Of Symptoms and Causes.......
Over the past few weeks there appears to have been a number of items appearing in the media regarding the life insurance industry. Some of these items seem to have been concocted with a low level of research or knowledge, and therefore have little validity, while others appear to be regurgitating issues already addressed elsewhere.Nevertheless, it’s worth recording an overview which may assist more informed judgements and provide a more grounded perspective on the current state of the industry, so let me address these issues in no particular order of merit or preference.
Self-regulation of the Life Insurance Industry
As has been expressed by others –including this commentator – the ship has sailed. The life insurance industry is already regulated, by the FAA 2008, and by IPSA 2010. Strategi states in one of their publications:- “Every financial adviser, regardless of whether an RFA, AFA or QFE adviser, has to abide by the Financial Advisers Act 2008 (the FA Act). Section 33 of the FA Act states: A financial adviser, when providing a financial adviser service, must exercise the care, diligence, and skill that a reasonable financial adviser would exercise in the same circumstances. Every adviser when doing their job is caught by this section. The care, diligence and skill requirements apply whether the adviser is selling insurance, mortgages or investments, or whether it is class advice or personalised advice.” Because the 2008 Act does not distinguish between AFAs and RFAs – in fact, the Act makes no reference to either. The Code of Conduct requires those who recommend Category 1 products to client to attain authorisation status which means obtaining a relevant qualification at, currently, NZQA Level 5. For those recommending Category 2 products only, please see the paragraphs above from Strategi. In any event, the contradictory shareholder obligations of product providers and independent (i.e. non-aligned product distributors) are not easily reconciled. In fact, on many occasions these interests can be diametrically opposed – particularly in the ex gratia claims settlement area, for example – and which render self-regulation an impossibility. The concept of self-regulation was given plenty of room in the early days of the UK financial services regulation and was found to be wanting by most stakeholders. While it’s always helpful to re-visit the discussion periodically to ensure new entrants have an understanding of the relative functions of industry players, there is no advantage in expecting the concept to be embraced by those who are charged with framing the regulation and legislation surrounding the industry.
Life Insurance Commission Levels
There is no doubt that our local industry offers advisers the highest level of upfront commissions in the OECD . But it’s also true to say that this is a free market economy, and, rightly or wrongly, our elected employees in Wellington have decided not to place regulatory limitations on commission levels. If the market sustains these levels, it runs contrary to the natural ideology of any Centre-right government to interfere and impair the perceived ability of life insurance companies to compete with whatever legitimate means are at their disposal. It may be considered preferable if the lower upfront/higher renewal combination held appeal – and it may do so to a significant number of advisers – but efforts to promote this have met with limited success. The whole industry performance metrics from the CEO to the Receptionist are based on new business sales. Latter day attempts to create preservation initiatives, reduced lapse rates, and similar, have also achieved modest results, despite the apparent advantage to the bottom line by small reductions in a product provider’s lapse rate. Of course, every life office CEO will be by now snorting indignantly that he/she pays as much attention to both measurements, but in reality, the new business flow is what impresses the shareholders, the analysts, the Board of Directors and their constituents, the company’s shareholders. There may be regrets expressed at consumers having to carry the additional cost of these commissions, but they represent an expense built into the retail price of the product, much like University tuition fees contribute to the cost of academic staff salaries, and advertising rates are set to cover part of the salary costs of journalistic staff and management. ‘Churning’, ‘twisting’, whatever term you care to employ, is a by-product of high upfront commissions, but such inappropriate behaviour is already dealt with in legislation. Of course, the wording does not specifically refer to the replacement of one policy with another to the disadvantage of the client, but if this can be proved to be to the client’s disadvantage, the legal mechanism is there to hold the adviser to account. It would be perfectly feasible for the FMA to prevent wholesale churning taking place, given the necessary resources and the co-operation from product providers. Also, insistence by-product providers that the relevant replacement policy form be completed is only part of the story. I wonder how many applications with the said replacement form attached, have been sent back adjudged to contain insufficient justification for the replacement to take place?
