FMA concerned about life insurance commissions

FMA concerned about life insurance commissions

The Financial Markets Authority (FMA) is concerned about sales practises within the insurance industry.

It is worried some financial advisers might be switching their customers from one policy to another because of the commissions they receive.

The FMA says in some cases advisers can receive an upfront commission as high as 200 percent of the annual premium, and "soft" commissions such as overseas trips to places like Shanghai, Prague, Las Vegas, Hollywood, Rome, New York and Rio de Janeiro.

The FMA plans to take a closer look at 200 financial advisers who it says have written a high number of 'replacement' policies.

The FMA says that of the $1.7 billion spent on annual life insurance premiums in the year to June 30, 2014, a "significant number" of existing policyholders were switched between providers. It is known as the 'replacement business.'

It says the 'replacement business' carries the highest risk of churn.

"That is where the switch is primarily being done to benefit the adviser, and not the consumer."

The Financial Services Council (FSC), which represents insurance companies, said it welcomes the FMA's interest in the issue.

"The FSC believes churning of policies in this way is unacceptable," says executive director Owen Gill.

 "The FMA's report, and the discussions alongside it, have allowed the insurers and bodies like the FSC to focus on what consumers should know and understand in buying life cover, and other initiatives that could be taken."

The FMA looked at data from 12 life insurance providers and focused its inquiries on policies sold through authourised or registered financial advisers (AFAs and RFAs). The advisers sold 40 percent of the policies in force in June 2014.

The FMA says there are 3,700 advisers in New Zealand with at least one active policy. Among them, 1,100 had more than 100 policies on their books. Of those advisers, 200 met the FMA's criteria for "a high estimated rate of replacement business".

In June 2014, the 200 advisers:

The FMA says it is going to be taking a closer look at these advisers.

Director of regulation Liam Mason says: "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.

"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 afforded to their customers."

Advisers must usually repay some if the policy is cancelled within the claw-back period, but after that they can receive a new upfront commission if they change a client's policy.

"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 upfront commissions, or incentives for high sales volumes, such as overseas trips laid on by providers."

The FMA says good advice is important within the life insurance industry, and there are many good reasons why an adviser might consider it beneficial for a client to switch policies.

But the FMA is concerned "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 findings from the report have been given to the Ministry of Business, Innovation and Employment to consider as part of its review of the Financial Advisers Act.

The FMA says there are a number of ways customers could get caught out when switching life insurance policies.

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