A detailed survey by the Financial Markets Authority
(FMA) indicates that there is a significant amount of
churn in the life insurance industry, to the possible detriment of
Many people will be unsurprised by the finding, but will
appreciate the research to back up their impressions. The empirical
evidence provides a helpful measure of the extent of the problem,
and should provide a solid foundation for future
The next challenge for regulators is what to do with the
results, particularly as part of the Financial Advisers Act review
and the FMA's on-going focus on improving market
surveyed the last four years of data from the 12 main life
insurance providers in New Zealand. The period covered was April
2011 to March 2015 and included four types of cover: life, trauma,
income protection, and total and permanent disability.
Particular interest was paid to registered financial advisers
(RFAs) and Authorised Financial Advisers (AFAs)
with more than 100 active life insurance policies on their books or
who had a high rate of replacement business.
The number of policies grew at under 2% each year over the
review timeframe but in those years, the survey group described 11%
to 13% of their policies as "new", suggesting they were
probably replacement policies.
The majority of advisers do not have high levels of replacement
business. 200 out of 1,100 of advisers who currently have a book of
more than 100 active life policies, have a high estimated rate of
replacement business. Those 200 advisers earned almost 50% more
from commissions compared to the others.
Policies with a high upfront commission were more likely to be
replaced once the commission clawback period ended (the period
within which an adviser must repay a portion of their commission if
the policy is cancelled).
The quality of the new policy was only a minor factor in
whether it was replaced, indicating that some advisers are putting
their self-interest ahead of the consumer's interest.
Policies no longer subject to commission clawback were 2.2
times more likely to be replaced if the advisor was offered an
overseas trip as an incentive.
RFAs had higher rates of replacement business than AFAs, some
replacing more than 35% of their life policies in one year.
Actions FMA is taking
The FMA is working with insurers and the Financial Services
Council to address the risks posed to consumers from these high
churn rates and plans to conduct site visits where it has
identified a particular risk.
It is also planning to provide further guidance for the industry
and further resources to assist consumers to make better informed
decisions. The FMA has the power to take action against advisers if
they have breached their statutory duty of care, diligence and
skill or been misleading or deceptive as to the benefits of
changing policies. The FMA can also refer AFAs to the Financial
Advisers Disciplinary Committee if they breach their Code of
In addition, the FMA:
has provided its report to the Ministry of Business, Innovation
and Employment (MBIE) to inform MBIE's current review
of the Financial Advisers Act 2008 (the Financial Advisers
Act) and the Financial Service Providers (Registration and
Dispute Resolution) Act 2008 (FSPA), and
will provide it to the Council of Financial Regulators
(comprising the Reserve Bank, FMA, the Treasury and MBIE) which
coordinates financial regulation across government agencies.
Chapman Tripp comments
Because pure risk insurance policies are category 2 products
under the Financial Advisers Act, most insurance broking has been
subject to the base level of financial adviser compliance. Arguably
choosing the most suitable insurance policy is as important for
consumers as choosing the right investment, where additional
conflict of interest restrictions apply. Where AFAs have been
involved, they are being held to the higher standards, but then
different regulatory responses arise for performing the same
activities (which will also need to be re-thought from a policy
Concern that adviser incentives are driving insurance policy
churning have been openly discussed worldwide and have led to
commission bans in some countries. Rightly, in our view, banning
commissions is not government policy in New Zealand. But other
responses to insurance policy churning will need to be
The Financial Advisers Act and FSPA review will provide a useful
opportunity to explore these responses. The Report may also be the
catalyst for more active responses from the FMA against insurance
brokers involved in churning policies, some of whom have already
come to the attention of the FMA.
The information in this article is for informative purposes
only and should not be relied on as legal advice. Please contact
Chapman Tripp for advice tailored to your situation.
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The failure of a party to call a witness does not necessarily give rise to an adverse inference being drawn in accordance with Jones v Dunkel (1959) 101 CLR 298. An unfavourable inference is drawn only if evidence otherwise provides a basis on which that unfavourable inference can be drawn.
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