THE YEAR IN REVIEW
WHAT’S CHANGING IN CYBER SECURITY? CONFRONTING THE “NUMBER ONE PROBLEM WITH MANKIND” Insurtech disruption is inevitable - are you ready? Cyber-insurance: Get it right for your clients Insurers and Privacy Act requests www.ibanz.co.nz
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Cost an important compliance consideration
CoverNote is the official publication of IBANZ and is distributed FREE on a quarterly basis (March, June, September, December) to members throughout New Zealand and associated companies. Additional copies are available at a cost of $7.50 per copy, or 12 month (4 issue) subscriptions at $30.00, inclusive of postage and packaging. The articles or opinions featured within this magazine are not necessarily the opinions of the publishers or IBANZ, and they do not accept responsibility for the content of articles featured within the publication. No part of this publication may be reproduced without the written permission of the publisher. The publishers do not accept responsibility for loss or damage to unsolicited photographs or manuscripts. IBANZ enquiries should be made to: Gary Young, Chief Executive, IBANZ. Email: firstname.lastname@example.org IBANZ National Office located at: Level 5, 280 Queen Street, Auckland (P.O. Box 7053, Wellesley Street) Telephone 09-306-1732. Website: www.ibanz.co.nz
pproaching the end of the year we can take the opportunity to take stock of our situation, what has been achieved and where to from here. This year has continued the trend of IBANZ increasingly focusing on legislation and the resulting regulations with their inevitable compliance costs. Legislation on financial services is growing and will continue to do so, that is the reality of the world we live in. As government seeks greater consumer protection more rules are written around fairness and transparency. Unfortunately in doing so, the reality of what it will cost gets forgotten. The cost/ benefit relationship is vitally important. A perfect system is useless if no one can afford it. We are currently engaging with government on two key pieces of legislation where the cost of compliance will be significant. The Financial Services Legislation Amendment Bill (FSLAB) and the Fire and Emergency New Zealand Act (FENZ) both raise compliance issues for insurance brokers. In the case of financial advisers under FSLAB the issues centre on how an adviser will be required to prove competence. If that is a qualification, then what is appropriate? No easy answer given the wide range of financial advice and experience within the adviser population. Few would argue that some proof of competence is necessary, particularly for those who see themselves as professionals. However the testing regime must be fair, relevant and cost-effective. In relation to the FENZ legislation, compliance cost is a far greater challenge. The new levy regime is totally unsuited to our industry and is creating significant problems before it is even implemented. We are headed towards a complex and costly compliance regime. No matter how it is approached there are no simple solutions. The insurance industry faces huge costs in trying to respond to, and eventually manage, levy collection. The stated reason for this change is fairness. It is difficult to understand how the imposition of an expensive bureaucracy on responsible consumers is in any way fair. Surely we can do better; not to will be an indictment of all involved. In the meantime I trust you all finish the year on a successful note and are able to take a relaxing break before tackling the challenges and rewards of 2018.
Gary Young, CEO, IBANZ
14. The year in review 15. The year in review - Marsh A 12 month view of the New zealand
16. The year in review - NZI Change at the top 18. The year in review - Vero Year of change for Vero
6. Spotlight on ANGUS DALE-JONES Angus Dale-Jones says he fell into his career
20. The year in review - Rothbury Eye on expansion 22. How the sharing economy is blurring insurance lines 24. A Review of the Review - IPSA in Context The review of the Insurance (Prudent Supervision)
Act 2010 is progressing in a measured and thorough manner, as might be expected from the Reserve Bank of New Zealand.
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WHAT’S IN CYBE CHANGING R SECUR G THE “NUMBE ITY? R ONE PROBLE Insurt M WIT
ech MANKIND” Cyber-insu disruption is inevita rance: Get ble - are you Insurers and it right for your clients ready? Privacy Act requests
Expansion After ticking over five years since establishing in New Zealand PSC Connect has been a remarkable success story. With 35 Member Broker businesses throughout New Zealand dealing with $30mill GWP they continue to provide an outstanding opportunity for experienced brokers to build a significant asset for themselves by utilising their strong personal client relationships with the significant leverage that an international company like PSC provides. NZ National Manager, Dave Penfold, says one of the key attractions to being part of the PSC Connect group for both new start-ups or existing broking businesses is that while our brokers have very strong business relationships with their clients, those clients need comfort that they have some leverage and clout behind them. “Brokers that have joined us have been amazed at the deals we can get across the line for them, both in terms of placing of large or diffcult risks and with claims negotiations. Their clients are delighted because they retain the personal relationship with their brokers backed up by a very strong international company.
“Our motto is 'we make it personal' and the success of our broker network is based on this by giving quality advice to their clients. SME businesses are still demanding this regular and quality communication despite the perceived threat of digital disruption. In saying that we also have some exciting IT/Digital developments being rolled out in 2018 to make the transaction process more efficient.” There are big plans for further growth with an estimated 50 Member Brokers by 2019, so additional resourcing is happening soon including the appointment of an in-house broker early in 2018. The PSC Insurance Group is also rapidly expanding with several recent purchases in Australia and the UK. “The Group generates over $900mill in premium, are members of the global broker network Brokerslink so together with our membership of the Steadfast Group we have some considerable strength that our member brokers gain the benefit from.”
Build your own broking business supported by a global insurance broking company ARE YOU: • Frustrated working for someone else? • Ready for an exciting new challenge? • Wanting 100% ownership of your business? • A quality insurance broker? IF YOU HAVE AN EXISTING BUSINESS DO YOU: • Want to level the playing field? • Need a new quality web based broking system? • Need access to more markets for your clients? • Want to increase the value of your business?
For confidential enquiries: call: Dave Penfold 09 358 1186 email: email@example.com Proud to be members of IBANZ and Steadfast
Insurance stalwart remembered Long-standing insurance adviser Kevin Allen is being remembered for going beyond the call of duty in his service to the industry. The father of four died in mid-November. Allen began his career in insurance with State Insurance in 1968 and moved through three broking houses before he started his own business in 1985. He was principal and director of Insurance Consultants Ltd until he sold the business in 2008, by which time it was an employer of 16. He was a board member of IBANZ for more than a decade and headed the education committee for seven years. Allen was named Insurance Broker of the Year in 2004. Through his career, he was a strong advocate of regulation and the need for insurance broking to be seen as a profession. In 2000, he won the Richard Burrows trophy for contributions to the NZ insurance industry, his company Insurance Consultants was awarded Company of the Year.
More recently, he helped the Professional IQ College write course material, deliver workshops and webinars around New Zealand. Allen was this year included in the Queen’s Birthday Honours, given the NZ Order of Merit for his services to people with brain injuries. He was also involved with fundraising for children with cancer. IBANZ chief executive Gary Young said Allen’s personal contribution to the insurance sector had been significant. “Always willing to help others in their journey to become qualified professionals, Kevin has been a valuable role model for others to follow.” Allen was engaged in substantial Christchurch earthquake, material damage and business interruption claims. He was known for his problem-solving skills, his technical know-how and excellent claim outcomes. He is survived by his wife Michelle and children.
Insurers on track Private insurers are on track to meet their target of having the majority of Kaikoura earthquake settlements complete by the end of the year, the Insurance Council of New Zealand said. They have fully settled 69% of all residential and commercial claims for the November 14 earthquake. “We are very pleased with our rate of progress and are on track to have in excess of 75% of all residential properties fully settled by year end,” said chief executive Tim Grafton. “Insurers are acting as agents for the Earthquake Commission (EQC) and are managing most of the building and contents claims. We believe this is the model for the future as it has proven to deliver efficiencies for everyone by reducing double handling and speeding up settlements. Treasury is currently reviewing the EQC Act and the new Government has the opportunity to ensure insurers assess and manage all claims in future,” he said. “As at October 31, 91% of all residential assessments have been complete with 65% of building claims fully settled and 92% of home contents claims fully settled. Private insurers have been settling at a rate of about 10% per month, so we are confident we will have the majority of claims closed out by the end of the year,” he said. The total value of insurance claims for the November 14 Kaioura 4
earthquake was more than $2 billion at the end of October, with most of the losses in commercial claims, at $1.47 billion. Private insurers have received more than 44,000 claims, of which more than 39,000 are for residential home and contents claims. Of commercial claims, 80% by number have been fully or partially settled by the end of October. In dollar terms, over $547 million of commercial claims have been partially or fully settled.
SMEs lack cyber cover New Zealand small businesses are lagging in their uptake of cyber protection compared with their Australian counterparts, the Insurance Council of New Zealand said. Only 6% of SMEs in New Zealand have cyber insurance, compared with 14% in Australia. Insurance Council chief executive Tim Grafton said: “big corporates get it, we are seeing a real move to most having a cyber policy or at least a standing item on their board agendas. “The real problem area is NZ small-medium enterprises. We are a nation of small businesses with 90%-plus of businesses in NZ under 20 employees. The common sorts of crypto attacks are unsophisticated, untargeted and while low in dollar value - usually sub $5000 - enough to be an annoyance and damaging to a small business.” A recent Norton NZ small business security survey found one in five small businesses in New Zealand had been targeted by a cyber attack. Nine out of 10 cyber incidents begin with a human error in the organisation being attacked, which makes education about cyber risks and robust cyber risk management extremely important.Victims are also very often unaware that a cyber breach has occurred; it may be some years before a breach or its consequences are discovered. The average amount of time a breach goes unnoticed is around nine months.
Financial adviser law changes delayed Insurance brokers preparing for a new regime may get a bit more time to do so. The Financial Services Legislation Amendment Bill, which repeals the Financial Advisers Act and puts provisions for the regulation of financial advice into the Financial Markets Conduct Act, has been introduced to Parliament. But the new government has indicated that it
is not a top priority. New Commerce Minister Kris Faafoi said, while he was conscious of the need to pass the bill, the government would focus on other priorities in its first 100 days. The Ministry of Business, Innovation and Employment has indicated that the bill may not now pass until the end of 2018. It had initially been expected that it could pass at
the end of this year or early next. The bill will require all financial advice businesses to be licensed. Originally, advisers were to have to obtain a transitional licence from November 2018, and the regime would come into effect from May 2019, with full licence required from 2021. MBIE told advisers that the timeline would not be compressed.
Insurance claim by chatbot Insurance start-up Cove is to offer New Zealanders a service managed fully by chatbots. The company, started by Andy Coon, Rob Coon and Brett Wilson, has been in the development phase for nearly a year. Andy and Rob are sons of insurance industry stalwart Chris Coon. “Most people we spoke to admitted they didn’t really understand how their insurance worked or what they’d actually bought. In general, what they wanted was an insurance experience that was quick and painless and provided them with rock-solid cover,” chief executive Andy Coon said. “We took note of how simple and clear the customer processes are with Lemonade and the emerging breed of digital financial service providers, as well as how quickly they are gaining enormous popularity.”
He said chatbots could simplify the process of purchasing products such as insurance and make it a smoother process to navigate without reams of paperwork. Chatbots can connect with a range of other technologies, such as facial recognition software, to detect a person’s age and health from a simple selfie. Internationally, chatbots in the insurance industry have enabled claims to be paid in as little as three seconds, and policies purchased in just 90 seconds. “Initially we are looking at offering insurance products that will be clear and easy to understand, easy to manage, and simple to purchase,” Rob Coon, head of product, said. “Early feedback from consumer testing on our next range of insurance products has been extremely positive, and we look forward to introducing them to New Zealanders in 2018.” 5
ACCIDENTAL REGULATOR ANGUS DALE-JONES SAYS HE FELL INTO HIS CAREER BY ACCIDENT T
he chairman of the Code Working Group grew up in South Africa and Zimbabwe and qualified as a chartered accountant. He moved to Australia in 1990 but initially struggled to get a job. Eventually a recruitment agent called to ask whether he knew anything about regulation. “I had never heard about regulation,” he said. “It sounds a silly thing now ... but I said ‘that’s exactly where I want my career to go’.” He took a job with what became the Australian Securities and Investments Commission (ASIC), the country’s regulator, and stayed with the Australian regulator for almost 18 years. While having dinner in Sydney, a discussion with New Zealand regulators, including Jane Diplock, former chair of the New Zealand Securities Commission, turned to whether he wanted to come to work on the other side of the Tasman instead. “I was looking to get out of regulation and she said ‘don’t get out of regulation, get out of Australia’.” Dale-Jones took a job as director of supervision at the New Zealand Securities Commission, which involved overseeing the implementation of the Financial Advisers Act. After almost three years there, he realised he still had not shaken the desire to try his hand at something other than regulation. He set up his own consulting firm, Knax. Soon, he was on the board of the PAA as its first independent board member, and a director of NZ Assets Management. He consulted on compliance issues but worked to broaden his scope to advise firms and organisations on wider conduct considerations. Although those roles have since finished, Dale-Jones said they helped to shape his thinking about financial advisers and funds management in New Zealand and rounded out his regulatory experience. When he saw the advertisement seeking members of the Code Working Group, to develop the new code of conduct that will cover all advisers under the new legislation, Dale-Jones decided to apply. “I didn’t hold out much hope but I got an interview and got the role.” He said he most enjoyed the policy thinking involved, looking at what the incentives were that made people act in certain ways. Most people were in business wanting to do the right thing by their clients, he said. It was rewarding to act as a prompt, he said, to encourage the conversations that would help people discover solutions. It was a role that involved bringing people together and looking for commonalities rather than focusing on difference. A disparate community of financial advisers would have to operate under the new code. The Code Working Group’s focus was on consumers but involved everyone across the financial services sector working together.
I DIDN’T HOLD OUT MUCH HOPE BUT I GOT AN INTERVIEW AND GOT THE ROLE.
