Proposed Government crack-down on insurance sales incentives re-sparks discussion over how to provide free or affordable financial advice that isn't compromised 

By Jenée Tibshraeny

The head of the organisation that represents life insurers in New Zealand acknowledges the industry needs to come up with a way to ensure consumers can still afford financial advice if advisers are paid less by the insurers whose products they sell. 

Financial Services Council (FSC) CEO, Richard Klipin, says the sector needs to figure out how to balance the interests of consumers and their abilities to access advice, with the interests of intermediaries getting appropriately remunerated.

His comments come off the back of the Government on Tuesday announcing its intentions to introduce new legislation to Parliament to stamp out "sales incentives" in the insurance sector. 

While details of the Government's plans are at this stage scant, with a consultation process starting in May, it says commissions will also be "scrutinised" in the process. 

Klipin hesitant to draw on Aussie experience 

Australian regulators are among those around the world that are progressively capping life insurance commissions.

As of the start of this year, upfront commissions have been capped at 77% of a customer's first year's premium. By January 2020, the cap will fall to 66%. Meanwhile trail commissions have been capped at 22%. 

Upfront commissions in New Zealand can be as high as 210% of a first year premium. Commission payments are equivalent to 20% of the life insurance sector's premium revenue - a very high portion by international standards.

Asked how the caps have gone down in Australia, having headed up Australia's Association of Financial Advisers in Australia between 2006 and 2013, Klipin stresses that while looking at international experience is useful, we need to find a system that’s fit for purpose for New Zealand.

However he does say: “Advisers need to reconfigure how they manage cash flow in their business. Some of them are charging fees for service. So there’s a really big adjustment, but again that’s been seen appropriate in the Aussie context.”

Insurer, Zurich, in a note published at the end of November, says: "The variations in remuneration impacted a large number of advisers with an overwhelming majority (82%) having adopted an upfront commission model.

"An adviser who previously elected this method of remuneration would have seen a sizeable reduction in initial income.

"Under the revised LIF commission schemes, policies that remain in force over time can be financially beneficial compared with the previous upfront rate."

Asked how major legislation enforcing similar rules could be for the industry in New Zealand, Klipin says he doesn't want to get into the "what ifs" until he knows exactly what's being proposed. 

“I don’t want to alarm anyone. I also don’t want to second guess exactly what the Government has said, because we haven’t had a chance to either talk to them or to the regulator," he says.

Positive changes underway 

Klipin recognises the Reserve Bank (RBNZ) and Financial Markets Authority's (FMA) frustration over the industry's lack of action on issues like churn, raised in its conduct and culture review, released hours before the Government's announcement to ban sales incentives. 

He says the industry's made some positive changes in the last six months.

The FSC has introduced a code of conduct with nine standards that go to the heart of issues discussed in the report, including product design, communication and oversight of intermediaries. 

Companies have also stopped offering soft commissions in the form of overseas trips. 

Klipin acknowledges that while neither of these changes are a "panacea", they’re important "sign posts" for change. 

Could too much heavy-handedness see insurers up and go from NZ?

Considering legislative changes on the horizon in New Zealand against a backdrop of regulatory risk being seen as one of the drivers behind a lot of merger and acquisition activity in the life insurance sector internationally, Klipin says: "That’s a signal for change in business strategy I think, rather than the opportunity in the sector.”

While businesses are scaling up on the one hand, they are divesting on the other.

Klipin says the sector needs to be "sustainable" in the sense that if consumers enter into an insurance contract, they want assurance the company they've entered into an agreement with will be there in the future. 

Furthermore, he says: “We’ll only be sustainable if we’re actually relevant to consumers, and that’s what this [RBNZ/FMA] report’s about.”

Watch the space for more publicly available industry data 

The report, among other things, identifies relatively high claim decline rates among poorer quality products such as the likes of accidental death cover, specified injury cover, funeral cover, ‘guaranteed acceptance’ products, and loan or credit card repayment protection insurance.

Asked why the FSC doesn't, in the name of transparency and consumer interest, release the industry data it collects that details decline rates across different products, Klipin says it is working on making more data publicly available. 

Yet he says insurers are winding down products that are no longer fit for purpose. 

“As the FSC Code of Conduct starts to bite, together with the findings out of the [Australian] royal commission, as well as the culture and conduct report, I think you’ll start to see signals from the sector which is, ‘let’s make sure our products are fit for purpose’.”