Following on from the Australian Royal Commission and subsequent New Zealand banking reviews, 2019 was a year of intensive focus from the Financial Markets Authority (FMA) and the Reserve Bank of New Zealand (RBNZ) on culture and conduct in the insurance sector.
The FMA/RBNZ’s review of life insurers in January led them to request both life and general insurers to undertake two specific activities: 1. An in-depth product review 2. A gap analysis against the Australian Royal Commission findings. This has resulted in a significant programme of work across the insurance sector.
This work needs to be considered against the backdrop of substantial regulatory change relevant to culture and conduct.
Amongst other reviews around insurance contract law and the role of appointed actuaries, two key changes include the introduction of a new advisory regime (Financial Services Legislation Amendment Act) and the Ministry of Business, Innovation and Employment (MBIE)’s review of the conduct of financial institutions and the introduction of a new conduct regime.
Under both of these changes, new licencing requirements for insurers and advisers will impact the way that the sector is regulated, introduce additional obligations for insurers and advisers and give the FMA more power to monitor and enforce against licencing obligations.
This will put the regulatory regime here more in line with frameworks in Australia and the United Kingdom, and will have a significant impact on manufacturers’ obligations both in terms of how products are designed and how customers are engaged.
In this article we will focus on the challenges and lessons learned so far from both the life and general insurance market, the questions that organisations should be asking to ensure they have done enough to address regulators concerns and the future outlook for the general insurance market, including how conduct and culture should be integrated into insurers’ strategies going forward.
Lessons learned from the wider industry
Recognising there are distinct differences between life and general insurance operations in terms of both product complexity and distribution, there are nevertheless important lessons to be learned from the life sector given they have been subject to direct reviews by the regulators and have therefore had a four month head start.
Product review
New Zealand insurers have not been required to have formal or comprehensive product review processes, and some have relied on informal processes and discussion.
As a result, the amount of work the specific product review requirement has entailed has generally been underestimated by the market.
Indeed, the RBNZ and FMA recently formally requested a large number of life insurers to re-submit their product reviews, because they were either incomplete or did not go deep enough in terms of identifying risks and issues, and/or investigating issues that had been identified.
This will be most relevant for general insurers with a large number of products and distribution channels, and where products have rapidly evolved over the last five years, meaning substantial legacy books. Organisations without appropriate data management and governance have struggled to pull together consistent and meaningful analysis across their product portfolios
Identification and remediation of issues
The regulators are realistic, and understand that organisations are not perfect; therefore, where no issues have been identified, they are likely to be sceptical that the process has been rigorous enough.
Insurers need to be proactive in identifying potential issues. In some cases, executive teams may have overly positive or biased views; gaining independent feedback from front-line staff, mystery shopping and feedback through customer forums can be effective ways of demonstrating this.
Where issues have been identified, insurers typically do not have formal investigation or resolution frameworks so calculating customer impact and identifying root causes is incomplete and unsurprisingly progress in terms of rectifying issues has been slow or absent. This is demonstrated through examples of insurers knowingly sending out incorrect information to customers. There are plenty of case studies outside of New Zealand which demonstrate the importance of investigating and remediating issues quickly and efficiently in order to limit the longer-term negative impacts.
Systems and controls
The majority of issues we identified through working with our clients have not originated from bad intentions, but point to potential cultural issues around allowing systems and operational risk issues to continue unabated.
It is apparent that there has been some reluctance to invest in systems, to address known issues and a general lack of accountability for identifying and establishing controls to stop issues from continuing to occur.
A lack of appropriate consideration for operational and conduct related risks, including putting formal tolerances in place so that they can be proactively monitored and mitigated has also exacerbated these problems.
Oversight of intermediaries
Any conflicts of interests created by commissions need to be proactively monitored by insurers, as it is apparent that soft commissions are still being used and are considered by the FMA and RBNZ as high risk.
In the general insurance market there are a wide variety of distribution channels and types of arrangements which has made investigation and oversight of these more challenging. The FMA and RBNZ have made it clear that the onus sits with the manufacturer to ensure customers are getting good outcomes from their products.
Expectations are that insurers understand the outcomes being delivered to customers by intermediary channels.
For agency relationships, where insurers only provide product design and pricing support and legacy arrangements, this has meant insurers have to take a different approach. Utilising data and analytics will help insurers to understand whether intermediaries are doing the right thing for their customers.
What are the key questions insurers need to answer?
Based on the work we have carried out in the insurance space, we have outlined the questions that insurers should be asking to understand whether they have done enough to change the way they are considering customer outcomes in their organisations.
How do firms ensure that they have identified all the culture and conduct issues that exist within their business? How are issues investigated and remediated within your organisation, what frameworks are in place to ensure these are carried out effectively? How do you ensure you get to the bottom of the issues identified to ensure they don’t happen again?
How do you demonstrate that commissions across your portfolios are appropriate and do not drive poor customer outcomes? What kind of oversight is required / practical to ensure you know your products are being sold appropriately? What do you do when you identify misconduct by an intermediary? How do you know that the way your staff are incentivised results in good customer outcomes
Where does it makes sense to invest in appropriate data collection where capability does not already exist? How is culture and conduct being considered as part of your overall IT transformation? How do organisations gain comfort that data governance and quality in particular with legacy systems? How does the business manage its risks and ensure its control environment is operating effectively?
How are legacy portfolios reviewed when there could be knowledge and data gaps? What are the appropriate lead and lag metrics to monitor customer outcomes? How can the product review process be leveraged on an ongoing basis to ensure changes are having the desired effect?
Future outlook
Based on initial feedback to life insurers and the legislation for a new conduct regime that has been fast tracked for implementation, it is clear that the focus on conduct and culture is here to stay and is likely to intensify as we move into 2020.
Customer centric focus and measurement
Understanding customers’ needs and customer outcomes is about more than culture and conduct, it is essential for an organisation to innovate and stay competitive in a rapidly changing environment. A more customer centric focus and an improved understanding of customers’ circumstances and needs will ultimately result in higher retention and sales.
Lack of investment in this is a double-edged sword - in an increasingly more connected and open world, negative outcomes can have a significant impact on an insurer’s reputation.
Appropriate measurement and reporting of customer outcomes is critical to enable strategic decision making; customers’ needs and financial performance should be synonymous. Use of advanced techniques for data analysis allows insurers to gain insights where data is unstructured or to identify trends and relationships that would otherwise not be possible.
New Zealand banks and now insurers are developing customer outcome measurement tools and dashboards which have tolerances built in and allow appropriate ongoing monitoring, allowing insurers to be at the cutting edge of product design.
There will undoubtedly be challenges the insurance market need to face up to in the foreseeable future if insurers want to get ahead of the coming conduct regime and build culture and conduct into their strategic direction.
Insurers who are treating their conduct and culture programmes as a conduit for change rather than a compliance box ticking exercise are those who will have a competitive advantage over their competitors.