THE NEW ADVICE CODE GOOD ADVICE OUTCOMES FOR RETAIL CLIENTS Angus Dale-Jones, Chair of the Code Working Group
he Financial Advisers Act 2008 has been reviewed and is set to change. While the details of the changes are still to go through a parliamentary select committee process, preliminary work has begun on a draft new code for financial advice services. The aim is to ensure the quality and availability of advice across the entire financial sector. To me, that’s all about focusing on good advice outcomes for retail clients. It means shaping advice standards so that people can realistically get the financial advice — simple or complex — that they need. The existing code applies to 1,800 Authorised Financial Advisers (AFAs).The new code is far wider. It will cover advice on almost all financial products — including advice on insurance contracts, renewals and variations. It reaches all advice situations: full advice, partial advice, a recommendation or opinion from a customer service representative to buy or sell a financial product, and even advice given in a brochure or on a website. SO WHAT ARE THE KEY DIFFERENCES? First, there will be no “class advice” or “category 2 products”.There will just be regulated financial advice: everyone giving advice to retail clients - including those currently known as AFAs, registered financial advisers (RFAs) or qualifying financial entities (QFEs) - will need to comply with the new code. Second, the AFA, RFA and QFE labels will go. Third, licensing for all retail client advice will be at the firm level. Those licensed businesses will be able to give advice directly (for example on their website) or through people they engage as: • financial advisers, who are to be registered individually on the FSPR (in addition to the licensing and registration of the financial advice provider business that engages them) and are personally subject to disciplinary ction by the Disciplinary Committee, or • nominated representatives, who are not required to be registered individually and are not subject to disciplinary action, because the business itself is expected to have processes, controls, and limitations in place (in effect to exercise a high level of control over the advice outcomes). WIDE-REACHING CODE The code will apply to all regulated financial advice given to retail clients, regardless of the extent to which an individual adviser is involved. It must provide for minimum standards of professional
conduct including minimum standards of: • general competence, knowledge, and skills that apply to all persons that give financial advice, • particular competence, knowledge, and skills that apply in respect of different types of financial advice, financial advice products, or other circumstances, • ethical behaviour, and • conduct and client care. The code must also provide for continuing professional training for persons that give financial advice, including specification of minimum requirements that a person must meet for the purpose of continuing professional training. These components are similar to the current code, but are now to be re-engineered to apply to the whole advice service, not only to the occupation of AFA.This means that organisational capabilities, processes and corporate behaviour become as relevant as the individual’s personal competence, knowledge, and skills in ensuring the availability of quality financial advice. EARLY PROGRESS OF CODE WORKING GROUP The Code Working Group (CWG), appointed by the Minister of Commerce and Consumer Affairs, started work in August 2017 to produce a draft code for approval by the Minister. The CWG is required to consult extensively, including with anyone we reasonably consider to be representative of the financial advice industry or of consumers of financial advice.We view consultation as a critical component of the code design process, and will be seeking input from the widest possible range of affected and interested parties. In October 2017, we commenced initial consultation through targeted focus groups representing a broad range of impacted stakeholders, to help prepare for subsequent wider consultation. The CWG’s background document for those focus groups is available at www.mbie.govt.nz/ faareview (under “Code Working Group”). It notes that we are deliberately centring the design, structure and requirements of the code around the recipients of advice (the retail clients): When considering retail clients, we have in mind a very broad range of people seeking advice outcomes. It covers the full diversity of advice complexity from (for example) simple general insurance product advice to sophisticated, multi-faceted planning.The focus groups are being asked for feedback on three areas:
PRINCIPLED CODE First, on general principles that underpin the development of the code.These draft principles are: • Retail client understanding: the code will be drafted on the assumption that retail clients have basic knowledge but not the financial advice provider’s expert understanding, • Recognisable minimum standards: givers and receivers of advice must be able to easily identify and understand exactly what minimum standards apply, • Delineation between standards: minimise the number of different minimum standards by drafting them using a flexible, principles -based approach, and clearly define and delineate when a different standard applies, and • Delivery agnostic: minimum standards should as far as possible be the same irrespective of the method of delivery of the advice, so that they work across the entire advice ecosystem of advisers, systems and processes. APPROACH TO MINIMUM STANDARDS Second, the CWG focus groups are considering what different types of financial advice, financial advice products or other circumstances may warrant different treatment when setting standards of particular competence, knowledge and skills. For example, different competence standards may be justified based on scope of advice, whether the advice is for a product or involves designing an investment plan, complexity, or risk to the client. In respect of advice that involves designing an investment plan, the CWG is specifically asking for views on the extent to which the current code is a useful benchmark. Feedback on this point will help the CWG develop its thinking around competence and other standards. Finally, the CWG is requesting focus groups to comment on other minimum standards, in particular whether there should be different standards of: • ethical behaviour, or • conduct and client care in respect of different financial advice situations. The input from the focus groups will be used by the CWG to develop its wider stakeholder consultation. To register to receive updates on the development of the code and to be involved in future consultations, go to: www.mbie.govt.nz/ faareview 7
INSURTECH DISRUPTION IS INEVITABLE...
ARE YOU READY?
nsurtech is the fusion of technology and business models to enable, enhance and disrupt the provision of insurance services, and it is becoming a key growth driver for early adopters worldwide. At its heart is the ability to enhance the customer experience, making buying insurance, paying premiums and making claims easier than under traditional business models. Innovative insurtech solutions provide an ability to enhance business operations and scale rapidly, presenting a risk (including possible market share erosion) to insurers that are slow to adapt to digital business solutions. However, there are inherent risks in technologydriven solutions, especially if a business’s underlying infrastructure cannot cope with rapid growth, or change management strategies are limited or non-existent. Understanding and managing the relevant business and regulatory risks to your insurance business when developing insurtech solutions will therefore be an essential component of your digital transformation journey. MARKET DISRUPTION Disruption in the insurance market is inevitable. New Zealand has already seen the rapid impact of FinTech in the financial services sector, and insurers can certainly take cues from the banking industry, which has encountered similar disruption. New entrants providing technologydriven insurance solutions are putting impetus on insurers to adapt to these technological
advancements. The ability for technologically savvy start-ups to develop innovative business solutions and customise those solutions for the regulatory environment in different jurisdictions is intensifying competition between traditional insurance companies, established technology companies and start-ups. In New Zealand, Cyber Indemnity Solutions (CIS) is one such new entrant. CIS recently announced a new cyber insurance product, has now launched in Australia, and expects to expand further internationally. CIS used New Zealand’s scale and expertise in programming to test their product (which provides digital asset protection insurance) in a micro space. CIS is not a licensed New Zealand insurer. Instead, it licenses insurers to use its policies (which includes a cyber insurance product), systems and software. Insurer partners can embed the insurance policy content into their own cyber policies and/or provide it concurrently with their policy offerings. Established insurance companies are also investing in insurtech solutions. Sovereign has recently announced that it has created a cloud data centre through Amazon, capable of powering “innovations, integrations and automations” for Sovereign and its customers. In practice, a cloud data centre can be scalable to a business’s needs, and when coupled with an integration suite, can produce customer-centric, data-led experiences in various forms (including through applications and platforms). Planning and preparation are essential to
performing strongly in an insurtech market. Globally, Insurtech is appearing in various guises with start-ups targeting all areas of the insurance value chain.These include, for example: • data analytics and developing risk analysis programs (e.g., using algorithms to more accurately assess a customer’s risk profile, policyholder behaviour or for more precise insurance pricing); • industry-specific technology (e.g., technology that helps farmers to farm better, reducing their overall risk); • bespoke policies (including on-demand, event-specific insurance policies or insurance for digital businesses); • smart contracts (i.e. programs using distributed ledger technology to facilitate the automated performance of contractual obligations (e.g. for assessment and payment of claims) without the need for human intervention); • establishing centralised claims platforms (that can be accessed by companies, insurers and insurance brokers to manage claims more efficiently); and • aggregator services using algorithms that assess an applicant’s insurance need, and match an insurer’s product to that need. In addition to the above insurtech uses, there are examples of start-ups looking to remove the need for a traditional insurer altogether by using peer-to-peer business models. A peer-to-peer business model allows insureds to pool their
While FinTech innovation has been the flashy attention grabber over the last few years, Insurtech has had a somewhat lower profile and slower rate of growth. This is set to change as the traditional business models of insurers are increasingly challenged by digital disrupters, and digital transformation in the insurance sector becomes an imperative. By Lloyd Kavanagh, Jeremy Muir and Kara Daly, Minter Ellison Rudd Watts
capital, self-organise and self-administer their own insurance. BE PREPARED Planning and preparation are essential to performing strongly in an insurtech market. Identifying and managing the risks presented by insurtech will be a key aspect of any digital transformation project. Insurers that develop clear growth strategies that incorporate technology driven, customer-centric solutions, that use technology to strengthen their identity (ensuring cultural identity and brand are not compromised), and that have a keen understanding of the regulatory framework and risks, will be better positioned to provide sustainable business models. REGULATORY CONSIDERATIONS Regulatory ambiguity is perhaps one of the biggest challenges facing regulators in this area. Insurance legislation written as recently as seven years ago did not anticipate the way technology would be developed and applied in today’s market. Ultimately, regulation will need to evolve to ensure the right balance between policyholder protection and encouraging innovation. Below is a brief summary and some observations of the key legislation affecting the provision of insurance in New Zealand: INSURANCE (PRUDENTIAL SUPERVISION) ACT 2010 (IPSA) • The IPSA is the primary Act regulating insurance business in New Zealand. Its primary purpose is to promote the maintenance of a sound and efficient
insurance sector and promote confidence in the insurance sector. The Reserve Bank’s current review of IPSA presents a timely opportunity to future-proof the Act to accommodate technological innovation, and the Reserve Bank has indicated a willingness to do so, consistent with its aim of promoting cost efficiency in the insurance sector.IPSA focuses on legal entities carrying on the business of insurance in New Zealand and places minimum governance, capital adequacy and solvency obligations on the licensed insurer as a legal entity. IPSA will therefore capture all significant insurance activity carried on by such licensed insurer entities, including services provided through technology-based innovations. In addition, the broad definition of “contract of insurance” under IPSA could arguably include innovative new contracts including smart contracts using artificial intelligence and distributed ledger technology, as long as the contract involves, among other things, the transference of risk in accordance with the definition. The draft Code is still being written, so it is not yet clear how robo-advisory services will be monitored and assessed under the new Code. However, areas where IPSA could benefit from ‘future-proofing’ amendments include: • the “carrying on insurance business in New Zealand” test: This test is linked to companies that are required to be registered
(including as overseas companies) under the Companies Act 1993.The issue of territorial reach is relevant here, when overseas-based entities may offer digital insurance services from an offshore jurisdiction, without triggering the requirement to register as an overseas company under the Companies Act; • licence conditions and risk management provisions: The scope of these should reflect specific risks associated with providing insurtech innovations. Sensible amendments would include incorporating new licence conditions that relate to insurance services through an automated platform, or a requirement to include, for example, procedures for managing risks associated with insurtech in a licensed insurer’s risk management programme (e.g. cyber risk and change management risks); and • adopting a broad exemption regime: Allowing the Reserve Bank to issue class or individual exemptions from aspects of the regime or from the requirement to be licensed, making it easier for new entrants and traditional insurers to bring innovative insurance solutions to the market as they emerge. NEW FINANCIAL ADVISERS’ REGIME • The Financial Services Legislation Amendment Bill (currently before Parliament), repeals the Financial Advisers Act 2008 (FAA) and will move the relevant financial adviser provisions into the Financial 11
Markets Conduct Act 2013.The new regime will enable the provision of “robo-advice” or digital advice services (including advice on insurance products), establishing new standards of conduct and governance that will take into account the provision of advice through both traditional and digital channels. Specifically, the new regime: • will require insurers providing a financial advice service to retail clients to be licensed as a “Financial Advice Provider”; • will enable Financial Advice Providers to be licensed to provide digital financial advice (as the requirement for a human to provide personalised advice will be removed); and • will introduce a new Code of Conduct (Code) which will set standards of professional conduct for those providing regulated financial advice (including for “robo-advisers”). The draft code is still being written, so it is not yet clear how robo-advisory services will be monitored and assessed under the new code. However, maintaining the standards of consumer protection provided by the legislation, while encouraging providers to harness emerging technologies, will likely be a key objective of the Code Working Group (the group tasked to establish the code). In addition to the code, the conditions that the Financial Markets Authority (FMA) will likely impose on a robo-advice licence may include strict governance and disclosure obligations on Financial Advice Providers offering advice via a robo-advice platform.The Australian Securities & Investments Commission’s (ASIC) guidance for digital-advice licensees provides some indication as to what licensees might expect under the new regime. ASIC’s expectations in respect of digital advice licensees include (among other things): • a requirement for the financial advice provider to have at least one responsible manager who meets the minimum training and competence standards; • to ensure there is at least one person that has an understanding of the technology and algorithms used to provide digital advice; • to conduct regular reviews of the digital advice generated by algorithms to ensure it is legally compliant; • to ensure the business has sufficient technological resources to maintain client records and data integrity, and to protect confidential information; • to establish and maintain adequate risk-management systems; and to assess cyber security using recognised frameworks. Principle 5 (storage and security of personal information) is especially critical as insurers now have access to ever- increasing quantities of policyholder data. 12
CLASS EXEMPTION FOR ROBO-ADVICE • A class exemption to enable digital advice under the existing FAA regime, prior to enforcement of the new financial adviser regime, is currently under consultation by the Financial Markets Authority (FMA). The exemption will enable the provision of robo-advice by removing the requirement for personalised advice to be provided by a natural person.To address the risks posed by the scalability of digital advice (i.e. poor outcomes could affect a larger number of consumers), the FMA has proposed various limits and conditions. These include: • limiting the exemption to products which are easy to exit (including, for example, general insurance products such as home, contents and vehicle insurance).The FMA has omitted personal insurance products – such as life, health and income protection – from the types of products that would be covered by the exemption, on the grounds that such products cannot always be easily exited, and the consequences of failing to disclose material information are high. FMA has sought submissions on this approach, suggesting that personal insurance products could be included in the exemption, provided they are subject to a value cap or duration limit; and • providing disclosure tailored to robo-advice and maintaining appropriate expertise to provide the personalised robo-advice service. The FMA has indicated that the requirements under the exemption may be different from those that will finally apply once the law reform takes place. Importantly, based on the FMA’s indicative timing, the exemption anticipates the ability to provide digital-advice in New Zealand by late 2017, supporting the growing demand for digitaladvisory services. Importantly, based on the FMA’s indicative timing, the exemption anticipates the ability to provide digital-advice in New Zealand by late 2017, supporting the growing demand for digitaladvisory services. FINANCIAL MARKETS CONDUCT ACT 2013 (FMCA) The FMCA, which regulates the offering of financial products in New Zealand, is a modern Act designed to be flexible and to encourage innovation in the market. The fair dealing provisions under part 2 of the FMCA apply to persons providing a financial service (which includes “acting as an insurer”). The provisions (which include the obligations not to engage in conduct that is misleading or deceptive, or make a false or misleading representation, in respect of a financial service) are broad and will apply to insurance services provided through both traditional channels and via online platforms or mobile applications.