Non-disclosure and declined claims
Let’s take a more reasoned view of this issue – other than that expressed by some journos that every evil insurance company is scouring its claims files every 5 minutes looking for so-called ‘technicalities’ to deny clients legitimate and valid claims.
This simply is not the case.
Smart insurers have long since realised that settled claims are their best advert, and many companies regularly publish details of their claims paid, and the circumstances which gave rise to these claims. Product providers have an obligation to deny fraudulent or invalid claims on behalf of the wider population of their policyholders, who will inevitably have to bear the additional (i.e. unanticipated) cost of these claims. Products are priced to cover specified contingencies which occur in specific circumstances; if claims are settled outside these parameters, the remainder of those in the insurance pool must pay more.
Non-disclosure elicits more emotive comment and reaction than any other reason for a claim being declined. At this point, it’s probably worth mentioning that the vast majority of claims are settled without drama, without controversy, and without any issues – of course, this doesn’t sell newspapers or increase circulation and attract more advertising dollars, but who cares, never let the facts get in the way of a good story.
Likewise, if you’re a consumer advocate, nothing attracts more pats on the head from your Lords and Masters than uncovering seemingly scurrilous behaviour from some wicked insurance company daring to suggest that a member of the public is trying to put one over on them. How dare this mighty corporate monster deny a poor unsuspecting consumer their rights to shareholder funds, even if the claim is outside the legitimate scope of the insurance contract?
Well, for a start, the said corporate monster is populated by ordinary New Zealanders, just like you and me. There is no conspiracy to do anything other than discharge the job they’re given in accordance with appropriate practices approved by generally accepted commercial standards.
That’s not to say errors don’t occur – of course they do. But most companies, I’ve worked with are quick to admit such errors and equally quick to seek resolution, as the adverse publicity is not generally regarded as advantageous. In other words, before a claim is denied, it has to go through some rigorous scrutiny and various layers of authority and approval.
And just another word to those who pen such emotive articles - almost exclusively, non-disclosure as a cause for rejecting a claim, is silent on intent.
There are seldom, if ever, any suggestions by an insurer, that a client deliberately withheld material facts. Non- disclosure, inadvertent or otherwise, prejudices the underwriters’ ability to offer economic terms to an applicant. Where the opportunity to assess the risk accurately is denied the insurer at the point of inception, there is an obligation – on behalf of all the other insured clients - to check that the request for claim is legitimate and that all appropriate terms and conditions have been observed by all parties to the contract.
However, being involved in a recent product design initiative, it was possible to create a process – cost included in the product pricing – which automatically included the attachment of the client/patient notes from the GP to every application. Granted this was driven by technology to which all advisers may not have access, but the cost these days is nominal and most advisers have internet access, in which case the process is sustainable.
Incidentally, this product also contained 125% upfront/20% renewal and came in around 10% - 15% below the lowest cost similar products in the market. Product providers showed little appetite to run with this – priorities, capital issues, systems re-designs, previous agenda items, were all trotted out as excuses for not adopting the new product design, so the initiative died on the vine.
So these various issues are symptomatic of an industry which attracts periodic adverse publicity, without any balancing perspective being effectively tabled. So while I’m not jumping to the defence of product providers en masse – after all, they can look out for themselves – neither am I making a sweeping condemnation of insurers.
And there is no doubt that our employees in Wellington are guilty of wilful neglect in not implementing the recommendations of the 2004 Law Commission Report.
The inevitable consequence of such neglect is for consumers/voters to suffer from disputes, as was outlined in the article.
It’s about high time those people in the Beehive who are paid to represent the interests of consumers/voters were held to account for ignoring the plight of those caught by the failure of the aforesaid elected representatives to address the issue of geriatric legislation.
Maybe it’s also high time for members of the Fourth Estate to focus on the causes of such events rather than the symptoms, and made a constructive and responsible contribution to bringing about the necessary legislative and regulatory changes to avoid further suffering.