The life insurance industry is bracing for the findings of a dive into its culture and conduct by regulators after warnings from the Reserve Bank governor that it will be tougher than its stance with the banks.
The Financial Markets Authority and the Reserve Bank are due to release a report this month after undertaking visits to insurers between August and November last year following requests for proof that there are "no material conduct issues" within their businesses.
The insurance report follows a look into the banking industry which found no systemic issues but "significant weaknesses" in the way New Zealand banks govern and manage conduct risks.
But Reserve Bank governor Adrian Orr indicated in November that insurers should be braced for worse.
"Banks are large institutions and are well-capitalised."
"The insurance sector is smaller, far more heterogeneous...and there are a lot more principle agent relationships going on and I would say the concept of capital can be far more complex."
Orr said insurers should be well aware of the issues pointing to previous reports undertaken by the FMA which showed concerns over conflicts of interest created by the way insurers incentivised advisers to sell their products.
The Reserve Bank's November financial stability report highlighted commissions in New Zealand are around 20 per cent of gross premium revenue - the highest in the OECD - and more than double the rate in Australia.
"We can't micro-manage this industry but it has some real significant issues that need to be aired and talked about," Orr said at the time.
Kara Daly, special counsel financial services at MinterEllisonRuddWatts, said the report would likely focus on sales practices and would be consistent with the themes the FMA and RB had already talked about.
"Commission based sales are obviously going to be a focus."
Other countries have capped commissions and talked about banning them completely.
But the government has not indicated any intention to cap or ban commissions.
Daly said that was a conundrum the regulators would have to face in making recommendations.
Already insurers have been making changes removing soft commissions like overseas trips for advisers who sell high levels of their products.
Daly said changes under the Financial Services Legislation Amendment Bill would also drive behaviour change.
The bill is expected to pass into law in the first half of this year bringing greater disclosure from advisers.
On top of that Daly pointed to the insurance law review which the government kicked off last year and predicted it would pick up on the themes coming out of the report.
"Financial services firms are already taking note of the findings coming out of Australia's Royal Commission and the banking review here and that will continue with the insurance review."
Jessica Wilson, head of research at Consumer New Zealand, said it wanted to see a ban of soft commissions which can include perks like travel, dinners out and tickets to events.
"They need to go in our view."
Wilson said it had always called for a phase out of commissions but if they were going to stay they needed to be monitored by regulators.
"We haven't seen that to date. More scrutiny is needed."
Wilson said there also needed to be better disclosure from insurers to help consumers understand what they were buying.
Consumer research on customer satisfaction showed life insurers had a very low rating at 39 per cent even compared to other insurers like car insurers which had 61 per cent customer satisfaction.
Wilson said using brokers who were paid by commission left questions over whether consumers were being sold the best product for them and whether they were getting the best after sales service.
"Insurance is one of the key areas where it is really difficult for consumers to work out which is the best policy and whether they were paying too much."
Michael Naylor, an insurance expert at Massey University said research showed there was limited evidence of incentives causing mis-selling and said this should not be a primary focus.
"New Zealand does, however, have unusually high up-front commissions and low trail commissions, which could be reformed.
"NZ is under-insured so it is vital that total long-cycle commission does not reduce so there are still incentives to enter the profession. There does needs to be the ability for insurers to be able to spend on education conferences."
Richard Klippin, chief executive of the Financial Services Council - the industry body - said it was ready to engage constructively and positively with the second stage of the conduct and culture review by the FMA and RBNZ.
"While we do not want to pre-empt the report or speculate on specific recommendations, we expect it will provide a valuable chance to better understand how the industry is meeting the needs of its customers."
Klippin said the FMA and RBNZ had been clear over the past few months that there will be a number of issues for the industry to consider and address.
"Conduct, culture and ensuring great consumer outcomes is paramount and we saw some
important first steps by the industry last year with the adoption of the FSC code of conduct across our membership, and tackling soft commissions head-on by stopping overseas incentive conferences.
"We expect that the report will highlight a numbers of areas where further action is required."