A shake-up of New Zealand’s life insurance industry is on the cards after it has been revealed that consumers are being sold poor-value products and paying higher premiums.

The Financial Markets Authority (FMA) and Reserve Bank review of the industry has found “extensive weaknesses” in the life insurers’ systems and a lack of focus on good customer outcomes.

Cabinet agreed today to get rid of sales incentives in the insurance industry that are driving behaviour that is not in the best interest of consumers.

Commerce and Consumer Affairs Minister Kris Faafoi says customers deserve better.

“Incentives such as overseas trips and loaded upfront commissions can cause a conflict for the salesperson. We have also heard about insurance policies being sold to people who are ineligible for cover, premiums continuing to be charged for a policy that’s no longer in effect, and policyholders not being effectively notified of increases in premiums.

“This, with the findings from the earlier report on banking conduct and culture, mean that we have to take action. We plan to release a consultation paper on the changes by May and introduce legislation later this year,” Faafoi says.

A comparison of life insurance commissions worldwide shows New Zealanders are paying a high rate of commissions – more than 20 percent of the cost of the premium. In comparison, consumers in Many European countries pay less than 10 percent, and in Australia just over 10 percent. Annual premiums paid by consumers for life insurance total $2.57 billion, with 4 million life insurance policies in New Zealand.

Consumer NZ chief executive Sue Chetwin said the review confirms problems in the industry that Consumer NZ’s research has highlighted, including the major risk that commission-based selling has for consumers.

“Sales incentives increase the risk consumers will be sold a product simply because the sales rep will earn another commission. There may be no benefit to the consumer at all,” she said.

The report also singles out products, such as funeral cover and credit card repayment insurance, that provide very poor value to consumers.

“Our investigation of these products shows they provide limited benefit and can cost consumers more than the value of the cover.”

Chetwin said major changes were needed in the industry to improve consumer protection. This needed to include stronger supervision of insurers and a shake-up of complaints schemes for the industry.

Minister of Finance Hon Grant Robertson says that while the industry has started to address issues raised in the reports it is clear that the Government needs to act on regulation and conduct of financial institutions, including banks.

He says the Government wants to see clearer duties on banks and insurers to consider a customer’s interests and outcomes and an “appropriately resourced regulator” to monitor the conduct of banks and insurance companies, with strong penalties for breaching duties.

“Because the issues identified with insurance and banking are similar, we will consider changes that apply across both sectors.

The FMA is supplying individual feedback to the 16 life insurers reviewed, with a response and action plan on how they will address their issues due back to the FMA by June 2019.

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