These fair dealing provisions, together with the financial adviser regime discussed above, provide the FMA with oversight over the way in which insurance products are marketed and sold. The FMA has already signalled that it will be looking closely at life insurance sales and advice. With the added complexity, and potential risk around digital sales channels, we see it as a real possibility that the FMA will focus on insurtech innovation and compliance with the fair dealing provisions of the FMCA. PRIVACY ACT 1993 While the 12 privacy principles in the Privacy Act apply broadly to any personal information collected by an insurer (including any third-party platform provider), advances in technology have dramatically changed how information is collected, stored and shared. Principle 5 (storage and security of personal information) is especially critical as insurers now have access to ever-increasing quantities of policyholder data. The Privacy Commissioner has recently recommended changes to the Privacy Act and a new Privacy Bill is expected to be introduced this year (although timing is currently unclear). The recommendations are based on rapid changes in data science and information technology in the five years since the last review and, if adopted, could mean, among other things, an increase in the penalty for a serious or repeated breach of the Privacy Act to a fine of up to NZ$1 million for body corporates. Additional guidelines for data use are being developed by the New Zealand Data Futures Partnership, which is currently consulting the New Zealand public in relation to how information about them is used and shared. Enforcing stricter penalties and narrowing defences under the new Privacy Bill will go some way to ensuring companies invest heavily in security and data management. However consideration should also be given as to whether more prescriptive regulation is needed in respect of technical / organisational measures – including, for example, in relation to data transferability between providers, IT management, cyber security and internal controls for outsourcing services. CONCLUSION Increasingly, there is an impetus on insurers to compete against, and/ or work with, new entrants and established technology companies to improve customer engagement through technology, and to digitise certain back-office functions to create more efficient and nimble business models. While existing laws and regulation have tended to lag behind technological developments, there is an increasing awareness and acceptance by regulators of the need to accommodate technological innovation in the delivery of business products and services. Awareness of changes in the way in which regulation applies in this new environment must be maintained as a key developer and user requirement at all stages of the digital transformation journey.
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2017 THE YEAR IN REVIEW
THE YEAR IN REVIEW
THE YEAR IN REVIEW
A 12 MONTH VIEW OF THE NEW ZEALAND RISK LANDSCAPE By Marcus Pearson,
Country Head, Marsh New Zealand
t has been 12 months since I arrived in New Zealand to take up the role of Country Head for Marsh. I have thoroughly enjoyed my time here, getting to know the local business landscape and talking to clients, insurers and, of course, our people. During my tenure, so far, I have observed many similarities to what is happening in global markets as well as some notable differences, which I thought I would share with you. HEALTH & SAFETY It is a huge positive that New Zealand legislation has caught up with countries such as Australia and the UK, to more strongly address health and safety risks here. Earlier this year, we released our annual Directors’ Risk Survey. The results from this showed that the new health and safety legislation was encouraging directors to take a more active role in managing the risks of their business, which is a very positive result. It is however just the beginning of a very big shift away from a "she'll be right" attitude to a far more active and, dare I say, cautious approach to safety. Even after all of the publicity, events and papers about the new legislation, people don't just go to work automatically thinking about health and safety. It is behaviours and ultimately culture that need to change. Whilst overall fatalities appear to have dropped from 50 to 39, according to WorkSafe NZ’s October report, this is only a year-to-date figure (and does not include deaths in the maritime or aviation sectors or fatalities due to work-related road crashes). There are still many large accidents causing death and serious injury throughout the country, in a range of industries, with large fines being handed out to the companies concerned. In fact, in the first year of legislation WorkSafe had issued more than 3,400 prohibition, improvement and infringement notices to
employers. Suffice to say, we still have some way to go but the progress is encouraging. CATASTROPHE EXPOSURE Following a spate of global natural catastrophe events, New Zealand has become a lot more exposed in regards to its insurance losses and the potential for very challenging property renewals in 2018. Like New Zealand, Australia has its fair share of natural catastrophes but they tend to be more predictable and in lower asset concentration locations like North Queensland or country Victoria. Whilst New Zealand had one of the worst flood loss years on record, it is the earthquake exposure and relatively small premium pool that drives the market cycles. The estimated $3b insured losses for the Kaikoura earthquakes may seem like small fish in a big global insurance capital pond, however that loss event will wipe out our commercial premium pool for the year and has spooked global reinsurers following the failure of Wellington buildings that, according to trusted engineering standards and sophisticated loss modelling tools, should not have failed. This has led to deepening concerns about the Wellington property loss potential; the result being capacity restrictions and rising prices. Traditionally, this would be remedied by international markets such as Singapore and London who provide a geographical hedge for New Zealand buyers; however this year’s spate of hurricanes and other disasters have generated 15 events that have caused in excess of $1b of damages each in the US alone with aggregate total insured loss estimates currently exceeding US$100b. This ties the record for the most disasters in a single year and easily eclipses the total annual aggregate record of US$54b in 2016, according to Swiss RE, for individual disaster losses for the entire globe. There is also potential for the loss estimates to significantly increase, making this an unprecedented capital loss ratio event. This is particularly concerning for New
Zealand due to the high reliance on offshore reinsurance capital that underpins the ability to buy full limit earthquake protection. SOCIAL AND POLITICAL CHALLENGES I wrote an article in February noting the importance for New Zealand businesses to take a global perspective when considering future risks and that New Zealand was not immune from the trends shaping the world’s risk landscape. Rising income and wealth disparity, social media and “fake news”, anti-establishment populism, a lack of trust for political leaders and big business, intensifying national sentiment, and deepening concerns about the environment all determined election outcomes across the globe. There has been a very clear message for change, which we saw in our recent local election. “Jacindamania” took over - a phenomenon reminiscent of the UK Brexit vote, US presidential election, the far right making a strong bid for power in France and a referendum in Turkey. This trend was bought to our attention in The World Economic Forum Global Risks Report, released in January, and 2018 is not likely to be any different. These waves of political and social instability could create a range of disruptions to business activity, not only in regards to regime change but also from civil disturbance, to regional conflict and government policy reversals – for example the TPPA (Trans-Pacific Partnership Agreement). New Zealand can no longer be complacent in thinking it is an isolated island nation far away from the rest of the world – a safe haven to live and do business. The world of risk is now more interconnected than ever and our clients are increasingly turning to us for advice to assist them with succeeding in this challenging environment. As professionals in our field, we need to consider all of the risks, the potential impact on businesses here and then share these insights with our clients. Only then will we have done our job to the best of our ability. 15
THE YEAR IN REVIEW
CHANGE AT THE TOP T
here are very few people who have the experience and passion for insurance of NZI’s acting executive general manager Karl Armstrong. Having led the NZI team between 2008 and 2014, Armstrong brings a wealth of knowledge and tenure as he steps in to run the business while a new EGM is recruited. Travis Atkinson is leaving the business. Armstrong was humbled to receive a Lifetime Achievement Award at the ANZIIF Awards last month – an accolade he says is “suburb acknowledgement of my life within the insurance industry”. “After 46 years in insurance I still get up in the morning excited about the work we do to make a difference. I was truly blown away for being honoured for just doing my job, something I love.” For Armstrong, a highlight of 2017 has been seeing how teams responded to the unprecedented number of natural disasters during the year. “It is testament to the sustained hard work of our team during an extremely challenging year. We responded fast and helped customers with the reinstatement of their lives.” NZI is on track to have completed 80% of Kaikoura claims by the end of December. “We learned a lot of lessons from Canterbury which have ensured a quicker and more streamlined approach to Kaikoura claims settlements.” NZI was awarded Insurer of the Year at the recent ANZIIF Awards. The judges praised NZI for its forward-thinking, relationship-first approach and impressive disaster response process. Armstrong say NZI has spent a lot of time over the last year scrutinising the environment to prepare for the future.“We’ve been challenging ourselves to broaden our thinking as we know customers’ needs and preferences are changing. We’re focused on being the next-generation insurer by innovating to offer more individualised, more flexible, and more responsive products and services.” An example of this is NZI Total Development – a new commercial product for developers which is a first for New Zealand. It gives comfort that insurance is in place for the whole development and stops the need to negotiate at each stage, while also helping developers secure funding. It is truly customer-focused. Looking back over the last 18 months,Armstrong says a key focus for NZI has been how it adapts and evolves to the changing market. “Disciplined underwriting is the key to turning an unsatisfactory result around.We must have a sustainable and profitable business if we are to remain relevant to both brokers and customers.” NZI has remained committed to a long-term, New Zealand-wide approach, providing cover in areas of high risk. To do that it has increased prices and placed a renewed focus on risk that doesn’t generate returns. “This will enable us to continue to provide cover in all regions our customers are, who expect us to remain,” he says. As NZI looks to the future there are a number of key trends shaping the market, forcing both underwriters and brokers to review their approach. While not a new problem, New Zealand’s level of underinsurance was recently highlighted by the Kaikoura earthquakes. “Underinsurance presents a real risk to our customers, and we must continue to educate them around the need to select a sum insured that allow them to survive an unexpected event,” says Armstrong. 16
The challenge that climate change presents to the industry is gaining momentum – but it has been on NZI’s mind for many years. “This is an important issue for our market which will not be solved overnight. There will be locations in New Zealand challenged by floods, storms, tidal changes and erosion, and this will put pressure on affordable, available insurance.” As complexity increases and risks change, the role of the Broker has never been more relevant, says Karl. “The advice model will continue to play a part, but the responsibility is on brokers to show the value-add they provide.” A majority of SMEs prefer to insure through brokers because of the customization required – and increasingly sound advice will be sought and valued. NZI, backed by IAG, is well placed for the future, says Armstrong. “We have a saying – NZI is 158 years young. We’re here for the long term – and it’s been a privilege to have been on that journey for 46 years.”
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THE YEAR IN REVIEW
A BIG PRIORITY FOR 2017 HAS BEEN TO IMPROVE THE CUSTOMER EXPERIENCE FOR OUR INTERMEDIARIES AND POLICYHOLDERS, WHILE BUILDING A SUSTAINABLE AND LONG-TERM BUSINESS.
YEAR OF CHANGE FOR VERO WHAT’S THE YEAR BEEN LIKE FOR SUNCORP NEW ZEALAND? 2017 was a challenging year for the industry due to cyclones and the response to the Kaikoura earthquake, but it was also a year of change.We’ve embraced new digital technology and new ways of working that will enhance the experience of our intermediated customers and policyholders. WHAT’S GONE WELL THIS YEAR? A big priority for 2017 has been to improve the customer experience for our intermediaries and policyholders, while building a sustainable and long-term business. We’ve looked closely at how we could improve our systems to provide easier access and greater capability. Driving a better holistic customer experience, through elevated claims management standards and a consistent and high-calibre support service, is essential for success. Core to our strategy has been the improvement in our digital ecosystem. We have embedded 18
Guidewire’s ClaimCenter and we have also invested further into other new technology platforms. Some of that is still behind the scenes and we expect to roll more out in 2018, but a good example is the Symbility platform that Vero has signed up for with CoreLogic. Symbility is a cloud-based claims assessment and management workflow solution, that we’re using to speed up the process for property claims. It deliveries efficiencies and offers full visibility to all participants in a claim. We will be implementing further initiatives over the next 24 months that will enhance our service delivery, speed of service and consistent high levels of engagement with our intermediaries and our policyholders. Vero was also delighted to launch the first New Zealand SME Insurance Index this year. This index helps brokers to identify specific customer needs, and tailor the brokers service proposition for greater success.
With 97% of New Zealand businesses being in the SME category, it’s an incredibly important segment for New Zealand’s economic wellbeing and a vital component of our insurance community. Just as every business faces the challenges of change, we expect the SME Index to indicate how SMEs will view the changing insurance landscape and how they will respond. We’ve seen in Australia (over the last six years) what a valuable tool the SME Index has been for brokers, so we’re delighted to be producing it in New Zealand. WHAT CHALLENGES HAS THE INDUSTRY FACED THIS YEAR? We’ve all had to face the impact of the Kaikoura Earthquake and, to a lesser extent, the impact of Cyclone Debbie and the Edgecumbe flooding, on our businesses. I think one of the highlights of the year has been how, as an industry, we’ve shown that the Kaikoura model and the MOU with EQC
THE YEAR IN REVIEW
(where insurers manage claims on behalf of EQC) has been a more effective way to deal with major disasters. A year on, as an industry we’re sitting around the 70% settled mark which is great for customers, and we know the process has been easier for them. Vero has been particularly proud of our response to both those events.We were first on the ground in Kaikoura and we worked really hard to triage and assess claims in the aftermath, and to help out remote or vulnerable customers and do our part in that community. In Edgecumbe, we expect that most of our customers will be back in their homes by Christmas, and the remainder in early 2018. Another big challenge for the industry has been the rising cost of motor claims.The number of vehicles on the roads, the number of accidents and the rise and rise of better, more expensive technology in vehicles has meant we’ve had to find new efficiencies in the motor space. We’re just in the process of opening our third SMART Repair Centre, which is certainly helping to manage high volume, low-impact repairs and take the pressure off the panelbeating
industry for bigger jobs. SMART technology is enabling us to turn around minor damage to cars in three to five days, so our customers can get their cars back on the road as quickly and safely as possible. WHAT ARE SOME OF THE BIGGEST TRENDS YOU SEE FOR INSURANCE IN 2017 AND 2018? Sustainability and affordability continue to be big issues in our market. Protecting Kiwis during their time of need is a core objective for Suncorp New Zealand. We’re committed to making sure we’re here for the long term, which means offering products that are sustainable for our customers, pricing appropriately, working closely with our reinsurers, brokers and business partners. But affordability is a growing concern, particularly with the increased claims costs we’ve seen in some parts of our business and the increases in levies on premiums this year. That adds to the pressure for brokers, customers and insurers to make sure that our products are as efficient as possible. It’s also a good time for us as a business to
examine how the sum insured model has impacted those customers' claims. I don’t think we are where we need to be in terms of educating customers about the importance of setting an accurate sum insured. WHAT DO YOU HOPE 2018 WILL BRING FOR SUNCORP? One of the big things we’ve done in 2017 is develop new ways to use technology to support our business, and I expect to see more of those initiatives begin to roll out into market next year. As Suncorp, our focus is still on creating a financial services marketplace where customers can meet their needs across the spectrum of Money, Self, Mobility and Home. In New Zealand, and especially for Vero, the intermediated focus of our business mean that brokers are an important part of that process. Right now we’re working with brokers to understand how that marketplace will work for them. We’re also looking at our digital offering as it stands today, and how we can support customers through an intermediated journey and make sure they understand the value of the broker proposition.
