MR No. 2018 – 30
18 July 2018
Customers not the focus of replacement business at large insurers
The Financial Markets Authority (FMA) is considering regulatory action against three large financial institutions or
qualifying financial entities (QFEs) following a review
of insurance replacement business practices.
The inherent risks of conflicts of interest involved in selling financial products are heightened when vertically
integrated organisations both create and then sell their own products. This thematic review looked at how insurance
firms identify and manage these risks through their policies and procedures when a replacement insurance policy is sold.
The FMA considers that replacing insurance policies is a high-risk transaction for customers, because of the risk of
claims being declined in the future and original policy benefits being lost. Customers may never discover this, until
they try to claim on the insurance.
Even where the impacts on the policy-holder are neutral, the FMA is concerned that replacement of the policy benefits
those making the sale rather than the customer. Most “new” life insurance written in NZ is actually replacement
insurance rather than a customer taking out insurance for the first time.
The key findings in the report:
• Most firms had processes in place to identify when a customer was being advised to replace life or health insurance,
showing awareness of risk associated with these transactions. Generally, these processes seemed oriented towards
reducing firms’ legal risk, rather than to identifying and mitigating risks for customers.
• Fewer than half of firms reviewed advise customers that replacing their life insurance could lead to worse cover or
the potential loss of benefits. Insurers need to acknowledge that replacing insurance policies is a high-risk
transaction for customers.
• Although firms use transaction-specific “replacement business forms”, these are used mainly as a risk management tool
for insurers, presented at the end of the advice process, rather than being used to help and support customers in their
• None of the insurance providers reviewed have an independent process to distinguish between new and replacement
Of 11 firms subject to the review, two entities’ internal polices and processes were high quality and appeared designed
with better customer outcomes in mind.
Six firms have taken some steps to mitigate the risks associated with replacement business, but need to improve their
practices for customers.
For three entities, the findings of the review indicate that they may not be meeting their legal obligations, and the
FMA is considering regulatory action.
Liam Mason, FMA Director of Regulation said, “We are concerned that a number of firms are not recognising or treating
the risks to customers in replacement insurance transactions. Processes seem to be set up to manage the risks faced by
the firms, not to help customers.
Without appropriate procedures in place, QFE advisers and intermediaries are being set up to fail in complying with
their obligations to exercise care, diligence and skill. It is disappointing that despite the risks to consumers, some
insurance providers do not identify insurance replacement as a particular area of risk. We are now considering
regulatory action where our findings suggest a firm is not meeting its legal obligations.”
The report focused on 11 QFEs or large firms selling life insurance in New Zealand. This report is part of the FMA’s
regulatory focus on managing conflicts of interest in the insurance industry.
The role of registered and/or authorised financial advisers in insurance replacement business was examined in two
reports, published in 2016 and 2018.
A thematic review of incentive structures in banks is also underway. This is due to be completed by the end of 2018. The
RBNZ/FMA culture and conduct review is also ongoing.
Notes to editors:
Replacement business is where a client changes insurance policy or providers.
A qualifying financial entity is a large financial organisation like a bank or insurer. It has responsibility to ensure
employees and its nominated representatives comply with their financial adviser obligations.
The Financial Services Legislation Amendment Bill is currently before Parliament. The conduct examined in this review is
covered by the Financial Advisers Act 2008, which would be replaced by the bill currently before Parliament.