The FMA requested four years' data from the 12 main insurers in New Zealand to conduct research on replacement business.

It looked only at insurance advisers - not banks or other product providers - because while they might have a risk of mis-selling, the FMA said it was only advisers who could "churn" - move clients for the benefit of the adviser - multiple times.

FMA director of regulation Liam Mason said: "The reason we are looking at this issue is not because we say this is the only potential issue in the life insurance market. This distribution channel covers over 40% of the in-force life insurance policies in New Zealand and is where there is a high risk of churn. This was a specific data-gathering exercise to look at churn, not a clean bill of health for other distribution channels."

The FMA took a particular interest in 1100 AFAs and RFAs who have more than 100 active policies on their books and 200 advisers who were seen as "high volume", with a high rate of replacement business. Forty-five of those replaced more than 20% of policies in a single year.

Mason said it was quite pleasing to see that the majority of advisers did not have high levels of replacement business. "But at the same time a relatively small number do seem to have unusually high levels of replacement business."

The advisers identified as high-volume have not yet been told they have been singled out as such.

The report said replacement business was a worry because there is a risk consumers could have claims denied that might have been accepted under their original policies if they are moved. They could also lose benefits in their original policies, end up paying more over the long term or be over or under-insured because of poor advice.

"The type of commission was the most significant factor in whether a policy was replaced," the report says.

"The next most important factor was whether the clawback period had ended, followed by the age of the policy. The quality of a product (known in the industry as ‘product scores’) was only a minor factor. This suggests that some advisers are acting in their own interest."

Policies with a high upfront commission and a lower trail commission were 1.6 times more likely to be replaced after the clawback period ended.

The report said overseas trips were an effective sales incentive for advisers. Policies no longer subject to clawback were 2.2 times more likely to be replaced if overseas trips were offered as an incentive. Even new policies still subject to clawback were 8% more likely to be replaced if an overseas trip was offered.

During the review period, advisers were offered trips to destinations such as Shanghai, Prague, Las Vegas, Hollywood, Rome, New York and Rio de Janeiro as sales incentives by life insurers. The high-replacement advisers took an average of two of these trips each. One high-replacement adviser took 10 trips in four years.

On average, RFAs had higher rates of replacement business than AFAs. About two-thirds of the high-volume advisers, and 86% of the high-replacement advisers, were RFAs. Some RFAs replaced more than 35% of their life policies in one year.

Mason said something that had come through clearly was that AFAs and RFAs were being held to different standards, while dealing with the same products. "We don't think that's particularly helpful for consumers. They should know what to expect from an adviser."

The high-replacement advisers earned almost 50% more from commissions on life insurance than other high-volume advisers. More than half of advisers had 90% of their policies with one provider.

The FMA will now use its findings to focus its monitoring efforts. Mason said the report highlighted that while most advisers were doing well, it should focus its efforts on those who were not behaving responsibly.

The FMA has given its findings to the Ministry of Business, Innovation and employment as part of its review of the Financial Advisers Act. It has also held talks with insurers and financial adviser groups.

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