THE YEAR IN REVIEW
EYE ON EXPANSION By Roger Abel,
Managing Director, Rothbury
WHAT HAS THE LAST YEAR BEEN LIKE? It’s been a very good year for Rothbury and I’m proud of what we’ve achieved.We’ve continued to grow as a business and innovate. While it’s been a year of change, it’s also been a year of opportunity. As regulation increases and technology advances, technical skill, competence and expert advice is increasingly being sought to help clients mitigate their risk and exposure. WHAT HAVE THE CHALLENGES BEEN? Market conditions have been challenging. The soft market we’ve been in is undoubtedly starting to firm up and prices are rising. Explaining to clients why costs are increasing is an ongoing job and not a particularly easy one. Robust communication is critical. Retaining existing clients is vital, so we need to continue to prove ourselves and show our value in the chain. It’s about providing advice, finding the right solutions to meet our clients’ needs and that’s more about product than price. WHAT HAS GONE WELL? Over the last year, we’ve achieved significant growth and exceeded our best new business year ever. We’re expanding our client base by a hundred new clients every week. The Learning Programme we put in place to upskill our brokers and help them become more sales-focused, and assist our branch leaders to be sales coaches, is showing results. Our Sales Programme has also been integral to helping reward our people working on the front line. We spend a lot of time making sure we get the right people on the bus. Our people and culture are very important to us, and this is something that particularly resonates with me. For the past four years we’ve been named finalist in the Kenexa Best Workplaces Survey in the Medium to Large Workplace category, and last year we were placed third – something I’m very proud of. Rothbury has also been named ‘Large Broker of the Year’ by ANZIIF for the last 20
THE YEAR IN REVIEW
three years in a row and we’ve made finalist again this year. Digital advancement and innovation remains an important focus to optimise client experience. Our new online active invoice connects us more to our clients – providing photo, contact and social media details of their broker, and the ability to link through to make a payment directly. We also rolled outVersion 3 of ‘My Rothbury’, an innovative smartphone app that over 6,000 of our clients have downloaded to give them instant access to all their insurance information anytime, anywhere. One more standout achievement this year has been our project connecting NZI with our broking system Swift via the Steadfast Virtual Underwriter (VU) interface. This went live in July and delivers full life cycle auto-rating and connectivity for our brokers working with SME clients, providing a faster turnaround time, as well as increased efficiency and functionality internally. WHAT ARE YOU HOPING FOR IN 2018? The last 10 years have been very positive and now with over 260 staff we want to continue to build our business and expand our footprint further,
while remaining focused on providing personal service and quality advice for clients. We’re always open to investigating partnerships with other broking businesses who are considering their future. Our move to Nelson as a result of our partnering with Lifetime has meant for the first time Rothbury has a presence here and we’re very excited to see that grow. We’re also the first brokers to open an office on Waiheke Island, so it’s great to be a part of the Waiheke community and be able to service the local community and do business at a local level. Going forward, there’s still room for us to do more to educate our clients about their exposures. Cyber risk is one great example. We must continue to be strong communicators and active in telling stories that highlight risk to our clients and provide the right solutions. I’m really looking forward to 2018 and whatever it brings.
Thinking of selling your business? Do you have an exit plan? Talk to us today.
“I made the move to Rothbury and I’m loving it. Want to know more? Give me a call.” PAUL MUNTON, EXECUTIVE GENERAL MANAGER BROKING BRANCHES
CALL PAUL ON P 021 243 9207 PAUL.MUNTON@ROTHBURY.CO.NZ
HOW THE SHARING ECONOMY IS BLURRING INSURANCE LINES By Richard Godman, Vero
ntil recently, most New Zealanders’ lives had well-defined boundaries that made it easier for insurers to assess and price risk. But the sharing economy is changing the way we use our assets and belongings – and blurring the lines of traditional insurance policies. “The core of the sharing economy is people renting things from each other.” The Economist WHY IS THE SHARING ECONOMY BLURRING LINES? The rise of platforms that allow us to rent out our personal belongings mean that people are now making money from their cars, homes, clothes and even their money. This raises questions for insurers about when something you own stops being for personal use, and starts to be a commercial asset. For insurers, the sharing economy changes the amount of risk that assets face and makes it harder to put things into traditional commercial and personal insurance buckets. For example, a basic house insurance policy covers owner-occupiers on the assumption that only close friends and family will be invited to their home. But listing a home on Airbnb opens the door to strangers staying in the family home, and the risks that come with not knowing who your guests are.
PERSONAL OR COMMERCIAL – WHY DOES IT MATTER? If you’re making money from your assets, especially a car or house, it’s possible a commercial insurance policy will suit your needs better than a personal one.You may not even need to pay more in premiums. Another option is to check with the platform you’re using to rent out your belongings. Some platforms may offer built-in insurance cover, but it’s important to check the limits and how those compare to your own insurance policies. TEMPORARY RENTALS VERSUS TRADITIONAL TENANTED PROPERTIES If you’re letting out a home on Airbnb, it’s important to remember that traditional insurance for rental homes may not cover you. That’s because temporary rentals have more visitors, and fewer checks, compared to a normal tenancy agreement. For example, Vero’s policy defines a ‘tenant’ as someone who holds a tenancy agreement with you that’s not less than 90 days. Landlord cover often contains conditions around how you select and inspect your tenants that you’re unlikely to be able to meet through platforms like Airbnb, so don’t assume that traditional landlord insurance will cover you.
Are you covered? What to look out for in your insurance policy: Car insurance
You sometimes drive for Uber or another ride-sharing platform
You rent out your car for others to use
You’re renting out rooms in the home you live in
You’re letting out an entire home (or holiday home) for casual use by paying guests, but you frequently stay in it yourself
You’re letting out an entire home (or holiday home) for casual use by paying guests and you have no intention of staying there yourself
- Check your policy for conditions on using your car to carry farepaying passengers
- Check your policy for any conditions around your car being used for hire
- Check your policy for terms around guests and commercial or business use.
- Check your policy for terms around guests and commercial or business use.
- Check your policy for terms around guests and commercial or business use.
- You may need a commercial motor insurance policy
- You may need a commercial motor insurance policy
- Your ordinary home insurance policy may cover you for accidental damage, but not deliberate damage.
- Check for terms around homes that are unoccupied - Your ordinary home insurance policy may cover you for accidental damage, but not deliberate damage. - You may want additional cover for things like loss of income cover if damage to your home prevents guests from staying
- Check for exclusions around homes that are unoccupied - It’s likely that you’ll need a commercial insurance policy - The Earthquake Commission probably won’t cover you if you don’t plan to stay in the home - You might want cover extensions like ground up natural disaster cover, and loss of income cover if damage to your home prevents guests from staying.
A REVIEW OF THE REVIEW â€“ IPSA IN CONTEXT
The review of the Insurance (Prudent Supervision) Act 2010 is progressing in a measured and thorough manner, as might be expected from the Reserve Bank of New Zealand.
By David Whyte,
David Whyte is a consultant and board director in the financial services sector. He formerly headed up AIA in New Zealand. 24
n a recent Feedback statement, the RBNZ indicated that the 42 submissions received gave rise to a number of issues that would be the subject of ongoing attention and consideration over the next 12 - 18 months. The general tone of the statement suggested that while there were a number of constructive suggestions for improvement, the industry was performing well and that the community is being well served by those subject to the Act. Mention is made of the IMF Report suggesting a ‘tightening’ of certain aspects, e.g. disclosure of information, audit reporting standards, but the IMF Report was generally reflective of an industry operating within an OECD-style jurisdiction that is largely getting things right. Of course, there have been aberrations along the way. The seismic activity events in Christchurch caught the industry off-guard, but, to be honest, in four decades of working in the industry in the U.K., Australia, and NZ, these circumstances were unique and the response has been, by and large, favourable. Of course, there are contentious issues still. Southern Response Earthquake Services will be involved in defending class actions against a group of aggrieved residential property claimants and the courts will decide the outcome.
TO BE HONEST, THE SUGGESTION THAT SUCH RATINGS REPRESENT “A USEFUL CROSS-CHECK ON THE RESERVE BANK’S VIEW OF THE FINANCIAL STABILITY OF INSURERS” WEARS SOMEWHAT THIN WHEN THE ADDITIONAL COSTS OF COMPLIANCE ALREADY HAVE A SIGNIFICANT IMPACT ON EXPENSES. Unfortunately, there was always going to be a residue of awkward contentious claims – think cross-leases, apartment blocks with different insurers, different Project Management Organisations, different Loss Adjusters and different Engineers – the possibilities for dispute, conflict and confusion are endless. I sympathise with both sides, having seen the issues from both sides. Claimants feel that they have been poorly served by the process or have received less than their appropriate settlement, and Southern Response has an obligation to be prudent in looking after the public purse from where claim settlements are now coming. So, there is no easy solution and the courts may well be the only place that such cases can be settled to everyone’s satisfaction. And, of course, this attracts media attention much more than the progress Southern Response has made in settling the 6000+ property damage claims and 20,000+ contents claims the company originally faced in 2011. But such incidents apart, the IMF report on the industry is largely consistent with the IPSA review findings. And the review statement is worth perusing as it contains the intentions
of the RBNZ to focus on specific issues in Phase 2, including consideration being given to ‘Disclosure and financial strength rating requirements’. This is an area where some debate should occur. Back in the old days, a company that obtained a financial strength rating was obliged to publish and publicise that rating with the normal attendant explanation of what the rating meant. Ratings have been a legislated requirement in New Zealand on the majority of non-life insurers since 1994 under the Insurance Companies (Ratings and Inspections) Act 1994. This was a sensible and prudent measure in the absence of any effective legislative and/or specific regulatory requirements around insurer solvency and financial stability. However, with the introduction of the Insurance (Prudential Supervision) Act 2010, the solvency and capital management requirements were defined in specific terms, with the intention of providing comfort to the community that the risk-based regulatory regime was playing its part in preventing insurer failure to meet policyholder obligations. These measures were generally welcomed by insurers and while the current review suggest some adjustments, the broad thrust of the financial and capital requirements have been confirmed as being robust, appropriate, and prudent. So, the question then arises as to why, if the measures in the Act are sufficiently stringent and exacting, insurers have to pay what amounts to another audit fee to private rating organisations? To be honest, the suggestion that such ratings represent “a useful crosscheck on the Reserve Bank’s view of the financial stability of insurers” wears somewhat thin when the additional costs of compliance already have a significant impact on expenses. If the ratings exercise is so ‘useful’, what is it about the IPSA measures that are less useful? And the other claim that “ratings are a useful independent opinion of the financial strength of an insurer which can assist policyholders and prospective policy holders to assess the risks associated with particular insurers” has no evidential support. Indeed, in the recent past, examples of ratings being questionable are fairly and squarely in the public forum. Witness the AA+ rating ascribed by Standard & Poor’s shortly before the US Government bail-out of AIG. Given the annual income S & P received from AIG, is it little wonder this rating stuck around longer than was appropriate? Also, In the lead-up to the GFC, the ‘Big Three’ credit rating agencies: Moody’s, S&P, and Fitch, which between them held a collective 95% global market share, were giving subprime bonds BBB ratings that implied a 1 in 500 risk of default.Yeah, right. Numerous commentators have cast doubt on the veracity and independence of the ratings agency since, so their credibility is seriously in question. Finally, the assertion that buyers of insurance use these ratings as a guide is likewise dubious. From experience of leading one of the last AAA-rated insurers in NZ, I could find no reliable evidence that consumers even understood the significance of the rating, never mind placing any reliance on the rating to determine their buying decision. At the time, we thought that it was a good marketing strategy; in reality, it had little impact on results. In summary, compulsory blanket rating for all licensed insurers is a serious financial burden which, ultimately and unnecessarily, the consumer lands up paying for, but which fails to achieve any added value to the prudent regulation of insurers in the market. If any aspect of IPSA 2010 needs to be seriously reviewed, it is this. 25
HEAVYWEIGHTS IN COMMERCIAL MOTOR REPAIRS A
s the most experienced in-house commercial motor repair insurance team in the country, the NZI Commercial Motor Repair Management team use their expertise to get customers back on the road again, faster. “After a crash, you want to know that everything is done right within the best possible timeframe.The NZI Commercial Motor Repair Managers are here to make sure that our commercial motor repairs are dealt with quickly, by the best repairer and to the highest standard,” says Trevor Hemmingson, National Commercial Motor Repair Manager, NZI. And the team know that time is money when fleets are off the road. “We don’t wait for paperwork! The clock’s ticking so we start an assessment straight away – sometimes just from a crash scene photo. We already know what repair options are available, so we get on with quantifying the options available and making recommendations.” Hemmingson’s 16-strong team is intentionally located across all regions of New Zealand, providing a nationwide network of local knowledge and industry connections. They approach every incident knowing the geography, the people, the pressures and the options available. According to NZI’s Head of Commercial Motor Vehicle, Ian Taylor, everyone in the team was hand-picked for their mechanical and technical expertise, having all come off the tools to join NZI. “What makes this team market-leading is their collective years of commercial transport experience, together with their passion for keeping up-to-date with the latest trends and developments,” says Taylor. “Our collaborative Commercial Motor team includes repair managers, Crash Scene Assistance, Fleet Risk Management, underwriting, claims and
sales. Sharing experiences regularly in a team environment provides us with a definitive point of difference, which we’re very proud of. We have no peers in this arena, which means we can come up with opportunities, solutions and overcome issues quickly.” Handling the full spectrum of commercial motor damage assessments, the team are guaranteed to have ‘been there, done that’. They’re involved in all repairs from minor scrapes through to large, complex losses involving specialist work. And it’s not just trucks and fleets that benefit from the team’s skills. Their reach extends to buses and coaches, motorhomes and caravans, mobile plant, agricultural, construction and forestry equipment – anything over 3.5 tonne. “We keep the wheels turning – from the accident scene until the final delivery of the vehicle (or alternatively to when the claim is settled), our expert team get the right repairer and keep the broker and their client in the loop throughout the entire process.” There are cost benefits to using an in-house team. According to Taylor, his team can better control repair costs with the correct repair scope and work with the most appropriate and experienced repair partners. Both nationally and regionally the NZI Commercial Motor Repair Management team are entrusted to negotiate deals with service providers.This ultimately leads to better service, quality of repairs and a more cost-effective offering for NZI commercial motor customers. To find out the criteria to have the NZI Commercial Motor Repair Management team involved with your client’s claim, speak to your local NZI Business Development Manager.
