The fortune sellers
Life insurance providers are under pressure to disclose sales incentives, which can distort their advice and are banned in some countries. But the industry is resisting.
Life insurance providers are under pressure to disclose sales incentives, which can distort the advice they give and are banned in some countries. But the industry is resisting.
He was 18, unburdened by the responsibilities of life. He had no dependants, no mortgage, no debts to be a drain on his estate. Indeed, if the unthinkable happened, he would have no estate to speak of. None of that stopped a canny salesperson selling him life insurance, though the policy he signed up for was promptly unsold when his mum stormed into the insurance company’s office demanding an explanation and a cancellation.
Walking into some life insurance sales offices can be bad for your health. Reports released over the past four months suggest that some New Zealanders are being fleeced by insurance advisers, who persuade them to buy life insurance and related products that don’t suit them. And the advisers are rewarded with hefty – but typically undisclosed – commissions. They may persuade customers to unnecessarily switch policies, so they can get another commission. It’s all legal. And customers are none the wiser.
Sometimes the agents’ commissions are financial; sometimes they get so-called “soft” perks such as prize draws or expensive overseas holidays. Sometimes both. Either way, it is tempting for advisers to put their own interests ahead of those of the customer. And the customer won’t even know what’s happened.
Here’s how it works. You walk into a life insurance office. The adviser will probably have several products on offer, some of which will be better suited than others to your needs.
But what if one insurance company offers a 200% commission on the first two years’ premiums (not unusual), but another offers only 100%? The difference could easily be several thousand dollars for the agent involved. One insurer may give an all-expenses-paid overseas trip to an agent who meets certain sales targets, while another one doesn’t. Or perhaps one offers a trip to Europe and another to the Bay of Islands.
The temptation to steer you towards the product of the company offering the best trip, or the biggest commission, is strong. So the adviser ends up convincing you to buy a product that isn’t ideal – or even that you don’t need at all.
Furthermore, insurance companies often pay big commissions to advisers for the first two years of a policy, but then the remuneration drops sharply or stops. This is an incentive for advisers to persuade customers to switch policies regularly, so they keep reaping new commissions, even if the new policy isn’t necessarily in the best interests of the customer. It may be more expensive than the old one, or contain nasty clauses or exclusions
Advisers who persuade people to buy products that don’t suit them are rewarded with hefty – but typically undisclosed – commissions.
that will leave them (or their dependants) worse off if they have to claim on the policy.
THE COMMISSION CUT
In May, the Financial Markets Authority (FMA), the regulatory body for capital markets and financial services, released its review into conflicted soft remuneration from nine of New Zealand’s biggest life and health insurance companies: AIA, Asteron Life, AMP, Fidelity Life, nib, OnePath, Partners Life, Southern Cross and Sovereign. The review, which looked at life, income protection, trauma, total and permanent disability and health insurance, excluded small insurers and those – banks, for example – that sell only their own products.
The report found that, in the two years to March 2017, the nine companies spent a total of $34 million on soft commissions, including $3.8 million on events (dinners, conferences and corporate entertaining), $1.6 million on gifts (vouchers, Christmas presents and prizes), and $18 million on domestic and overseas trips.
Only the top salespeople got to go on the trips, and they always involved advisers meeting targets – selling a certain number of policies or dollar value of cover over a set time, or minimising the number of policies cancelled or moved to another insurer.
These are not day trips to Hamilton. We’re talking the Bay of Islands or Queenstown; Tahiti, China, the US or UK. In most cases, partners got to go, too.
“These trips are intended to both incentivise advisers to sell the insurers’ products and to reward them for their success,” the FMA said. “The focus on sales volumes and targets rather than good customer outcomes increases the potential for conflicted conduct.”
At the lower end of the scale, one insurer took 12 advisers on a four-day trip to Queenstown, paying for all flights, accommodation, meals and activities, including heliskiing, a wine tour and a motorsport driving experience. The total cost of the trip was $103,000, which works out to $8600 per adviser.
At the top end, serious money was spent on 20 advisers who took an allinclusive trip to London worth $1.9 million ($95,000 per adviser).
It’s hard to imagine how you spend $95,000, even in London. Presumably that includes the cost of taking insurance company staff along too. And maybe their partners.
But soft incentives work. The FMA report notes that when one insurer stopped offering overseas trips to advisers who met the specified targets, its sales dropped by about a third in a year. To its credit, the company didn’t immediately reinstate the trips, deciding instead they were “no longer aligned with their goals of protecting and acting in their customers’ best interests”.
THE HIDDEN COST
The FMA calculates that the $34 million insurers spent on soft incentives is 9% of the amount customers paid in premiums for their new policies over the same period. And that’s not including monetary commissions, which, for the first one or two years of the policy, can be as much as 200% of total premiums.
