News Life and Health19 Jul 2018

New Zealand:Replacement business at big insurers focuses on sale rather than client

| 19 Jul 2018

The Financial Markets Authority (FMA) is considering regulatory action against three large financial institutions or qualifying financial entities (QFEs) following a review of insurance replacement business practices.

In a statement, the FMA says that it considers that replacing insurance policies is a high-risk transaction for customers, because of the risk of claims being declined in the future and original policy benefits being lost. Customers may never discover this, until they try to claim on the insurance.

The FMA says that nearly every entity has a different definition of replacement business. It observed that of the 11 entities reviewed, only four take into consideration the time periods between a discontinued policy and subsequent replacement policy when defining replacement business. Furthermore, one entity does not define the practice as ‘replacement business’ unless the original policy is from within their group. “Based on this definition, it appears that the entity is only monitoring replacement business to protect its revenue and not to protect their customers from potential risk. In addition, this indicates that they have no oversight in place for replacement policies between other insurance providers,” the statement says.

Even where the impacts on the policyholder are neutral, the FMA is concerned that replacement of the policy benefits those making the sale rather than the customer. Most “new” life insurance written in NZ is actually replacement insurance rather than a customer taking out insurance for the first time.

The key findings in the report:

  • Most firms had processes in place to identify when a customer was being advised to replace life or health insurance, showing awareness of risk associated with these transactions. Generally, these processes seemed oriented towards reducing firms’ legal risk, rather than to identifying and mitigating risks for customers.
  • Fewer than half of firms reviewed advise customers that replacing their life insurance could lead to worse cover or the potential loss of benefits. Insurers need to acknowledge that replacing insurance policies is a high-risk transaction for customers.
  • Although firms use transaction-specific “replacement business forms”, these are used mainly as a risk management tool for insurers, presented at the end of the advice process, rather than being used to help and support customers in their decision-making
  • None of the insurance providers reviewed have an independent process to distinguish between new and replacement business.

The report focused on 11 QFEs or large firms selling life insurance in New Zealand. This report is part of the FMA’s regulatory focus on managing conflicts of interest in the insurance industry.

Of the 11 firms, two entities’ internal polices and processes were high quality and appeared designed with better customer outcomes in mind.

Six firms have taken some steps to mitigate the risks associated with replacement business, but need to improve their practices for customers.

For three entities, the findings of the review indicate that they may not be meeting their legal obligations, and the FMA is considering regulatory action.

The report covers:

  • AMP Services (NZ) Limited
  • ANZ Bank New Zealand Limited
  • Asteron Life Limited
  • Bank of New Zealand
  • Cigna Life Insurance New Zealand Limited
  • Farmers‘ Mutual Group
  • Medical Assurance Society New Zealand Limited
  • Partners Life Limited
  • Sovereign Services Limited
  • The New Zealand Automobile Association Inc.
  • Westpac New Zealand Limited.


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