customer care duties on life insurers and banks would change the way their boards of directors behaved.

The FMA/Reserve Bank report criticised life insurance boards for their lack of interest in policyholders getting a good deal, but, the Institute of Directors said insurance boards were far from alone in putting little effort into monitoring ethics risk.

IoD chief executive Kirsten Patterson, said: 'Our November 2018 Director Sentiment Survey found just over half of New Zealand boards had assessed ethics risks – 55 per cent, up from 44 per cent the previous year. While this increase is a positive development, more focus is still needed by boards across New Zealand.'

She said: 'The report stresses how conduct directly affects customers and can result in a loss of trust and confidence in an industry. It finds that most boards of life insurers had not given any serious thought to conduct and culture prior to this review.'

The IoD's Kirsten Patterson is pushing for directors to learn from the criticism of life insurance company boards, and start taking ethics seriously.

'All boards have a core role in overseeing corporate culture, conduct risk and setting high standards of ethical behaviour. They need to think beyond compliance, take the lead and set the tone.'

BATTLE FOR COMMISSIONS

'We must, collectively as a sector, review commission models to ensure they support good outcomes for Kiwis, as well as ensuring any changes to remuneration supports the continuation of the insurance advice sector and access to quality advice for New Zealanders,' said Katrina Shanks, chief executive of the Financial Advice New Zealand industry lobbying body.

While the life insurance sector responded quite meekly to the Government's plan, a rear-guard action has begun to save commissions.

High up-front commissions, sometimes as high as 200 per cent, were inflating premiums, and were driving a culture where sales were prioritised ahead of serving customers' needs.

But adviser groups and insurers will fight to fight against banning commissions.

But Katrina Shanks, chief executive of Financial Advice New Zealand said: 'The last thing anyone wants … is the dismantling of the insurance advice community. As the FMA and Reserve Bank report highlighted in its comment on product suitability, quality advice significantly contributes to the financial well-being of New Zealanders.'

'We must, collectively as a sector, review commission models to ensure they support good outcomes for Kiwis, as well as ensuring any changes to remuneration supports the continuation of the insurance advice sector and access to quality advice for New Zealanders.'

The insurance industry is on the back foot though. Self-regulation is seen by the FMA and Reserve Bank to have failed.

It was only at the start of this year that the Financial Services Council (FSC) created a code of conduct for its member insurers, but the Reserve Bank/FMA found no evidence that the life insurers had taken it seriously.

'Ten of the insurers in this review are FSC members,' the report said. 'However, they made little reference to the FSC code during the review, and we saw little evidence of them analysing whether their conduct risk systems and processes would be compliant by 1 January 2019.'