The NZI Commercial Motor Repair Management team. Left - Right: Craig Tait (Otago & Southland), Ken Duffy (Canterbury, Marlborough & Nelson), Lawrie Johnson (Waikato & King Country), Peter Cress (Auckland & Counties), Matt Patterson (Manawatu, Palmerston North, Hawke's Bay & Wellington), Curtis Trillio (Canterbury, Marlborough & Nelson), Mike Radford (Senior CMRM, Auckland and Northland), Daryl Hone (Bay of Plenty & Gisborne),Trevor Hemmingson (National Manager), Bryce Feather (Taranaki & Wanganui), Sean Jansen van Vuuren (Manawatu, Palmerston North, Hawke's Bay & Wellington), Roger Capil (Dunedin & Otago), Mark Green (Auckland & Northland), Matthew Lett (Central North Island), Clifton Beech (Waikato & King Country) and Cohen Clarivette (Auckland & Northland).
From inspiration to completion, weâ€™ve got it covered. NZI Total Development is a new property development insurance that covers your clients from the very beginning of the project until itâ€™s completed. So instead of continually renegotiating insurance throughout a development, your clients can keep their focus on what really matters - being inspired to create something of lasting quality. NZI Total Development. Property development insurance from day one to done.
Business Insurance for a growing New Zealand
PRODUCTIVITY IS A STRATEGIC IMPERATIVE FOR NEW ZEALAND INSURERS By Dylan Marsh,
associate director, performance, KPMG
The New Zealand insurance industry has seen its cost base expand over the last five years.
onsider that, in 2012, there was a cost of 31c for every dollar of net premium earned. By 2016, this had risen 14% to 35c – an increase of $180 million for the industry. At the same time, the insurance industry faces a barrage of challenges, such as the following: A shifting and broadening of customer expectations.The expectations of some groups of customers are shifting, creating a different and broader set of expectations and needs. New competition. New forms of competition are entering the market; they are geared for innovation and the ability to cherry-pick markets, and are not constrained by physical infrastructure or geography. Product portfolio complexity. Product portfolios have expanded to provide a greater range of options for customers, raising the levels of complexity and increasing frontline time requirements. These bring into question the profitability of different products. Inconsistent use of internal and external services. Sourcing versus internal capability versus specialisation versus managed services adds complexity, bureaucracy and unnecessary cost burdens. The regulatory and compliance burden. This burden continues to grow unfettered. Staffing and operating models. Staffing levels and salaries have grown consistently over time, with low spans of control and a skew towards non-customer-facing roles; this is particularly so in head office and supervisory functions. Reliance on third-party origination. This results in sub-scale and inefficient physical distribution channels and service. New business models and advancements in technology promise to improve productivity and respond to industry challenges yet, in practice, many senior business leaders struggle to look beyond the complexity inherent in their organisations; this constrains their ability to respond. This pressure focuses senior leaders on optimizing the current cost
base for profitability, delaying focus and investment that will position their businesses to navigate future challenges. We strongly support the need to continue to invest in the medium term but it is clear that a radically different approach to productivity is required to release resources and create financial capacity to invest in transformation while delivering acceptable financial results. Typically, a successful financial services firm is pursuing cost productivity in a consistent way. For example, it will: • Leverage analytics and customer insights to focus productivity improvement and rationalise customer, channel and product investment. • Improve customer satisfaction by aligning acquisition and service resources to the needs of priority segments, creating a nimbler corporate core and management layer. • Optimise channels by designing cross-channel experiences that fit seamlessly into the lives of customers – while still offering economical options. • Ensure that customer coverage is refocused on sectors and segments that deliver value. • Revert back to core by exiting non-core businesses, products and markets. • Develop strategic outsourcing/offshoring propositions and partnerships to leverage scale and innovations. • Work persistently towards digitisation and simplification of end-to-end processes and products. • Transform technology through infrastructure, changing delivery and system/platform rationalisation. • Leading financial services firms are tackling these challenges through clear business-wide strategies that are built on tangible insights and that draw from the innovation of others both within financial services and from other sectors (e.g. technology).
Insurance Advisernet Australia - 21 Years Strong
Insurance Advisernet Australia celebrated 21 years in business at their annual conference in the Gold Coast at the end of October. Over 400 delegates attended, including a contingent of 37 Kiwis which included representatives from 8 New Zealand insurers. The theme of the conference was “Power of the Past. Passion for the future.” Shaun Standfield reinforced to delegates IA’s commitment to its vision, to be Australasia’s leading General Insurance Broker Group. The focus of the group remains on providing initiatives, services and support that will Protect, Enhance and Grow members' business. He spoke of the changing role of the Broker, highlighting the need for change, with a focus on providing personal not general advice and claims advocacy for clients. IA will continue to provide leading edge technology and tools for its members, enabling them to be at the forefront of this change. Once again, the IA Foundation exceeded all previous years' donations, with delegates contributing a record $200,000. Every year the foundation contributes to a number of worthy local and national charities, giving something back to communities in need. Some of the conference highlights were Chubb winning the inaugural “Insurer of the Year” and the first ever IA’s Got Talent show, which after many auditions, was launched with 8 entries including one from New Zealand. There was never any chance of the Kiwis winning the night, but they came a close second and we would like to thank contributions from Chubb, Delta, NZI, Allianz, Macquarie & Ando for being part of the New Zealand entry.
All in all, the feedback was overwhelming, it was by far Insurance Advisernet Australia’s best conference ever. David Crawford said “It will be a hard act to follow, but I’m looking forward to hosting the New Zealand Insurance Advisernet conference in Taupo in April 2018 and we will certainly go all out to match if not exceed the Australian effort.”
INSURERS AND PRIVACY ACT REQUESTS By Andrew Horne,
Minter Ellison Rudd Watts
WHAT MAY INSUREDS ASK FOR? Insureds who are natural persons (companies have no such rights) are entitled to access their “personal information” held by insurers on request, without giving a reason. There is no particular form for a request and it does not have to be in writing or mention the Privacy Act to be effective. Insurers must provide a decision on whether to grant the request within 20 working days and must then process the request without undue delay. WHAT INFORMATION MUST BE PROVIDED? Personal information is information “about an identifiable individual”. This is interpreted broadly. In Case Note 228045  NZ PrivCmr 8 the Privacy Commissioner ordered an insurer to disclose an engineering report about an insured person’s house. The report did not name the insured, but that person could be identified because the report referred to the “property owner”, contained the property address and described the damage it had sustained.The report was “about” the insured because it related to the insured’s house. When considering what documents to provide in response to a request, insurers should consider whether they contain information that could identify the insured and whether they relate to the insured person or his or her property. Insurers should also check their privacy policies to ensure they are not acting inconsistently with them. DO INSURERS HAVE TO PROVIDE ALL THE 30
DOCUMENTS IN THEIR FILE? Insureds will often request a copy of the insurer’s “file”. This can exceed the insured’s entitlement under the Act, as most insurers hold personal information and non-personal information in a range of formats and locations associated with an insured or a claim. If an insured requests the “file”, insurers are entitled to review the file and provide only those documents that contain personal information about the insured. WHAT ABOUT EMAILS, PHONE CALL LOGS AND RECORDINGS AND OTHER RECORDS NOT IN A “FILE”? This depends upon the request. If an insured requests a “file” for a particular claim and the insurer has a system that manages and stores its records for that claim, such as a hard copy file or a computer-based file, the insurer may take the view that the request relates only to that “file”. However, if the request appears to encompass all documents relating to a claim, the insurer is obliged to provide access to all documents that it holds that contain personal information about that insured, whichever form they are in. An insurer’s documents may not extend to documents held by its employees in their personal capacity, such as text messages on personal telephones and diaries that are their personal property. WHAT INFORMATION CAN BE REFUSED? Insurers may refuse to disclose, or may redact, information that is protected by legal professional privilege. This generally falls into two main categories:
1) Solicitor-client privilege, which in summary protects documents sent or received by lawyers for the purposes of obtaining legal services or advice; 2) Litigation privilege, which in summary protects documents prepared for the purposes of a proceeding (not just documents sent or received by lawyers) that is reasonably apprehended. Normally this requires the claim having been declined – claims which involve a difficult relationship between the insured and the insurer do not necessarily meet the“reasonably apprehended.” In February 2015, the Privacy Commissioner decided that an insurance company could not rely on litigation privilege to withhold an investigation report, as the dominant purpose of the report was to set out the details of the incident that gave rise to the claim and advise the insurance company whether to accept it (Case Note 48835  NZ PrivCmr 5). A proceeding was not reasonably apprehended until the insurer had made its decision based on the report. Another ground to withhold a document is that it contains information that would disclose a trade secret or be likely to unreasonably prejudice the commercial position of an insurer. In the insurance context, this may include information about claim reserves, the method by which an insurer calculates the level of reserves to pay out on a claim, and estimates of costs. EQC will generally release cost estimates, although there
Insurers have experienced a recent surge in Privacy Act requests from homeowners with unresolved claims arising from the Canterbury earthquakes. Some requests coincided with the impending expiry of the time limitation extension to September 4, 2017 agreed by the insurers who are members of ICNZ. Others appear to be an inexpensive means to gather evidence for proceedings or complaints.
are circumstances in which it will not, primarily where commercial negotiations for repairs are occurring. Insurers can refuse to provide evaluative material if that would breach an express or implied promise to keep the material confidential. The Privacy Act recognises that evaluative or opinion material used for the purpose of deciding whether to insure or renew insurance for an individual or property qualifies as “evaluative material”. An insurer’s documents may not extend to those held by its employees in their personal capacity, such as text messages on personal telephones and diaries. WHAT ABOUT DRAFT DOCUMENTS? Draft documents may expose information that an insurer decided not to pass to an insured or may otherwise reveal a weakness in its position. There is no special protection for draft documents and they must be reviewed on their own merits and disclosed if they contain personal information that cannot be withheld for a recognised reason, such as solicitor-client privilege. WHAT ABOUT CONSULTANTS’ DOCUMENTS HELD ON THEIR FILES? Insurers may instruct loss adjustors and other consultants who will have additional documents on their files that contain personal information. The Privacy Act applies only to documents that an insurer “holds”, but this is interpreted widely. The Human Rights Review Tribunal has decided that an agency holds information that it controls, whether or not that information is in its physical possession. Insurers are therefore obliged to provide
personal information held by a consultant where the insurer is entitled to that information. In most instances, however, the consultant will have provided the insurer with all the information to which it is entitled, such as a final report. A consultant is not normally obliged to provide an insurer with other information. In the context of professionals such as accountants and lawyers, the usual test is whether the document was intended to become the property of the client and does not extend to internal records, notes and draft documents. MAY AN INSURER CHARGE A FEE FOR PROVIDING A FILE? Act request, which may reflect the urgency requested by the insured. An insurer may charge for the costs of material and labour for time spent locating the relevant material, collating, transcribing and copying it. However, an insurer may not charge for the time spent deciding whether to disclose particular information, such as a legal review. The Privacy Commissioner and Human Rights Review Tribunal have endorsed the Ministry of Justice’s Charging Guidelines for Official Information Act 1982 Requests dated 18 March 2002 as a useful starting point. The guidelines provide that the first hour of staff time and 20 pages of photocopying should normally be free and then charges of $38 per half hour and 20 cents per page (GST inclusive) apply. WHAT ABOUT EQC? Insureds may make Privacy Act requests to EQC. They may also make requests for information from EQC under the Official
Information Act 1982, which does not apply to private insurers. WHO ENFORCES THE PRIVACY ACT? Persons who wish to complain that an insurer has failed to provide information that it is obliged to provide The Privacy Commissioner has limited powers and normally seeks to resolve complaints by agreement. In serious cases, the Privacy Commissioner or the insured person may refer a complaint to the Human Rights Review Tribunal, which may make orders and award damages for breaches of the Privacy Act. Such cases normally involve circumstances in which sensitive personal information such as medical information has been disclosed in a way that has harmed an individual. HOW SHOULD INSURERS PREPARE FOR PRIVACY ACT CLAIMS? Insurers may prepare to respond to Privacy Act claims by: • ensuring that their staff do not record statements or information that would be harmful or embarrassing if provided to an insured • keeping commercially confidential information in a separate location or file • having an efficient system for managing client files which includes relevant emails, contact notes and records of telephone calls • deleting any unnecessary files and records
CYBER-INSURANCE: GET IT RIGHT FOR YOUR CLIENTS By Kirk Wakerley,
believe we are part of a very noble and fundamental industry; without insurance, commerce cannot exist in its modern form. Commerce in return supports the communities we live in. In the event of a claim our client’s first point of contact is us, not the family lawyer, not their accountant but us - their broker. So when you get that call, text or email “we’re having a ransomware attack!” How will you respond? Sit, pause and dwell on that thought for a moment. Considering that this event could very well be the death of your clients’ business, your answer could be the lifeline it needs… Will your first thoughts and comments be: “Bugger… I was going to talk to you about that next renewal.” “You may recall I mentioned it, but you didn’t really show much interest.” “I didn’t bring it up as it’s not cheap and you’re quite price-conscious.” “I think we might have some cover under your liability package.” “Hold fire, I’ll call the helpline and get the experts on to it right away.” Given how many businesses are taking out cyber insurance, the likelihood of the latter response is sadly quite small. We know our clients are vulnerable and an attack could cripple them; we know that attackers are targeting small businesses, not just large international corporates; we know the larger corporates spend millions on systems and IT defences that are still breached, while our clients have limited resources in comparison to protect their businesses. We know all this, yet market statics clearly show we are not selling enough cyber, so: ‘WHAT IS OUR ISSUE WITH CYBER?’ Do we believe it is the insurer’s job to educate us, is it up to our clients to ask for it or do we need broker principals to make a directive to sell it? I talked to one old associate recently to find out that his entity had been hit twice on two separate occasions in the last 18 months, yet they didn’t put cover in place until after the second event with the excuse being: “We had really good systems and processes in place, which were then made more
likely outcome in the not-too-distant future, which will increase reputational damage, monitoring requirements and potential claim costs in these areas. • 28% of New Zealand businesses faced a cyber-attack in the last 12 months. Source: Grant Thornton International Business Report • 60% of cyberattacks target SMEs. • Only around 4% of attacks in New Zealand are reported. Source: Netsafe • 108 Ransomware attacks occur per day in New Zealand. Source Trend Micro & KSN Ransomware report, June 2016 A one-word solution isn’t the best way to manage cyber risk. To manage your clients’ risk you really do need to understand the client’s exposure, their key digital assets, presence and structure. To make your recommendations around the coverage they need using the most appropriate wordings. This places some risk on placing any form of cyber cover without a detailed proposal. I recently spent some time discussing cyber risk with a number of noninsurance business representatives to obtain their understanding of the risks and perception. My key findings were: • Not one had been initially approached by their existing broker to discuss cyber; • A high proportion believed that a standard general liability policy would indemnify them against third party claims; • An almost similar amount believed a cyber-attack could potentially cause damage to their server so “that would be covered by our material damage policy”; • Of those that thought about their loss of income, all believed that their standard business interruption policy would cover them. Their protection expectation from a cyber policy, after discussing the above: • Breach of privacy and records. • Virus and ransomware damage. • Extortion.
