Insurance policy churn rates 'a disgrace', says NZ Shareholders' Association
Figures showing some financial advisers have high insurance policy churn rates, where customers are shifted from one policy to another with no benefit other than generating a commission, are "a disgrace" and Kiwis need more protection from "salespeople dressed up as advisers," says the NZ Shareholders' Association.
The NZSA was commenting on a Financial Markets Authority survey released this week that showed that out of 1,100 'high volume' advisers with more than 100 active life insurance policies on their books, 200 advisers, or 18 percent, were deemed to have a high level of replacement life insurance business, or churn, with some replacing 35 percent of policies in a year. Those 200 earned almost 50 percent more in commissions on life insurance than other 'high volume' advisers.
"Clearly, a significant minority of these so-called advisers are acting more as commission salespeople and putting their own interests first", said NZSA chairman John Hawkins. "Appropriate insurance is essential for most people and there can be no place for salespeople dressed up as advisers ripping off people in this way".
The FMA sought four years of data from New Zealand's 12 main insurance providers spanning April 2011 to March 2015 for the survey. Hawkins said the report showed churn was highest among registered financial advisers (RFAs), a classification that carries limited disclosure obligations and restricts the advice to simple financial products. Authorised financial advisers (AFAs), who must be qualified, free of criminal convictions and in exchange can advise on a broad range of investments, on average had replacement rates of about half that of RFA's.
Hawkins said churn not only provides no benefit to policyholders but it drives up premiums for all New Zealanders.
"Any insurance industry claims that advisers were not influenced by large upfront and trailing commissions and other soft benefits such as overseas trips are shown by the data to be weasel words," he said.
The government is reviewing legislation covering financial advisers, the Financial Advisers Act 2008 and the Financial Service Providers (Registration and Dispute Resolution) Act 2008, having determined that rules on the disclosure of commissions and potential conflicts of interest were inconsistent and difficult for consumers to understand. The findings of the FMA report have been given to the Ministry of Business, Innovation and Employment as part of the legislative review, which Commerce Minister Paul Goldsmith has said is one of his top priorities for the year, although he's indicated he's comfortable with the use of commissions.
The NZSA wants the review to take note of the FMA's data and make sure that the term financial adviser "is reserved for those that are properly qualified, meet high ethical standards and are able to recommend a wide range of products that are best suited to the client's needs."
"If people are primarily salespersons, then let the designation reflect that," Hawkins said.
A New Zealand Institute of Economic Research report commissioned by Sovereign Assurance and published last month calculated that life insurers are spending about $430 million a year on commissions and if that were halved "premiums could be cut by up to 12 percent."
Jack Regan, the New Zealand managing director of Australian wealth managers AMP, said today that the FMA report is without precedent for the industry in New Zealand.
"Our referee has blown the whistle and the game needs to change," he said. "AMP will consider the FMA report in depth and expect that it will be a catalyst for effective engagement between the FMA and industry participants."
Seven of the 12 major providers, including AMP, use a network of financial advisers to sell their products, with commissions paid either upfront, trailing, via bonuses, and as 'soft' commissions including free overseas travel, sports tickets and even subsidised loans.
Advice on the MBIE website for Kiwis seeking financial advice includes the warning to be aware of two common problems: Advisers mis-selling insurance or investment products to earn commissions; and advisers giving advice without adequate knowledge, skills and competence.
It also has a warning to watch out for churning, "when an adviser recommends you change your insurance or investment products so they can earn a commission."
The NZSA also wants similar data produced for the banking sector which was "becoming increasingly dominant in the provision of a range of financial services such as KiwiSaver."