Life insurance payouts to aggrieved customers rise to $43 million in four years

Life insurers had to compensate consumers for poorly sold products. photo / file

Almost half a million life insurance customers have received $43 million in compensation for underselling products since 2018, the Financial Markets Authority says.

And companies are expected to report more issues as they continue to search for and find historical issues.

Clare Bolingford, director of banking and insurance at the Financial Markets Authority, told attendees at the Financial Services Council conference in Auckland today that many providers have themselves raised concerns since their behavior and culture review in 2018.

“In that time – almost four years – we’ve had 225 such problems with life insurers reported to us, many the result of creaking systems and weak controls.

“Nearly half a million customers were affected and more than $43 million was paid for the fix. And that applies to only a third of the issues whose impact has been fully assessed.”

That remediation has skyrocketed since September 2019, when insurers identified 75,000 affected customers with a remediation value of approximately $1.4 million.

One area that has caused particular problems for the industry has been credit card prepayment insurance; virtually all have stopped selling it now.

Bolingford said it highlighted the product last year because it offered little or poor value to a large number of customers, unhelped by the way it was sold.

“The more companies searched, the more problems they found.”

In June, Cigna New Zealand was ordered to pay the FMA $180,000 after two life insurers it now owns admitted to breaking the law on credit card payback insurance policies.

OnePath Life (NZ) and Cigna Life Insurance New Zealand were found to have breached the fair trading provisions of the Financial Markets Conduct Act 2013.

The violations related to misleading information provided by ANZ when issuing monthly credit card statements to certain ANZ customers who had purchased Credit Card Refund Insurance (CCRI) policies with Cigna and OnePath.

Bolingford said it was very likely that more issues would be self-reported as companies continue to investigate historical issues.

The FMA has been mandated to license the financial industry for conduct in recently passed legislation under the Conduct of Financial Institutions Act.

The new rule comes after a gap in the oversight of the behavior and culture of banks and insurers was identified in the wake of Australia’s Royal Commission on Financial Sector Misconduct.

Some also called for a Royal Commission in New Zealand, but instead the FMA and the Reserve Bank conducted behavioral and cultural reviews of banks and life insurers.

The life insurance review found that the industry was in need of major restructuring as it was failing to meet customers’ needs.

Bolingford said the reviews helped the FMA deepen its understanding of the banking and insurance sectors and enabled better collaboration with the industry.

It had also helped root out behavioral issues and prioritize customer interests.

“When we asked companies to review their business for signs of bad practice, we found – and indeed continue to be informed – that several issues had negative impacts on customers and unfair treatment.

“Many of these have now been fixed and customers sorted out, but many are still being worked through. And I expect more to come to light, particularly in companies that may not have properly tested the areas where harm can occur for customers.”

Bolingford said the new law is a shift from ticking boxes to a focus on better outcomes for consumers.

“It places the responsibility on institutions to consider what fairness looks like and then formalize that in what is called a ‘fair conduct program’ that is specific to each entity.

“These programs must be approved by the company’s board of directors before they can apply for a financial institution license, which they can do starting next year.”

Once the regime is in place, it will hold insurers accountable, she said.

Clare Bolingford, Director of Banking and Insurance at the Financial Markets Authority. Photo / Included

Bolingford said her message to the sector is that finalizing a behavioral action plan is not the end and a more fundamental change is needed to bring customer justice into every aspect of decision-making.

“Life and health insurance are long-term products that many people buy unconditionally and faithfully for decades, often from the same provider.

“Unfortunately, some customers only find out that there are problems with their insurance cover at the time they report the claim – which is too late.”

For this reason, it was important that the product features and exclusions as well as the determination of the premiums were properly understood.

Bolingford said she hopes for more transparency, better communication and a better understanding by customers of the products they are selling once the regime takes hold.