• Reputation damage. • Spam to third parties if own system hacked and used including VoIP phone systems. • Cost of remediation. • Cost of downtime and loss of income/profits. So if you are in the habit of selling a watered-down version of cover, or a policy that doesn’t include the likes of business interruption*, crime** and reputation cover without the knowledge, understanding and agreement of your clients, both you and your client could have a problem. As mentioned earlier all things are not equal with cyber, so double-check the sub limits and insurable clauses. BUSINESS INTERRUPTION* Does the policy cover just the period of interruption or the full period of recovery while the business builds itself back up to its pre-loss situation? Is the insurable period sufficient? CRIME** Does the policy include this, or is it an optional extension? Additionally, what is the limit of indemnity, the full sum insured or a sub limit? MONITORING COSTS: Following the Equifax breach in the US, recent reports have indicated a cost of US$15 - US$30 per month for a fully-fledged identity and credit monitoring service per client. Experts are also suggesting credit monitoring especially around credit cards should be maintained for anywhere up to two years. Looking at your clients’ customer numbers, using these figures how far will a sub limit of $50,000 or $100,000 really go? Based on my findings you would not be able to meet standard business expectations. The reality is that we are in a digital age and businesses in New Zealand are exposed and under-protected.The only real way to educate the market is through brokers and insurers. We don’t need to be the experts; we just need to educate ourselves enough so that we can educate and protect our clients. 33
WHAT’S CHANGING IN CYBER SECURITY?
CONFRONTING THE “NUMBER ONE PROBLEM WITH MANKIND” By Karl Deutschle, PwC Partner
arlier this year, at the Berkshire Hathaway annual shareholders' meeting, Warren Buffett said he believes cyber issues are “the number one problem with mankind” – ranking them above even biological and nuclear weaponry. This problem is hardly getting smaller. Quite the opposite, in fact: cyber attacks grow in sophistication and morph seemingly every week. For its part, the insurance industry understands the risk, even if many others are burying their heads in the sand. In PwC’s 2017 CEO Survey, cyber security ranked as the joint-second-highest threat that insurance-industry CEOs say could impact their growth. A huge 81% of them told us they’re concerned by cyber threats, while only 61% of CEOs in general think the same. So, given Warren Buffett’s warning (among countless others), what are some of the cyber security trends that insurance companies should be aware of? PwC recently released its Global State of Information Security Survey (GSISS) for 2018, which looks at how cyber threats have developed in New Zealand, and what our businesses – and insurance experts – should look out for on the road ahead. CYBER INSURANCE GATHERS A HEAD OF STEAM Cyber insurance is becoming a more 34
important safety net for businesses in this current climate – one that’s typified by not ‘if ’ you’ll get hit by a cyber attack, but ‘when’ it will happen. As a relatively new product, cyber insurance has certainly come of age, and has been snapped up by many businesses both in New Zealand and around the world. Over half the organisations responding to our GSISS survey (58 per cent) now have a cyber security insurance policy – a growing figure that’s still slightly behind those in Australia. It’s very likely that cyber insurance policies will continue on a similar trajectory for the time being, too. Research from our colleagues at PwC US shows that annual gross written cyber-insurance premiums are set to increase from around US$2.5 billion today to US$7.5 billion by 2020. Considering our uptake in New Zealand, we could expect to see growth in this region, too. We’re also seeing insurers take the front foot and expect clients to proactively manage their cyber risk. It might not be long before New Zealand’s cyber insurers are demanding companies have their cyber-security processes independently verified to confirm they’re maintaining an environment of best practice. MOBILE BREACHES RISING GLOBALLY American entrepreneur, venture capitalist and four-time New York Times bestselling author
Gary Vaynerchuk says the mobile phone is today’s television, and television is now the radio. The smartphone has completely changed how people consume media, communicate with people and businesses, and perform certain tasks during their day-to-day lives. It was five years ago, in 2012, when connected mobile phones in New Zealand reached a point where they outnumbered New Zealanders themselves. Today, there are some 6.3 million smartphones, tablets and other connected mobile devices in NZ. So it’s not surprising that cyber attacks via mobile connections are quickly growing, too – at least globally. In fact, around the world, mobile devices are the scenes for the highest number of cyber attacks. In New Zealand, it’s the sixth most common platform for a security incident (traditional software is currently the highest in NZ, and ninth internationally). Expect New Zealand’s mobile vulnerabilities to become more exploited in line with global averages sooner rather than later. NEW ZEALAND BUSINESS PERHAPS TOO TRUSTING PwC’s GSISS 2018 report found that current service providers, suppliers and business partners have collectively caused around half of all cyber incidents in New Zealand over the past 12
months. On top of that, former employees ranked highly as an entry point for hackers. All of these causes are significantly above global averages, while current employees as an originator of a cyber breach are similarly as highly ranked in NZ as they are overseas. One of the things all these sources of a cyber breach have in common is they all come from relationships and partnerships that a business should trust. It’s clear we need to maintain New Zealand’s high-trust business environment for all its benefits, although there’s also a pressing business need to put the controls in place to limit liabilities from the people and organisations we work with. The best-locked digital door is pointless when everyone’s holding the keys. Instead, businesses and insurers need to start looking at how their company’s identity and access management stack up. Insurers, similarly, will want to take this into account with their clients. Without an improvement in proven cyber security controls, insurers will have no option but to start seeing a company’s cyber security standards as being only as strong as those of their partners, suppliers and service providers. THERE’S A GOLDEN OPPORTUNITY IN INSURTECH At the risk of sounding contradictory, New Zealand’s insurance companies need to team up more. Many insurance incumbents are already doing just that – particularly with insurtech start-ups – to unlock growth opportunities in innovation. Annual investments in InsurTech start-ups have increased fivefold over the past three years. Around the world, cumulative funding for InsurTechs has reached US$3.4 billion since 2010, based on the companies followed by PwC’s DeNovo platform. There are plenty of reasons for this spike in interest from funding sources. InsurTech start-ups – as with FinTechs in general – have been able to go to market quickly, with technology on their side, to experiment with what consumers want. Their fearlessness has found the odd failure, but it’s also uncovered new ways of serving policyholders that risk-averse companies might never have realised, showing the way for other insurance start-ups and established firms alike. Some popular ways insurance companies today are partnering with and leveraging the capabilities of InsurTechs are to develop new products or services, aid market exploration and discovery, and to test and deploy new insurance solutions. So, while cyber security principles suggest companies lock down their business borders, the insurance industry will need to continue to expand their number of partnerships and joint ventures. Of course, that will require the right security control environment, one that allows out-of-firm access to important information to those who need it, and keeps out those who don’t. BREAKING THE CHAINS OF HABIT Cyber security is a relentlessly changing beast, but keeping up with the trends and changes gives businesses – both inside and outside of the insurance sector – a chance to stay ahead of it. With shifting (or shifted) consumer tastes towards mobile devices, the broad acceptance of new products like cyber insurance, upgrades to business control environments, and the symbiosis between incumbents and InsurTechs, many of the old ways of working may soon be left behind. But that lets me finish with another Warren Buffett quote: “Chains of habit are too light to be felt until they are too heavy to be broken.”
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Karl Deutschle is a Partner at PwC and the Insurance Sector Leader. 35
CLEAR DIRECTION AHEAD FOR FINANCIAL ADVICE
by Rebecca Sellers
n May 2017, the results of New Zealand’s latest financial health check were published. The International Monetary Fund (IMF) found that New Zealand did not meet international standards for regulating intermediaries or conduct. The regime for “registered financial advisers (RFAs) is open to a variety of abuse… and there is some evidence of poor conduct by RFAs”. New Zealand should “strengthen or remove the registration-only regime available now to intermediaries, introducing minimum requirements on competence and disclosure that apply to all advisers, including insurance brokers…” New Zealand had already started on that journey. The Financial Services Legislation Amendment Bill is currently before Parliament that will meet some of the IMF’s recommendations. The changes aim to align regulation with good business practice: building a trusted relationship with clients; giving advice that helps clients better understand risk; making sure that advice makes the client better off. Changes are likely to take effect during 2019, but you should start to plan now. SCOPE OF THE NEW REGIME FOR FINANCIAL ADVICE As the IMF observed, “almost all (and all significant) intermediaries are captured by the relatively wide definition of advice in the Financial Advisers Act, which includes simply giving an opinion on a financial product.” The bill currently before Parliament will repeal 36
the Financial Advisers Act and will move the regulation of financial advice to the Financial Markets Conduct Act 2013 (FMC Act). The wide definition of “financial advice” will remain. You will be caught by the new regime if you provide a recommendation or opinion about acquiring or disposing of (or not acquiring or disposing of) a financial advice product, such as an insurance policy. Financial advice can be provided by a business acting through employees, agents or computers (“robo-advice”). Certain occupations (such as teachers and journalists) are excluded. There is also an exclusion for any financial advice that is given as an ancillary part of a business “the principal activity of which is not the provision of a financial service”. Certain activities will not amount to “financial advice”, such as: providing factual information, recommending a type of financial advice product (for example, “it is sensible to consider business interruption insurance”); recommending that a person obtain financial advice or passing on financial advice. There is also a new exclusion for “execution only” business. The Financial Markets Authority (FMA) will have discretion in the application of the new regime, including the power to: • Declare a person (or class of person) who would otherwise be a wholesale client to be a retail client; • Declare advice to be, or to not be, financial advice; and
• Remove an exemption from a licensing requirement. This highlights the importance of developing a good relationship with the FMA as regulator. Technically it will be possible to sell insurance without “financial advice”, but in practice, the circumstances where insurance can be sold without advice will be very limited. Under the new regime, there will be no distinction between “class” and “personalised” advice. This means that you may have to become licensed even to publish an advertisement about a product, as if the advertisement includes a recommendation or opinion it will be “financial advice”. WHOLESALE CLIENTS A licence is not required if the financial advice service is not provided to any retail clients. However, it is not possible to avoid the new regime by only dealing with other businesses. Other aspects of the regime will apply to wholesale clients, including the requirement to meet the duties to: • Give priority to the client’s interests; • Exercise care, diligence and skill; • Disclose information, which may include levels of commission. The regulations to set disclosure requirements are being developed and an exposure draft should be released shortly. The FMC Act defines “wholesale clients” to include investment businesses, Government agencies and persons who are “large”, which means:
As at the last day of each of the two most recently completed financial years of the person before the relevant time, the net assets of the person and the entities controlled by the person exceeded $5 million; or • In each of the two most recently completed financial years of the person before the relevant time, the total consolidated turnover of the person and the entities controlled by the person exceeded $5 million. Any service your business offers must comply with the regime for retail clients if any client does not meet the definition of a “wholesale client”. This could happen if you have a client who does not hold adequate net assets or turnover. Clients can also opt out of being a “wholesale client” by providing you with a signed notice to that effect. If you decide to limit your business to service wholesale clients, you must ensure that your clients continue to meet these requirements. RETAIL CLIENTS Anyone providing advice about insurance to retail clients must be covered by a licence. To obtain a licence, your business will need to have adequate IT systems, competent people and proper processes. The FMA will require that your business meets minimum standards, so the main variables you can control are cost and time.
This means you should start planning now to minimise cost. When providing advice to retail clients you must meet the same duties as for wholesale clients: giving priority to the clients’ interests, acting with care, diligence and skill and making appropriate disclosure. There are additional duties that apply when advising retail clients, including that you must: • Provide advice only where competent to do so, and be subject to a code of conduct that sets minimum standards of competence, knowledge, skill, ethical behaviour, and client care; and • Ensure that clients understand any limitations on the nature and scope of the advice provided (for example, how many products or how many providers have been considered). WHAT NEXT? The intermediated nature of insurance distribution brings innovation and flexibility, enabling businesses and clients to identify risks and obtain appropriate insurance cover. Globally, regulators struggle to regulate advice about insurance or other financial products. Banning commission in the UK led to an “advice gap” where customers could not access advice. In Australia, numerous Senate inquires have brought
waves of regulatory reform to the industry. The proposals in the bill before Parliament were developed in line with international best practice and have already been subject to a lengthy consultation process. It is likely that the bill will be passed substantially in the current form. The detail of the new regime for disclosure, licensing and code of conduct are all in the process of being developed. However, with a view to international best practice and FMA licensing, it is possible to anticipate how those requirements will develop. There is a clear direction ahead for the regulation of financial advice.
Rebecca Sellers is a director of Melior Law & Regulation. She is a contributing editor to Colinvaux’s Law of Insurance in New Zealand and Convenor of the Commercial and Business Law Committee of the New Zealand Law Society.
SIMPLER PROTECTION FOR DEVELOPERS CONTINUITY OF COVER ACROSS THE LIFE OF THE PROJECT WILL MAKE IT EASIER FOR DEVELOPERS TO SECURE FINANCIAL BACKING AND ATTRACT TENANTS WHEN THE DEVELOPMENT IS FINISHED.
rokers can forge an advantage with commercial property developers by offering faster and simpler insurance for their projects. Developers embarking on new projects are on the stressful incline of a potentially risky ride. Throw in unpredictable factors like a labour shortage or weather events and they’ve got themselves more than proverbial spanners in the works. NZI is offering a new insurance product, providing surety and end-toend cover upfront at the most uncertain time in the development cycle. “We call it NZI Total Development and it offers property development insurance from day one to done,” said Bryan Tedford, NZI’s national portfolio manager – business continuity and asset protection. Designed for and targeted at commercial property developers, the package provides a material damage policy – from consenting through construction to completion – with a contract works policy running alongside. “The combined approach we’re taking to brokers for property developers hasn’t been done before, not by NZI nor in the New Zealand insurance industry,” Telford said. “The real beauty of NZI Total Development is that brokers no longer need to negotiate insurance at three separate stages of a development project. Those negotiations are condensed into one upfront contract. “It’s simpler for the broker, the developer knows their project is protected for the entire development cycle, and neither of them has to think about the insurance again. You wouldn’t lay your foundation three times over, would you?”
