The Melville Jessup Weaver report, Review of Retail Life Insurance, has been released this morning by the Financial Services Council.

The report says life insurance in New Zealand is 10% to 15% more expensive than it should be because of advisers’ commissions. It claims conflicts of interest cause poor outcomes for consumers.

It says up to 50% of advisers’ policies are replacement business, while bank staff operate at a rate of 10%. 

The report also cites data showing an increase in lapse rates in adviser-sold policies’ third year, when commission clawbacks no longer apply.

“A high upfront commission paid on a successful sale incentivises a consultant to firstly make a sale (without which they might not get paid at all) and to sell as much as they can (as that increases their remuneration). So we can end up with inappropriate sales (mis-selling) and inappropriate levels of cover (too high),” the report says.

“A manifestation of this conflict of interest is that personal risk insurance cover is more expensive than it needs to be and can be compromised by inappropriate policy replacement – commonly referred to as 'policy churn'. Policy replacement occurs in some instances not because the customer needs a new policy but because it will generate a financial return for the consultant.”

Report author David Chamberlain (pictured) said better alignment between insurers, advisers and consumers was needed.

The report makes a number of key recommendations:

It wants to drop the registered financial adviser designation so advisers are only authorised financial advisers, or qualifying financial entity (QFE) advisers.

AFAs would have to be able to access products across the market. QFEs would need to make it clear they were pushing their provider’s products.

Chamberlain said there was no requirement that advisers sold policies from every insurer but they needed to be able to access them. “If they do research and decide they want to sell one, that’s fine as long as you have the ability to access others. “

• Advisers would have to disclose their actual remuneration to their clients and tell them what their policies would cost without it. This would be part of a simplified disclosure process.
• A new remuneration model would see advisers paid 50% commission upfront, instead of up to 200%, and 20% servicing commission, up from about 7.5%. 
• The maximum upfront commission that could be paid is $3500.
• If a client moved to a different adviser, they could take the trail commission with them.
• No upfront commission would be payable if a policy was replaced within seven years unless the premiums increased.
• Volume-based incentives would be banned, including overrides and soft commissions.

Chamberlain said while fee-for-service was the ultimate model, that was unlikely to work because insurance had to be sold rather than bought.

But he said the intention was to move from rewarding the sale to rewarding service.

Advisers were looking for every reason to move customers, he said, and the new model would encourage more co-operation.

“We don’t know what’s good or bad in many cases, it can be very hard to determine. We are trying to deal with the underlying cause, which we think is the high initial commissions. If we take out the underlying incentive it should slow the rate of replacement business. That should reduce costs to the industry and should benefit consumers and ultimately advisers because it would be a stronger industry.”

One insurer had told him the proposed model was too expensive, he said.

Other suggestions include an industry-wide replacement business process, FMA being the conduct regulator of the industry, a code of practice and allowing KiwiSaver members to use their accounts to buy insurance.

The system would be reviewed in 2020.

If its recommendations were adopted, the report said replacement business should be halved, true new business volumes would increase as advisers had to find new clients, insurer costs would drop and take premiums with them and consumer confidence should lift.

Cameron Gray, spokesman for the Commerce Minister Paul Goldsmith said he was due to release the options paper for the Financial Advisors Act and Financial Service Providers Act review soon.

"Given the likely high level of crossover between the options paper and the MJW report, it would not be appropriate for the minister to comment on the report while he is seeking public feedback on the FAA review."

FMA director of regulation Liam Mason said: “The FMA has already been focused on the issues within the MJW report specifically in the release of our Strategic Risk Outlook last year and our sales and advice report this week. The SRO highlighted our focus on sales and advice and conflicted conduct  - and in particular the risks associated with remuneration structures  - and the inherent conflicts of interest that sales commissions can create. We note the MJW report as an interesting addition to this debate. There is also the current ongoing review of the FAA which is considering these issues."

MORE REACTION TO THE REPORT

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DOWNLOAD Full report here