Ironically, it was the life insurers’ own industry body, the Financial Services Council, that first put numbers on the cost to consumers of all those adviser commissions. In 2015, it contracted insurance consulting firm Melville Jessup Weaver to look into advisers’ remuneration. Its report (tinyurl. com/NZLMJWreport), which appeared in November that year, found that consumers were paying 10-15% more for life insurance than they should, because of the agency commissions that were often ridden with conflicts of interest.
The consultants’ recommendations, included:
forcing advisers to disclose their actual remuneration to clients (and tell them what their policies would cost without it); cutting upfront commissions, which could be as high as 200%, to 50%; lifting the ongoing servicing commission to 20% (from about 7.5%); imposing a maximum upfront commission of $3500.
But the big one was a recommendation to ban volume-based commissions, including soft commissions.
All hell broke loose in the insurance industry. Some of the biggest companies, including AMP, Sovereign, Asteron and Partners Life, resigned from the Financial
The nine big companies spent $34 million on “soft” commissions in two years, 9% of the amount paid in premiums for new policies.
Services Council in protest. In February, the council’s long-standing chief executive, former Labour Cabinet minister Peter Neilson, stepped down after his position was disestablished. The report was filed.
The FMA says paying higher premiums is not the only risk to consumers when conflicted insurance advisers are motivated more by the prospect of a trip to London than by their customers’ interests.
“A customer may be overinsured, or underinsured … may have a policy with lessfavourable terms … or with features that do not meet their needs. This may affect the customer’s ability to claim on the policy at a later date.”
Despite all this, even the most conflicted advisers could argue they aren’t breaking the law – and they’d probably be right. One section of the profession, authorised financial advisers (AFAs), must abide by a code of conduct that includes a requirement to
place client interests first, but most life insurance policies are sold by RFAs, or registered financial advisers. And RFAs are under no such obligations. The main rule for them is to “exercise care, diligence and skill” when giving advice.
This, one might argue, could mean anything, perhaps even an adviser’s requirement to carefully, diligently and skilfully feather his or her own nest.
WHEN UNFAIR IS FINE
In late May, Consumer Affairs Minister Kris Faafoi announced a review of insurance contract law aimed at improving consumer protections. He wants consumers to have confidence in how insurance works and for interactions between parties to be “fair, efficient and transparent”.
As a first step in the review, the Ministry of Business, Innovation and Employment (MBIE) released an issues paper covering, among other things, claims handling, disputes resolution, excessive sales pressure, and the problem of soft and hard commissions, which “may be incentivising behaviours that are negatively impacting consumers”.
The issues paper highlights another area that may shock many consumers. The Fair Trading Act 1986 regulates against unfair contract terms in most sectors, but some extraordinary exceptions for insurance companies allow them virtual carte blanche to put in any unfair clause they feel like.
For example, insurance policy documents can contain potentially unfair terms in relation to:
■ the risk insured against; ■ the sum insured; ■ the exclusions in the contract; ■ the basis on which claims are settled; ■ the requirements for disclosure;
■ “the duty of utmost good faith that applies to both parties”.
It seems astonishing that the legislation appears to be allowing insurance companies not to act in good faith, which has long been regarded as one of the fundamental principles of the contractual relationships between insurers and clients. As the MBIE document mildly puts it: “We have heard concerns from consumers about the exceptions for insurance. We understand these concerns to be that action cannot be taken against some unfair … terms in insurance contracts because of the exceptions.”
The minister’s review isn’t the only spotlight on the insurance industry. MBIE has commissioned a working group to develop a code of conduct for financial advice; its draft code is due in August. At the same time, Australia’s Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is opening cans of worms across the Tasman, and there are ramifications here, including a “please explain” letter to insurance company chief executives from the FMA demanding assurances that the bad behaviour revealed in Australia isn’t happening in New Zealand.
The FMA has made it clear it isn’t finished with the insurance industry yet. Richard Klipin, chief executive of the Financial Services Council, says if the industry had been new in 2018, practices might look very different. But he argues that life insurance companies struggle against a reluctance from the public to confront mortality, and therefore accept the need to protect themselves.
“Often there is a tension there. The reason people take out insurance is to manage risk in their lives, but most people underinsure. They don’t get up in the morning saying, ‘Something bad is going to happen to me; I need to do something’.
“If all New Zealanders were walking around with adequate savings and insurance and KiwiSaver, I’d be going ‘the job’s done’. But the reality is we are far away from that.”
Still, Klipin accepts that in an industry where products tend to be sold, not bought, some practices need to change.
“A whole load of conduct has grown up around the industry, and if we were going to judge by 2018 standards, you might say maybe we would do it differently.
“It’s in the interests of everyone to work