HOW IT WORKS With Total Development, NZI agrees to cover a property: • even before any work begins – during phase one (planning and design) of a development project, and under a Material Damage policy • when the work starts – this is phase two, and the Contract Works policy kicks in alongside the Material Damage Policy • when the project is complete – phase three cover, which automatically reverts to Material Damage on the entire completed structure. “Continuity of cover across the life of the project will make it easier for developers to secure financial backing and attract tenants when the development is finished,” says Bryan. GROWING MARKET Residential, commercial and infrastructure-related building activity is forecast to continue to boom, according to the National Construction Pipeline Report 2017. Non-residential building activity grew 12 per cent in 2016, with the pipeline report now forecasting another 29 per cent growth to a higher level of $9.6 billion in 2019. The industry’s importance is also reflected at a national level, with construction one of the largest sectors in the New Zealand economy. It employs more than 190,000 people, or just over 8 per cent of the workforce, and contributes almost $13 billion towards New Zealand’s GDP.
ADVISER REFORMS MAY FORCE INDUSTRY TO TAKE MORE LEGALISTIC APPROACH TO BUSINESS RELATIONSHIPS By Crossley Gates, DLA Piper
here are two pieces of legislation that directly govern the legal relationship between insurers and intermediaries: Insurance Intermediaries Act 1994 and section 10 of the Insurance Law Reform Act 1977. The Insurance Intermediaries Act 1994 addresses only a limited number of areas, viz. the legal effect of premium and claim payments made through intermediaries and the requirement for intermediaries to account for premiums separately through an insurance broking client account. Section 10 (1) of the Insurance Law Reform Act 1977 initially created much confusion in the insurance industry. When I first started working in-house in the industry in the 1980s, it was thought that it deemed an intermediary to be the agent at law of the insurer at all times. This, of course, was completely at odds with the business model of an independent insurance broker arranging cover for the insured. It was not until the Court of Appeal decision of Harewood Orchard Partnership v Mabey & Wallace Court of Appeal CA72/96 that the effect of the subsection was clarified. Effectively it says that if an intermediary acts for an insurer to any extent during the negotiation of the insurance cover, then it is deemed at law to the legal agent of the insurer for all purposes until the cover is arranged (regardless of any other legal relationship). The balance of the law affecting the legal relationship between insurers, intermediaries, and policyholders is all common-law (decisions made by the courts, which set precedents); in particular, the common-law of agency. (The one exception to this is the Secret Commissions Act 1910, although this legislation applies to all agents, not just insurance intermediaries.) Because the law of agency is "hidden" in case law, it is not as well-known and as well-observed as it might otherwise be. As a reminder, the law of agency says insurance brokers must: • Carry out their principal’s instructions. • Exercise the skill and care of a reasonably competent and careful insurance broker in
the circumstances. • Keep accurate accounts of all transactions. • Not put the duties to his or her principal in conflict with his or own interests. • Not profit from the agency without the knowledge of their principal. As a generalisation, some of the business arrangements I see between insurers and insurance brokers seem to overlook some of these obligations – particularly the one relating to conflicts. In a backhanded way, compliance with the duty not to be in a position of conflict is likely to be enhanced greatly by the proposed financial adviser reforms. This will occur through the proposed new Financial Advice Code of Conduct, which is being considered at the moment. I recently attended a presentation by Angus Dale-Jones, the Chair of the Financial Advice Code Working Group. He made the following comments about the proposed reforms: • The law will be more consistent across all types of financial advice. • The present distinction between Category 1 and Category 2 products will be removed. • The present distinction between personalised advice and class advice will be removed. • All advice will be regulated in a consistent way.
• The proposed new financial advice code will be wider. It will move away from occupational codes. It is more likely to have universal application to all advisers. • It will focus on the quality of the advice and on the availability (affordability) of the advice. • He hinted that the code may be framed through the eyes of the client and take the form of minimum standards of client care in relation to the agent’s competence knowledge/skills. The last point raises the possibility of the code setting out duties similar to those set out above by the law of agency. All financial advisers are agents. Therefore, by a backhanded way, those duties may now become much more visible and be enforced more readily than they have in the past. The industry should take stock of this now and view its business relationships through the lens of the law of agency. The new financial adviser code may effectively replicate much of this law.
Crossley Gates is a partner at law firm DLA Piper. email@example.com
ASK AN EXPERT
Employee or contractor? QUESTION… My client owns a transport company. One of their "employees" is employed on a sub-contracting basis, invoicing the company each month for his hours. He does not work for anyone else, just my client. His duties include driving as well as some light engineering and repair work as required on my client’s own vehicles (no thirdparty repair work is undertaken). For all intents and purposes, he is really an "employee". I have approached my client’s insurer and queried whether the sub-contractor is included under clients liability cover. Insurer advises yes, but only for driving activities as they are a transport company, not for engineering/repair work. Not sure I agree with this. Does the sub-contractor need his own liability cover, and what about statutory liability?
REPLY… JAY SINGH, NZI Most GL polices automatically provide cover for uninsured contractors whilst engaged/working only for the entity named on the schedule (insured) and the stats policy can be endorsed to cover them as well. This is designed to capture and cover the above employment arrangement.In respect of the activities not covered, this can easily be fixed by just noting those additional activities on the policy under the business description, but not sure if this is relevant here given the engineering and repair work is only done on the insured's own vehicles. Liability policy won't cover any damage as not TP property and most GL wordings would exclude cross liability.
GST concerns QUESTION… When an Excess/Deductible is payable by a commercial client, usually this includes GST - a $500 Excess is $434.78 + GST. In a recent claim, the Insurer has requested that our client pay their excess to them as they will be paying the repair invoice in full - but are not prepared to provide a GST invoice to enable this GST content to be recovered by the GST-registered client. Whilst I appreciate that the excess is a retained cost, my question is whether the client can properly recover the GST without such a GST invoice? And if not legally able to do so, how can this best be resolved?
REPLY… CROSSLEY GATES, DLA PIPER I am no tax lawyer, but the excess is an uninsured amount that remains payable by the insured to whoever is carrying out the repair/replacement of the asset insured. I don't believe the insurer can insist on it being paid to it instead. If doing this has a negative impact on the GST position of the insured (which looks likely) then the insured can probably refuse to do this and insist on paying it to the supplier of the goods/services and receive a GST receipt in the usual way.
Do you have a question for our experts? If so, visit iNavigator, www.inavigator.co.nz, or the IBANZ website, www.ibanz.co.nz - and let us know.
ASK AN EXPERT
My client inadvertently under-insured some property under a marine cargo transit insurance. The client suffered a loss and the insurer is applying the “average clause”, which is in the policy. Under the ILRA 1985 it states: "...Where a contract of insurance (not being a contract to which section 15 of this Act applies or a contract of marine insurance within the meaning of section 3 of the Marine Insurance Act 1908) contains a pro rata condition of average, the condition shall be of no effect unless, before that contract is entered into, the insurer clearly informs the insured in writing of the nature and effect of the condition. (2) Notwithstanding subsection (1), where it is not reasonably practicable for the information required by that subsection to be given to the insured in writing before the contract is entered into, that subsection shall be deemed to be complied with if the insurer— (a) gives the information orally before the contract is entered into; and (b) gives the information in writing as soon as it is reasonably practicable to do so.” The insurer when advising terms for the risk did not advise that “average” would apply, nor did they advise on their policy schedule received after the insurance was placed that it applied. The particular policy that applied is an updated wording, but that particular policy wording was not on their website, nor has the insurer sent through a copy of it (but they did send through the earlier wording. I have no doubt however that the modified policy would also include “average”). The insurer has advised that the rules relating to the application of “average” do not apply to marine contracts. This seems very unfair- I have tried to look through the Marine Insurance Act but apart from advising “average” applies nothing else is of assistance. Surely the Insurer is bound by some legislation to advise of average applying to applicable policies. In this case they did not comply, they have not even supplied a copy of the correct wording, and on the submission document to the underwriter it did advise that the client was unsure of the value of the items and requested terms on different values. At what stage should the underwriter make the client aware of the clause?
We recently transferred a client’s insurance covers from one insurer to another. The new client tested his employee-occupied houses for meth contamination, one came back positive and needs cleaning. We submitted a claim to his new insurer, which has declined the claim as the contamination occurred before they went on risk. The old insurer has a clause in their meth contamination clause that states for a meth claim to be accepted the client must be insured with that company when they make a claim. 15. Unlawful Substances (a) You are insured for loss to your employee house resulting from contamination by an unlawful substance occurring during the period of insurance if your employee house is occupied by your employees and provided that your employee house is insured with us when you claim under this benefit. In this case it is clearly evident that the contamination occurred whilst under the old insurer’s policy, what are your thoughts about the insurer’s ability to apply this time limitation on a claim?
REPLY… CROSSLEY GATES, DLA PIPER I am afraid your client doesn’t come within clause 15 and is out of luck.
Accidental damage QUESTION… We have a situation with our client. Tenant accidentally damaged the house with car. House insurer is saying the owner needs to pay the excess as they cannot recover it from the tenant’s insurer because of Osaki vs Holler case as damage was unintentional. My view is that that case pertained to a tenant who caused the damage themselves, not with an accessory that carried insurance.
REPLY… CROSSLEY GATES, DLA PIPER As the quote from section 16 above says, the section doesn’t apply to marine insurance as defined in section 3 of the Marine Insurance Act. Therefore, if the policy you refer to comes within section 3 then the underwriter is correct I am afraid. REPLY… PAULINE DAVIES, FEE LANGSTONE Crossley is correct. The Marine Insurance Act applies automatically as a matter of law to all contracts of marine insurance, so strictly speaking it isn't even necessary for the insurer to state that fact in the policy. It has to be remembered too, that underinsurance can also give rise to non-disclosure issues and will almost inevitably have had an impact on the amount of premium paid. The application of average largely redresses the balance in both areas.
REPLY… CROSSLEY GATES, DLA PIPER Osaki v Holler is the case that held that the Property Law Act exoneration provisions for lessees applies to residential leases as well as commercial leases. Therefore, the issue is determined by sections 269 to 272 of the Property Law Act. Where the exoneration provisions apply (which will be the case here as it appears the damage was accidental) the tenant is exonerated from all liability. This will include both the insured and uninsured damage to your client's property. Therefore, your client cannot recover the uninsured damage (excess) from the tenant in the same way he (or his subrogated insurer) cannot recover the insured damage either. 41
IFSO CASE STUDY
COMPLETING APPLICATIONS RISKY
olin* arranged life and trauma cover with the help of financial adviser Fred*. Fred and Felicity*, a mutual friend, completed the application on Colin’s behalf. When Colin required a coronary angiogram, he made a claim to the insurer. The insurer avoided Colin’s cover because Colin had not disclosed his hypothyroidism, elevated cholesterol, elevated blood pressure, impaired glucose tolerance, abnormal liver function results, back strain, right thigh pain, heel tendinitis, asthma/bronchitis and vertigo. Colin made a complaint about Fred, saying Fred should pay the value of his trauma cover ($80,000). Colin said that, when the insurance was arranged, he showed Fred and Felicity his medication, and Felicity wrote down the names on the application. Fred asked Colin if he had high cholesterol, Colin said he was unsure, and referred him to his doctor. In response to a cholesterol question on the application, Felicity wrote “please refer GP (normal limits)”. Colin believed the insurer had avoided his policy because the information about the medications hadn’t reached the insurer. However, the insurer avoided the policy because Colin hadn’t disclosed his numerous medical conditions. The information disclosed about cholesterol (“normal limits”) wasn’t correct. If the insurer had asked Colin’s doctor for cholesterol information, it would not have enabled the insurer to obtain information about Colin’s other health conditions. While Colin said Fred told him “medical history would be taken” before the insurer would accept the application, Fred said he’d only said that Colin’s insurer might obtain information from his doctor about his cholesterol. Fred didn’t have a file note of the meeting. Colin was under the mistaken belief that the insurer would obtain all of his medical notes before accepting the application but, as a matter of course, insurers are not required to obtain an applicant’s medical notes.
Unfortunately, there were no documents available. There was insufficient evidence that Fred or Felicity caused Colin’s misunderstanding. There was no evidence that Fred or Felicity knew Colin suffered from other health conditions, which would have necessitated the insurer obtaining more of Colin’s medical notes. The insurer had avoided the policy because Colin did not disclose multiple health conditions. Colin’s complaint was not upheld. LESSONS FOR ADVISERS KEEP RECORDS • Without any records of client conversations, there is no proof of what occurred at application time. • File notes and client correspondence enable you to respond to future issues that might arise. TAKE CARE WITH APPLICATION FORMS • Do not complete an application form on behalf of your client unless absolutely necessary e.g. the client cannot physically complete it and make a note about why you did it. • Ensure your client completes the application form in full, answering every question - even if he/she is an existing client. • If you do complete an application for a client, note on the form that you have completed it and why, and make a file note on client file. • Ensure that your client reads the completed application, or you read it to him/her. • Remind your client to double check all information e.g. vehicle modifications, convictions, claims history etc. • Remind your client that he/she has a duty to disclose all material information and that, if they do not, it could jeopardise a future claim. MEDICAL INFORMATION • Insurers do not, as a matter of course, get a client’s full medical history. • Insurers will only ask for medical information if the application triggers this.
