The chairman of a life insurance company has hit out at a failure to address high commissions on life insurance sale in a new law governing the conduct of the finance industry.
Brian Blake chairman, of Fidelity Life, which is 41 per cent owned by the New Zealand Superannuation fund, said in the company's annual report it was a "missed opportunity".
Life insurers have been under pressure from regulators to shape up after a joint conduct and culture review of the sector by the Reserve Bank and Financial Markets Authority in 2018.
It found life insurers had been complacent about considering "conduct" risk, too slow to make changes after previous FMA reviews and not sufficiently focused on developing a culture that balances the interests of shareholders with those of customers.
The regulators also found extensive weaknesses in life insurers' systems and controls, with weak governance and management of conduct risks across the sector and a lack of focus on good customer outcomes.
Commissions came under particular focus, with a Reserve Bank table showing the commissions paid by Kiwi life insurance companies to advisers were the highest in the developed world, making up 20.4 per cent of gross premium revenue.
Regulators have recommended insurers review their commission structures and volume bonuses for financial advisers to ensure they are "incentivising intermediaries to deliver good customer outcomes".
Life insurers were given six months from January 2019 to come up with plans to fix their businesses and are still in the process of making changes.
Blake, a former DB Breweries boss, said in his chairman's address the outcomes of the FMA/RBNZ conduct and culture review were being implemented across the industry.
"... we're confident in our own position. However, the failure to address high upfront commissions in the Financial Markets (Conduct of Institutions) Amendment Bill was a missed opportunity, in our view."
Blake said in a highly competitive market like life insurance there was unlikely to be change without regulatory intervention.
"... it's unlikely anyone will significantly reduce upfront commission levels and risk losing
The bill is aimed at amending the Financial Markets Conduct Act 2013 to ensure that certain financial institutions and their intermediaries comply with a principle of fair conduct and associated duties and regulations.
It will also set up licensing and regulation of conduct for banks and insurers which would be overseen by the FMA.
It was still going through parliament before it broke up for the election and was up for a second reading. If passed this year, it has a proposed phase in period of two years from when the bill becomes law.
Blake said while Covid-19 had caused lasting damage in some sectors so far, the life insurance industry had not felt the impact it initially anticipated.
While its customer call volumes spiked up 44 per cent in the early stages of the March lockdown they had since returned to more normal levels.
"We haven't seen the expected increase in claims or lapsed policies, and we've been able to focus our efforts on supporting customers through these difficult times."
However, he said the company remained cautious and vigilant.
"It's likely we haven't seen the full economic impact of Covid-19 yet, and economists
are forecasting a downturn in the first six months of 2021."
Fidelity Life's net profit was $20.1 million in the year to June 30, up from $18.3m. Its insurance premium revenue rose from $269.5m to $275.5m although its claims expense also rose during the year from $125.7m to $139.7m.
Blake said given the current economic context the RBNZ had advised all insurers that protecting capital should take priority over paying dividends.
The company is one year into a five-year technology overhaul. Blake said the next financial year would see the bulk of its investment made in the project and at the same time it needed to prepare for claims and lapse increases as a consequence of the deteriorating economy.
"Between this and the RBNZ directive, the board has decided not to pay a dividend this year."