The FMA has published its “Insurance conduct and culture: Fire and general insurers update”. The report covers the FMA’s findings from its evaluation of New Zealand fire and general insurers’ review of their operations to ensure a lack of conduct issues following the 2019 Life Insurer Conduct and Culture review.
Links to the report and the FMA media release are available online.
What does it cover?
Overall, the FMA found that most of the 42 fire and general insurers that were part of the review provided responses which were “well below” its expectations such that more work is required by most to prepare for the new conduct licensing regime. Two insurers (MAS and IAG) met the FMA’s expectations in full. The new regime is expected to come into force in early 2023, after the Financial Markets (Conduct of Institutions) Amendment Bill (CoFI) is enacted.
The key findings in the report can be summarised as follows:
- Conduct maturity: Overall, the FMA considered that the responses it received demonstrated poor understanding and commitment to conduct and culture. The FMA expects the sector to focus more on how conduct risks in the business are identified, managed and mitigated.
- Product and portfolio reviews: 22 out of 42 insurers conducted the systematic review of products and policy-holder portfolios requested by the FMA. Of those, all but four identified “major issues”. Most issues related to weaknesses in systems and processes, poor value and legacy products, and insufficient ongoing monitoring of product suitability.
- Remediation: Some remediation activity to address issues identified from the FMA review is already underway, with thousands of customers set to receive refunds as a result. The FMA considered that many insurers did not meet the “basic requirement that premiums are accurate, transparent, administered correctly and with value communicated to the customer”. The FMA expects compensation to be paid in a timely manner, and for the root cause of issues to be adequately addressed.
- Incentives and commissions: While many insurers were addressing staff incentives (including removing sales-based incentives), there was less proactivity in relation to commissions paid to intermediaries. The FMA expects insurers to have better oversight on commissions and incentives, including to intermediaries, which should be “fair and reasonable to customers, and understood by customers”.
- Oversight of intermediaries: The FMA considered that intermediary oversight by fire and general insurers was a key issue, like the life insurance sector. Insurers need to take ultimate responsibility for customer outcomes regardless of how products are sold. The FMA also reminded insurers of the obligations regarding intermediaries under the new financial advice regime and the need to ensure that insurers and intermediaries comply with the Code of Professional Conduct for Financial Advice Services.
- Governance and risk management: The FMA received mixed responses on the level of insurer board engagement. Boards are expected to set the tone for organisational culture and approach to conduct. The FMA expects boards and senior management to be “prepared to invest in systems and controls to manage conduct risk”.
Boards must set the tone from the top, developing a culture that balances the interests of shareholders with those of customers, and establishing an appropriate risk appetite that acknowledges conduct risk is material.
The FMA has written to each fire and general insurer communicating its findings in relation to that insurer, its expectations and the specific areas which it considers the insurer needs focus on. FMA has also met with industry bodies to advise them of its findings and expectations.
Our view
Conduct and culture in the insurance industry has been a key focus of the FMA in recent years. The FMA’s recent report makes its expectations very clear.
See our previous notes on the CoFI bill and upcoming regime here and here. Once CoFI has been enacted and comes in to force, licensed insurers (along with registered banks and licensed non-bank deposit-takers) will be required to apply to the FMA for a conduct licence, and, once licensed, to comply with fair conduct principles and to maintain an effective fair conduct programme.
Under the new CoFI regime , there will only be greater expectations on insurers (and others) to make sure that any necessary changes in culture, governance, policies, processes and procedures have been implemented to ensure good customer outcomes.
In particular, any fire and general insurer which does not already have a well-resourced project under way to address fully the FMA’s expectations before they need to apply to FMA for a conduct license under CoFI would be well advised to set one up promptly, as it appears the FMA intends to take a strong approach under the new regime from the outset.
What next?
Each fire and general insurer will be required to respond to the FMA’s letter to it within the timing set out in the letter (as applicable).
The timing of CoFI coming into force is not yet known, because the CoFI bill is still before Parliament. But our expectation is that it may be enacted before the end of 2021 or in early 2022, with the regime coming in to force by early to mid-2023. If you have any questions in relation to the above or are considering how the new regime may affect your business, please contact one of our experts.
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