IFSO CASE STUDY
ADVICE OBLIGATIONS D
onald*, a financial adviser, met with Mr and Mrs Jones* to review their life and trauma cover. They were concerned about increasing premiums and asked Donald if they could have a policy with level premiums. Donald provided a quote and it was agreed that they would apply to Insurer A, for life and trauma cover. Donald helped Mr and Mrs Jones complete the application. The insurer accepted the application and the cover commenced. Acting on Mr and Mrs Jones’s instructions, Donald cancelled their existing policy. A few weeks later, Mr Jones was admitted to hospital with renal failure, requiring a transplant and dialysis treatment. Mr and Mrs Jones made a claim to Insurer A for trauma cover. Insurer A avoided Mr Jones’s policy from inception, because he had not told it that, five years earlier, he’d had a hospital appointment about his renal function and was to have follow-up tests. Mr Jones had been told he needed to remain on hypertension medication for life, or he would risk further kidney damage. Insurer A declined Mr and Mrs Jones’s request to reinstate their policy. Mr and Mrs Jones made a complaint about Donald.They didn’t believe it was their fault that Insurer A had avoided their policy. Donald said he was not responsible for Insurer A avoiding the policy. Donald denied that Mr and Mrs Jones had told him about the kidney appointment, or that another insurer declined to offer cover. He said he had followed his standard process regarding the application and had warned Mr and Mrs Jones about the consequences of not providing full disclosure. DID DONALD MEET HIS STATUTORY OBLIGATIONS? Section 33(1) of the Financial Advisers Act 2008 (“FAA”) states a financial adviser must exercise the care, diligence and skill that a reasonable financial adviser would exercise in the same circumstances. Section 33(2) states that the degree of care, diligence and skill that a reasonable financial adviser would exercise, should be considered according to: (a) the nature and requirements of the client; (b) the nature of the service and the circumstances in which it was provided; and (c) the type of financial adviser. The Code of Professional Conduct for Authorised Financial Advisers, provides that: an adviser must place the interests of the client first and must act with integrity (Code Standard 1); and an adviser must take reasonable FINANCIAL ADVICE COMPLAINTS CAN LEAD TO POSITIVE CHANGE Last year, the Insurance & Financial Services Ombudsman Scheme (the IFSO Scheme) received the highest number of complaints in nearly 20 years, with 314 complaints and 3227 complaint enquiries. House insurance issues made up the highest proportion of investigated complaints (27%), followed by vehicle (13%), travel (13%), and health insurance (10%). The number of complaints about financial advisers remained relatively low, with 10 complaints (3%) and 73 complaint enquiries. “While no single issue has caused the rise, it is a sign of increased consumer awareness about being able to make complaints,” says Karen Stevens, Insurance & Financial Services Ombudsman. “Our resounding message is that complaints are not all bad.” “We encourage the industry to view complaints as an opportunity for valuable feedback which can improve their
steps to ensure that the service is suitable for the client (Code Standard 8). Donald said, when he completed the application, he asked the health questions and ticked the boxes accordingly. Mr and Mrs Jones said they told Donald about Mr Jones’s renal appointment and that another insurer had declined cover. They assumed he had written this on the application form. However, Mrs Jones had earlier said that they had forgotten about the renal appointment. The only available documentary evidence was the application, on which Donald had ticked “No” to a question asking about renal problems. Mr and Mrs Jones signed the application declaring that, if the information was not in their writing, they had checked and approved it as being accurate and complete. There was no evidence to show that Mr and Mrs Jones told Donald about Mr Jones’s renal history or the declined application. Donald had not failed in his obligations in this regard. It was also clear from the documents that Donald had warned Mr and Mrs Jones about the implications of replacing their existing policy. Specifically, that if they did not provide full disclosure, they might have no cover under the Insurer A’s policy. The IFSO Scheme case manager said Donald met his statutory obligations to Mr and Mrs Jones; he provided financial advice with the care, diligence and skill that a reasonable financial adviser would exercise in the same circumstances. Further, he met the Code requirements to put Mr and Mrs Jones’s interests first and to ensure the advice was suitable. LESSONS FOR ADVISERS UNDERSTAND YOUR DUTIES • Your duties to your clients are set out in the Financial Advisers Act (FAA), The Authorised Financial Advisers Code (AFA Code), the Consumer Guarantees Act (CGA), and common law. • Best practice is to have good processes for following up on client instructions and records that document that your processes were followed. • Good records, especially file notes of meetings, provide proof of your version of events. They can establish that you used the care, diligence, and skill of a reasonable financial adviser. *Not real names business. Lessons can be learnt and complaints can lead to positive change – including more informed consumers and better business practice, which means future issues can be managed and complaints can be avoided.” APPLICATION FORMS AND NON-DISCLOSURE “It’s important that financial advisers and brokers understand that most clients won’t know about their duty of disclosure, including what information is material,” Stevens said. “More importantly, most clients won’t understand the consequences of failing to disclose material information, which can be dire.” “Financial advisers have a key role in educating clients about their disclosure obligations and the consequences of failing to disclose,” says Karen. “Completing application forms on behalf of clients is very risky. We have had numerous complaints that highlight this risk.” “Keeping good records is critical,” says Karen. “In the event of a complaint, good records make it easier for financial advisers to resolve things before they escalate to the IFSO Scheme.” 43
FSCL CASE STUDY
INSURANCE LAPSES – WHO IS RESPONSIBLE? AN INSURED IS UNAWARE HIS POLICY HAS LAPSED BECAUSE HIS INSURANCE BROKER SENT THE RENEWAL REMINDER TO AN INCORRECT EMAIL ADDRESS LEADING TO LOSS AFTER THE MOTORBIKES ARE STOLEN
n December 2016 the insured purchased two motorbikes from a dealer who arranged insurance through a broker. He paid the annual insurance premiums for both bikes in one lump sum. In March 2017 both bikes were stolen from a secure garage. When the insured submitted the claim, his insurer advised him the policies had lapsed the previous December because he had not paid the premiums. He was shocked, the year had slipped past so quickly and he had simply forgotten to renew the policies. He complained to us, and we referred the complaint to the insurer and the broker, both FSCL participants. To simplify matters, the insurer agreed to accept responsibility for the complaint. INSURER’S RESPONSE The insurer went back to the broker for information about the renewal process, and discovered the broker had sent one email to an incorrect email address. The insured had given the broker his correct email address, telephone number and physical address. The insurer did not accept it had any legal liability, saying it was his responsibility to renew his insurance, but agreed the broker’s service could have been better. The insurer offered to compensate the insured for half his loss. THE INSURED’S VIEW The client did not accept the insurer’s offer. He said the broker was entirely liable for his loss because if he had received the renewal reminder he would have renewed the policies and been insured when the bikes were stolen. He referred his complaint to us. REVIEW While the client carried some responsibility for the loss, because he failed to renew his insurance policy, we considered the broker carried a greater degree of responsibility for the loss.The broker was the professional in the relationship and had sent one renewal reminder email to an incorrect email address. The client had given the broker his correct email address, a contact telephone number and physical address but the broker had made no effort to contact him by another method. It seemed to us fundamentally unfair that the broker could consider one email to the incorrect email address adequate service at renewal time. During our investigation, we asked other brokers for their view and they agreed, advising they would have tried to contact the client using his other contact details. The insurer also submitted that after three months the client should have realised his policy had lapsed. The insurer asked at what point would its liability for loss end? After six months, a year or would an insurer be indefinitely liable? We were unable to give the insurer a definite answer to this question, as each case is decided on its merits. However, we said we would take into consideration the length of time since the policy lapsed and the frequency of premium payments. If the premiums were paid monthly, we would ordinarily expect a person to notice payments had ceased after a couple of
months, but if payments are annual we would allow a longer period for a person to notice payments had ceased. OUTCOME We recommended, and the insured accepted, that the insurer assess the claim and split the loss on a 25/75 basis in the client’s favour, then deduct the premiums he would have paid if he had renewed his insurance and the excesses for both bikes. OUR INSIGHT A customer uses a broker’s service for help when first arranging cover, but also because the broker will provide on-going service and advice at renewal time. A broker is being paid to service a client, and can be expected to provide that service with reasonable care and skill.
FSCL CASE STUDY
“AT LEAST I HAVE LEASE COVER, RIGHT?” T
he insured contacted her broker to ask whether she had cover to lease a truck when her truck was written off after an accident. The broker told her she had lease cover, however it later transpired she did not. THE ACCIDENT The insured owned a trucking company. In mid-April 2016 one of the company’s trucks was involved in an accident and was written off. She immediately called her insurance broker to ask whether her company’s insurance policy provided cover to lease another truck, while the claim for replacement of the damaged truck was being finalised, and until she actually received a replacement truck. Her usual contact at the broking firm was not available, and another staff member told her there was lease cover and to go ahead and lease another truck. She immediately hired a truck to enable completion of jobs the next day. THE CLAIM FOR THE TRUCK The broker submitted the insured’s truck replacement claim and on May 6, 2016, the insurance company paid her $58,000. She had arranged a truck to purchase, but it would be a few more weeks until she was going to receive the new truck from the vendor. THE CLAIM FOR THE LEASE COSTS After she received the new truck, she decided to have the truck painted (which took a week). On June 13, 2016, the painting was completed and the truck was ready to go on the road. The total lease costs for the eight-week period were $6181.89. She said she was willing to cover the lease cost for the week the truck was being painted. However, when she submitted the details of the lease costs to her broker she was told there was never any cover for lease costs, being an error on the broker’s part. THE BROKER’S OFFER TO RESOLVE THE COMPLAINT The broker apologised for the error, and said it would put her back in the position she would have been in had she had the lease cover in place. If she had had cover in place, she would have had the benefit of lease cover until the $58,000 payment was made on May 6, 2016. This amounted to a sum of $1303. The broker said the insured could reasonably have known that the lease cover would end on May 6, 2016, being the day the truck claim was paid. THE INSURED'S VIEW ON THE OFFER The insured was not satisfied with the offer and said ideally, she should have been told in April, when she first contacted the broker after the accident, that she had no lease cover. However, she said that at the very least she should have been told on May 6 that the lease cover would cease that day (both she and the broker still being under the mistaken impression on that date that she had the lease cover). If she had been told earlier that there was no lease cover, or that the cover would end on May 6, she would have looked into other options (such as borrowing a truck from an acquaintance), instead of leasing the truck for as long as she did. She also said that when she was speaking with her usual contact about the lease cover issue, she said because she had been able to secure the $10,000
in cover she was not technically insured for, this subsumed the alleged $6,181.89 lease costs in any event. Overall, the insured was disappointed with the broking firm’s service, especially as she had been a customer for 20 years. In particular, she felt the broking firm should have had a better understanding of the cover she held, and advised her correctly when she contacted it in April following the accident. The insured complained to FSCL. OUR REVIEW We reviewed the file and it was clear there was a discrepancy between the parties about exactly when the client was told the lease cover would cease. There were also discrepancies about the advice given by the broker and her instructions to the broker, as to the type of cover required for the truck at both the February 2015 and February 2016 renewal meetings. We spoke to the broking firm about whether it might consider increasing its offer, taking into account the following factors. a) The broker had caused the insured inconvenience in providing the incorrect information about the lease cover. b) It was not necessarily reasonable to assume the insured knew the lease cover (if it had been in place) would have ended upon payment of the truck claim on May 6. c) It was not clear when the broker told the insured about the fact that lease cover was never in place.We could see why she thought the lease cover would be in place until approximately June 6 (she was prepared to cover a week of the lease cost while the replacement truck was being painted). d) Consideration needed to be given to the fact that she had not actually paid the increased premium, she would have needed to pay to have the lease cover in place. The broking firm reconsidered its offer, and said it would pay 65% of the lease costs, being an offer of $4,018.23. She accepted there was a “he said, she said” situation in relation to when the broker gave her certain information, and decided to accept the $4018.23 offer in full and final settlement of the complaint. OUR INSIGHT In this case, there was a human error by the broking firm in providing incorrect information to the insured about the lease cover, at the time of the accident. However, the broker’s service following that error then exacerbated the issue; in particular, when it did not outline explicitly to the insured that the lease cover was ceasing on May 6. 45
Professional Development: Professional IQ College
rofessional IQ College is pleased to announce the latest Kerry Wilson Trust Scholarship winner is Kristin Bridges. Kristin attended Sacred Heart Girls’ College in Hamilton before going on to Waikato University to do a degree in Social Science, majoring in Social Policy. Whilst Bridges is not directly using her degree as an insurance broker, she is finding that the skills she learned whilst studying, such as time management, stakeholder analysis and research skills, give her a good grounding to serve clients well and undertake her role at Bridges Insurance Services to a high standard. Beginning in a part-time role as an accounts administrator whilst at university, Kristin’s role in the workplace has evolved as she has developed additional skills and taken on extra responsibilities. She first moved into a domestic broker role, then commercial support, to finally become a commercial broker at the beginning of 2015. Bridges believes that obtaining the New Zealand Certificate in Financial Services Level 5 will enable her to further progress in her career as an insurance broker and understands that ongoing education is crucial to being able to offer excellent service to clients to ensure they are adequately and thoroughly protected from and aware of risk wherever possible. In an industry that is experiencing rapid change, particularly in light
of technological advances, it is more crucial than ever to stay one step ahead of the game and constantly challenge yourself to ensure your skills are remaining relevant. Part of this is a commitment to continual education and growth which Bridges is dedicated to achieving. Bridges is honoured to receive the Kerry Wilson Education Trust Scholarship, which she says will benefit both herself and the clients she interacts with will also be better served as she will have a more robust knowledge base to draw from when advising them. An educated broker is a good broker and in our ever-changing industry, education is extraordinarily important not only from a client perspective, but from a regulatory one also. The judges felt Bridges’ application was outstanding and she truly deserved the scholarship.Thanks to KWT and good luck to Kristin Bridges on her study journey through the New Zealand Certificate in Financial Services Level 5.
Save money, stay home to study
e need to be smarter about the reasons we travel and whether we even need to travel at all. For example, the difference between traditional classroom study and online learning could save you time and money. More and more students are taking online courses because of the flexibility and convenience it provides. You can attend courses anywhere you have an internet connection, which can be great for students who have family responsibilities or work inflexible hours. In addition, online courses are more cost-efficient because they don’t require any commuting, allowing you to save on petrol and the wear and tear of your vehicle. If you live or work in Auckland, you will understand that the increased population and shortage of affordable housing all adds up to increased traffic congestion on our roads. With Auckland petrol prices set to rise to help pay for the city’s transport infrastructure, we can expect to pay more for our fuel. Perhaps you already have the Gaspy App that tells you where the cheapest fuel is in your area and are already saving hundreds of dollars a year. The distance learning format allows students to pursue education wherever they are, rather than tying them down to a specific location. For those looking for a more flexible option, online education is something to check out. Another option is to use online resources to supplement and enhance your traditional education. Professional IQ College has a range of courses, including the New Zealand Certificate in Financial Services (Level 4 & Level 5). These courses can help you plan and achieve your professional development skills, and even accelerate your career opportunities, while still allowing you the freedom to participate. For more information contact Sylvia or Zeeshan on 09 306 1731 47
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Insurtech disrupti on is inevitable Cyber-insurance: - are you ready? Get it right for your clients Insurers and Priv acy Act requests
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