General insurers ill-prepared for conduct licensing

General insurers are not prepared for new legislation that will require them to establish systems and processes to ensure good conduct and fair treatment of customers, according to the Financial Markets Authority (FMA) – Te Mana Tātai Hokohoko.

A new FMA report – Insurance conduct and culture: Fire and general insurers update – summarises findings from the evaluation of New Zealand general insurers’ responses to the Life Insurer Conduct and Culture review, undertaken by the FMA and the Reserve Bank of New Zealand (RBNZ) in 2019.

Fire and general insurers – classified as those providing house, contents, vehicle, commercial, liability, travel and health insurance – broadly have a poor understanding of, and commitment to, good conduct and culture practice, the report says.

Insurers were asked to review their operations to make sure there were no material conduct issues and to demonstrate good conduct in their dealings with consumers. Responses from the sector were poor, according to the FMA, with only two out of 42 insurers – IAG and MAS – meeting expectations.

The majority of insurers did not complete their reviews to the appropriate standard, with 95% of responses considered inadequate or deficient.

Clare Bolingford, FMA Director of Banking and Insurance, said: “While new legislation is not yet in place, core conduct standards should apply across the financial sector. We’ve made this point repeatedly over several years and provided various resources and published reports for this section of the industry to measure themselves against.

“Prior to our enquiries, many firms claimed they were confident no significant issues existed. But this review has revealed a number of instances of poor conduct.”

The review found many insurers fail to actively monitor product suitability, fail to effectively withdraw poor value or legacy products and have over-charged some customers.

Examples of conduct requiring remediation activity – as a result of the review – included insurers double charging customers a number of times, not giving customers promised multi-policy discounts, and significantly overcharging some premiums due to poor IT systems.

The FMA report concluded the sector is not prepared for the Financial Markets (Conduct of Institutions) Amendment Bill, which will expand the FMA’s remit to regulate and license the conduct of the insurance sector.

Key findings of the review

  • The level of conduct maturity was low, with some insurers demonstrating that they did not see conduct and culture as relevant to their organisation
  • Product and policy-holder processes need to be improved
  • Insurers need to have a clearer line of sight on commissions paid to intermediaries, including whether they are fair and reasonable to customers, and understood by customers
  • Insurers should have greater oversight of how intermediaries are selling and managing the insurers’ products
  • Many boards are yet to support the development of an organisational structure that promotes good conduct, rebalances shareholder and customer interests, and sets an appropriate conduct risk appetite
  • Not enough has been done to ensure remediation activity is completed promptly and addresses the root cause of issues.

Ms Bolingford said some insurers will need to carefully consider what they need to do to meet the proposed requirements for a licence to operate under the new conduct regime. “They will need to ensure that their products and services are clearly understood by customers and suited to their needs,” she said.

The FMA has written to insurers to advise them of specific findings and reiterating expectations for the new conduct regime. The FMA expects insurers to complete the work requested by the regulator.

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