The Financial Markets Authority (FMA) is considering taking regulatory action against three large financial institutions following a review of insurance "replacement" business - which is essentially when one insurer poaches clients from another.

In a report, the FMA said most of the 11 firms it looked at 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, it said.

Fewer than half of firms reviewed by the FMA advised customers that replacing their life insurance could lead to worse cover or the potential loss of benefits.

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"Insurers need to acknowledge that replacing insurance policies is a high-risk transaction for customers," it said.

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 decision-making.

None of the insurance providers reviewed have an independent process to distinguish between new and replacement business, the FMA said.

Of the 11 firms subject to the review, two entities' internal polices and processes were high quality and appeared designed with better customer outcomes in mind, it said.

Six firms have taken some steps to mitigate the risks associated with replacement business, but need to improve their practices for customers, it said.

For three entities, the findings of the review indicated that they may not be meeting their legal obligations, and the FMA is considering regulatory action.

The FMA said there were inherent risks of conflicts of interest involved in selling financial products were heightened when vertically integrated organisations created and then sold 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 said in a statement.

The FMA said 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.

"Regulatory action" by the FMA could include public or private censure, a direction order to take certain steps to put themselves in shape, and or an administrative fine.

The FMA's director regulation, Liam Mason said the Herald that about six of the firms were "doing ok" but that there was room for improvement.

"We are disappointed to see that there are still some who have not got the message that they need to pay attention to their sales and advice practices in this area," Mason said.
"But the majority are, we think, meeting their obligations," he said.

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. "Customers may never discover this, until they try to claim on the insurance," it said.

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.

In a bid to front foot the report, AMP New Zealand's managing director Blair Vernon, said he was confident AMP - one of the country's biggest insurers - had the right systems and processes in place.

"It's a sobering report and we would hope that some participants in the industry reflect on the what the best outcome is for clients is and what whether that is really being delivered." he told the Herald.

"We are confident of our own position based on the director feedback from the FMA," he said. "You can't really take your eye off the ball because there are significant commissions and incentives in place in this market, and you need to be alert to conduct continuously," Vernon said.

The Financial Services Council said the FMA's review contained some important findings.

"We commend the FMA for the active role it is taking in carrying out these thematic reviews and setting out clear expectations in regards to industry conduct," the council's chief executive Richard Klipin said.

"We don't shy away from the fact that the findings of the review are mixed and that there is a clear challenge from the FMA for the industry to improve practices related to replacement insurance transactions," he said in a statement.