A guarantee for the future: Conduct transformation in New Zealand's insurers

The financial services sector is in a time of seismic change, with the last few years marked by significant scrutiny into the industry’s business practice and ethics, both in New Zealand and farther afield. The treatment of consumers and the concept of fair business conduct has come under the microscope. Now, it’s no longer enough for companies to cite their own ethical approach through careful brand communications - intent must be matched with actions.

These discussions have been driven by significant reviews, including the recent final Hayne Commission Report in Australia, whose emotive case studies and extensive analysis described a sometimes flawed approach to customers in the pursuit of profit. In turn, it has now set clear benchmarks for improvement for financial services to work towards. On this side of the Tasman, the New Zealand Financial Markets Authority (FMA) and Reserve Bank (RBNZ) have completed their own conduct and culture reviews, first into banks and then into prominent insurers.

Both reviews passed on specific feedback to the 11 banks and 16 life insurers that were analysed, with the latter given until 30 June 2019 to respond with actionable plans. There’s work to do – in the insurer review, the FMA and RBNZ identified extensive weaknesses in their systems and controls, extending from governance and management right down to front line employees. In some instances, a mismatch between product design and customer needs has increased the risk of long-term conduct issues. Financial conduct isn’t always being regulated sufficiently either, with financial advice sometimes only checked by intermediaries, covering just fractions of insurance policy lifecycle.

At a fundamental level, the recent insurer review is about accountability. It challenges these organisations to take responsibility for their conduct risk from the board right through to the front line, rather than rely on external mediators to highlight issues. After all, responsible conduct is something that should be a part of the fabric and culture of financial services organisations – something that we recently highlighted in our Deloitte New Zealand article series. An emphasis on good consumer care should always be front and centre, demonstrable to both the customer and regulators.

Taking time to make actionable conduct change is beneficial for a number of reasons, and not only to address pressing external scrutiny and boost an insurers’ reputation in the market. It can crucially build long-term customer trust, letting the consumer know that they’re getting fair treatment and have transparency over their commitments from day one. By building transparent and trusting relationships, organisations can also ensure long term sustainability and improved retention of customers. From a legal standpoint, it’s also essential, with improved business conduct ensuring that organisations are adhering to the broader regulatory framework.

So what practical steps can insurers take? First, they need to identify their plans for FMA and RBNZ’s June deadline, which can involve performing a culture assessment and engaging with regulators to develop a new working relationship. As mentioned in our Conduct article series, data can be harnessed to dig deep into where insurers may be missing the mark in serving their customers, and it’s crucial that they understand the full range of their customers, including the vulnerable ones.

For extensive change, business conduct transformation can be distilled into 11 clear areas that insurers must focus on to improve their own conduct and reduce risk. Those are:

• Purpose – insurers should ensure that their organisations hold a clear purpose that has the customer at the centre and translates into their policies and procedures from the top down.
• Culture – understanding what it means to put the customer at the centre and their interests and outcomes as priority will require a cultural transformation journey.
• Identity – organisations must identify how they differentiate from their competitors to clearly understand how they want to be perceived by consumers and regulators alike.
• Accountability – all decisions must have a line of accountability to ensure that they’re made responsibly and with transparency. One way to work towards this would be to appoint a Chief Customer Officer, with the right level of accountability.
• Customer – it’s crucial that insurers understand the people they’re working with, with all employees and intermediaries aware of their customers’ needs, both today and in the future. Customer requirements will change over time, and there is now an increased expectation that organisations continue to understand and monitor their customers’ needs and ensure that the products sold are still appropriate. Sufficient customer research, insights and ongoing analytics should be recorded, discussed and actively managed.
• Product – insurers should take inspiration from the recent Product Approval and Review Process requirements in the European Union MiFID II legislation, reviewing their products with relevant internal stakeholders and making assessments on their suitability for clients. Product testing with sample target customers and their advisors is another step in the right direction. Products need to be fit for purpose for each segment of target customer.
• Performance – there has to be clear structures in place to ensure that staff operate with the best interests of the customer at heart. Performance metrics that are linked to good customer outcomes (instead of sales targets) should be entrenched across the organisation.
• Governance – those at the helm should be able to tell whether every element of their organisations are working for fair customer outcomes.
• Channels – the different parts of the organisation should be working together seamlessly to ensure the best product for the customer. The appropriate channel given the target customer should be used and monitored.
• Communication – avoiding sales or brand spin, communication both internally and externally should be transparent, clear and in plain language, given the target demographic customer profile.
• Monitoring - efficient monitoring and responsible data collection should be used to target customers with the correct products and maintain effective conduct. It is critical to have sufficient data points regarding customer outcomes and customer metrics that are recorded and managed on a regular basis.

How Deloitte can help

Our team can support you and your organisation in your conduct and risk culture journey through:

• Performing risk assessments throughout your operations, covering people, channel, product and customers, to identify potential ‘hot spots’ and immediate focus areas.
• Working with boards and senior management to better understand the key conduct issues and risks, and ways to better engage with them.
• Assisting with culture assessments to understand where strengths and focus areas lie.
• Enhancing existing governance and monitoring processes to better protect you against conduct risks.
• Development of a project plan and road map to understand and mitigate your conduct risk.
• Supporting your engagement with the regulators.

Find out more and visit our Risk Advisory section at Deloitte New Zealand.