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Life insurers - continued focus on conduct and culture

September 20, 2019

Contacts

Partners Jania Baigent, James Caird, Helen Smith
Senior Associates Rebecca Faull

Insurance Financial services regulation

The Reserve Bank and FMA have come down hard on life insurance companies after carrying out a culture and conduct review of 16 life insurance companies. It looks like change will be forced on the sector whether it’s ready or not.

In Summary - what you need to know

  • The FMA says the response to their culture and conduct review was “disappointing” with insurers showing poor progress on improving processes and some failing to respond at all.

  • This outcome has prompted the FMA to call for greater regulatory powers to deal with issues before they arise, and force compliance. The Government seems likely to comply.

Background: Australian Royal Commission investigation

The life insurance review in New Zealand was prompted by the Australian Royal Commission investigation on issues within its banking and financial sector. The damning findings of the Australian Commission led to increased scrutiny in New Zealand against banks and life insurers, with calls for our own Royal Commission and increased regulation.

Review outcome: “disappointed but not surprised” - FMA

Now, after being asked to provide plans showing how they would improve their processes, the FMA has reported that some insurers have done little work on this and others have failed to respond.

The most concerning comment is from FMA chief executive Rob Everett, saying that while disappointed, the FMA is not surprised. That comment suggests the life insurance sector as a whole is not embracing the change that is being required or doing so quickly enough.

Timing and resource is likely to be an issue. Some of the issues raised by the FMA are structural and will take some time to correct, but the Government has made it clear it expects insurers to respond. 

As the report from the FMA and RBNZ was focussed on customer outcomes, the fact that some did not respond at all is a sad indictment and is unfortunate for those insurers who have made good progress in this area. The lack of commitment by some will drive the call for regulation to force compliance.

Next steps: increased regulation inevitable

Insurers who have more work to do, have until December 2019 to complete further reviews and develop mature plans to fix any issues. However, the FMA is already calling for greater powers so that it can deal with issues before they arise, and it looks like the Government is listening.

Minister Kris Faafoi is reported as sharing the FMA’s concerns about the life insurance industry as a whole being unwilling to embrace change and the Government is fast-tracking measures to improve conduct in the sector. There is no doubt those measures will be achieved by increased regulation. 

That will inevitably force change, but is also likely to create increased reporting requirements resulting in higher costs (costs that could be better spent in returns to shareholders or lowering premiums for customers). We are hopeful that this inevitable increase in regulation will come in a principles based form to avoid the costs and arbitrariness of prescription. But even so, would that be enough? 

The real question to be asked is whether New Zealand needs to carry out its own Royal Commission into the Banking and Financial Services Industry. We don’t think that it does. The issues are well known and New Zealand regulators have already signalled the changes that are required. The onus is on the industry to commit to those changes.

If you need help in planning for and achieving change, contact one of our insurance law experts.