Rebecca Sellers says conduct by insurers is effectively unregulated and the IMF is calling for some protection for consumers, at least up to Australian levels

By Rebecca Sellers*

Conduct of business by insurers is in the spotlight.

The International Monetary Fund assessment of New Zealand’s financial sector (IMF Report) identified gaps in the regulation of insurance.

Recommendations include regulation of insurers’ conduct and that the Reserve Bank take a more intrusive approach to supervision. This would bring New Zealand’s regulation of insurance closer to the Australian approach.

If the response of previous governments to similar IMF reports is any guide, we can expect more attention from regulators to New Zealand’s insurers. This IMF Report recommends that the government and Financial Markets Authority (FMA) review the scope of conduct regulation for insurance, considering all aspects of the insurance product life cycle and develop a regulatory framework.  Significant work is recommended to close gaps in the prudential supervision regime.

Prudential supervision

New Zealand’s regime was compared to an internationally developed set of principles viewed as being fundamental to effective insurance supervision (“IAIS Principles”).  The IMF Report identifies how New Zealand’s regime departs from the IAIS Principles and makes recommendations familiar to Australian insurers.  These include:

• On-site inspections, better resourced approach to supervision and increased powers for the Reserve Bank;
• The establishment of dedicated risk management and internal audit functions in insurers;
• Better policyholder protection;
• Comprehensive corporate governance standards; and
• Increased Reserve Bank oversight of outsourcing, reinsurance, investments and off-balance sheet business.

The IMF Report acknowledges the unique characteristics of the New Zealand insurance market.  However, their assessment applied the IAIS Principles as a standard template against which New Zealand’s regime was found to be lacking.  It is to be hoped that any changes made because of these recommendations will not automatically replicate the Australian regime, for example, restrictions on outsourcing could have significant consequences.

Sales without advice

The IMF Report identifies that the New Zealand focus on financial advice leaves much of insurers’ conduct effectively unregulated. The IMF is critical of the low level of protection consumers receive when buying most insurance products. The IMF acknowledges that change is proposed to the regulation of financial advice (“FAA Proposals”). However, the IMF Report’s recommendations go further than the FAA Proposals.  “The government should consider a proportionate regulatory regime for insurance intermediation not currently captured by the legislation, including pure sales and intermediation where ancillary to another line of business.” The IMF recommends that within one year the FMA should build more insurance expertise to promote adequate conduct supervision of the insurance sector. 

These recommendations are in line with the international experience of mis-selling, much of which has occurred by “sales without advice’, for example the misselling of credit insurance in the UK. The UK Financial Conduct Authority recently estimated that banks have paid out £26.2bn in compensation to customers and set aside more than £40bn to cover compensation payments and litigations costs. It is now recognized that poor conduct by banks and insurance companies can give rise to systemic risks.^[1]

Any entity considering restructuring its business in response to the FAA Proposals should be aware that “sales without advice” will be the subject of regulatory scrutiny. 

Claims

The IMF Report identifies claims handling as a potential source of misconduct by insurers. Australian owned operations in New Zealand represent 66% of the insurance market by premium and 75% of the insurance market by assets. This suggests that the findings of the 2016 Australian Securities and Investments Commission (“ASIC”) thematic review of claims handling practices could be relevant in the New Zealand context.

In March 2017, Peter Kell, Deputy Chair of ASIC, said that claims handling had brought insurers “under intense media, government and regulatory scrutiny in relation to conduct and culture concerns.”  The ASIC review identified higher claims denial rates for some types of insurance (TPD) and for life insurance sold without advice.  ASIC recommended that the Australian law is changed so that “insurance claims handling” is covered by the financial services conduct provisions of the Corporations Law. Industry has responded by launching the Life Insurance Code of Practice.

Even prior to a law change in Australia, the experience of a New Zealand consumer may be less favourable at claims time.  Australia has all but abolished the duty of disclosure in consumer cases. New Zealand’s antiquated law on non-disclosure provide insurers with additional grounds to deny a claim – leaving New Zealand consumers in a weaker position than their Australian counterparts.  

The IMF acknowledges that the developing framework of self-regulation in New Zealand has helped to reduce the risk to consumers. Since January 2016 members of the Insurance Council of New Zealand have been bound to higher standards of service by the Fair Insurance Code. The Financial Services Council of New Zealand is in the process of developing a code of conduct for its members.  However, the IMF Report states that self-regulation is not a “substitute for regulatory requirements and effective oversight”.

The Reserve Bank is currently seeking submission on an issues paper reviewing the Insurance (Prudential Supervision) Act 2010.^[2] It is timely and informative to have the IMF’s view on many of the issues raised in that review. The IMF Report challenges New Zealand’s regulators to stay in step with the global approach to protecting insurance customers.

Rebecca Sellers is director of Melior Law & Regulation and a contributing editor of Colinvaux’s Law of Insurance in New Zealand.