The Financial Markets Authority and the Reserve Bank say they are "disappointed" with life insurers' responses to their joint Conduct and Culture Review and the Government says the sector needs to "lift its game".
Significant work was still needed to address the issues of weak governance and ineffective management of conduct risk identified in the regulators' report earlier this year, the FMA and RBNZ said in a joint statement.
New issues in the sector were also identified, including:
• Overcharging of premiums and benefits not being updated due to system errors, human errors and under-reporting of deaths.
• Poor customer conversations overlooking eligibility criteria and poor post-sale communications, which lead to declined claims and underpayment of benefits.
• Poor value products were identified, where premiums charged were not fair value for the cover provided.
"While we're disappointed, we're not surprised as the responses confirm what we found in our original review," said chief executive Rob Everett.
"It's clear that progress has been slow and not as far-reaching as required. Some providers have started work to identify the customer and conduct issues they face, others have not provided any detail on this."
Sixteen life insurers were asked to provide work plans outlining the steps they will take to improve their existing processes and address the regulators' findings and recommendations.
"We're disappointed the industry's response has been underwhelming," said Reserve Bank Governor Adrian Orr.
"The sector has failed to demonstrate the necessary urgency and prioritisation, around investment in systems, to provide effective governance and monitoring of conduct risk."
There was also a wide variance in the quality and depth of the systematic review of policyholders and products, the regulators noted.
Some did not complete this exercise and others did not provide data on the number of policyholders affected or the estimated cost of remediation activities.
Insurers that completed the exercise identified at least 75,000 customer issues requiring remediation, with a value of at least $1.4 million.
Minister of Commerce and Consumer Affairs Kris Faafoi said he shared the regulators' concerns and the industry needed to "lift its game".
"Some life insurance companies also appeared to be trying to 'pass the buck' to the brokers and advisers they use to sell their products," he said.
He acknowledged that some life insurers had made commitments to address issues, and were moving in the right direction.
However, overall the industry still had work to do, he said.
"I want insurance providers to understand that they remain responsible for the quality and appropriate design of the products they sell, whether directly or through contracted agents, to ensure those policies fit customers' needs."
Faafoi said the Government was working to fast-track measures to improve conduct in the financial sector, and would announce action on this shortly.
The Financial Services Council - which represents the industry - said improvements across the sector remained "a work in progress".
"It is clear that as a sector we need to do more and do it faster to improve identified issues especially in relation to legacy products, customer communications, and product design", said FSC chief executive Richard Klipin.