Editorial: Customer-first rule should not do harm

Editorial

COMMENT: Long-term insurance is not a subject most customers monitor closely. Indeed, we take it out so we do not need to think about the hazards of life it supposedly covers.

In doing so we are placing a great deal of trust in the providers of insurance to sell us policies appropriate for our needs and changing circumstances.

Quite likely we will never know until we have to make a claim and that will be too late.

A report into the conduct and culture of life insurance providers in New Zealand by the Financial Markets Authority (FMA) and the Reserve Bank has found much room for improvement in the way they operate.

The investigation follows a similar one into the banking industry last year. Both were prompted by the current Australian Royal Commission into banking, superannuation and financial services and gives New Zealand financial institutions a chance to avoid the exposure some have suffered across the Tasman.

The report does not identify any firms by name; it confines its criticism to general observations. But all insurance providers are expected now to review their culture and conduct in line with the report's criticism and satisfy regulators they are bringing procedures up to standard.

As with the savings banks, the regulators are most concerned that insurance companies pay commissions to their sales staff. These, they believe, are in conflict with the interests of customers.

As with the banks, it is hard to see that this a serious problem. Customers know they are dealing with a company that has an interest in selling them its products. It would be different if they had engaged an adviser to find the best deal for them, that is why authorised financial advisers have to disclose any commissions they accept.

But the Reserve Bank and the FMA firmly apply the same code to insurance firm representatives. They expect all insurers to "remove or substantially revise incentives linked to sales for all frontline salespeople and all layers of management". Where they are not removed, insurers will need to explain how they will mitigate conflicts of interest.

The insurers are also expected to review the commissions and bonuses they offer to intermediary companies who sell their products. That includes "soft commissions", mostly overseas trips.

Insurers that continue to offer commissions and treats will need to ensure they are incentives for "good customer outcomes rather than just reward for the volume or value of products sold".

"Good customer outcomes", the regulators believe, does not mean any insurance is better than none. In some circumstances, no policy might be worthwhile. They want a culture within insurance companies that ensures products are sold only to those people they are designed for, that the policy's limitations and risks are fully disclosed and products provide good value.

The companies have been given a deadline to report the steps they are taking to ensure their systems and culture are designed to serve customers' needs rather than simply sell insurance. That should do no harm.