Consumer NZ is paving a road to hell with good intentions with the way it talks about personal insurance, and especially personal insurance advice.
I’m a big fan of Consumer NZ. I pay for membership to access its research and to support its mission.
I’ve benefited from Consumer’s guidance when purchasing big ticket items. For example, I bought a washing machine a few weeks ago and relied on Consumer’s research.
I love the fact we have a dedicated organisation that focuses on the interests of New Zealand consumers.
I’m also on board with a lot of Consumer’s campaigns, such as its mission for a mandatory sunscreen standard and regular product testing. (It’s mind-boggling that an organisation needs to exist in order to advocate for such things.)
Which is why it makes me sad when Consumer seems to be so anti-consumer when it comes to personal insurance.
I’m consistently disappointed with Consumer when it talks about insurance.
I’m less concerned about general insurances such as house, contents, and car insurance — although even in this area, I worry that Consumer’s messaging encourages cynicism and might even encourage people to have insufficient insurance.
I am REALLY concerned about Consumer’s stand when it comes to more complex personal insurances, such as life, income protection, total and permanent disability, and trauma/critical illness.
I believe that the poor quality of its reporting in this domain, and consistent messaging that discourages Kiwis to get specialised advice, has caused, and continues to cause, far more harm than good.
My main issue is that Consumer has a long tradition of discounting the value of getting good quality advice when it comes to personal insurances.
To a large extent, this is linked to Consumer’s aversion to commission-based remuneration. As someone who has has built a business that doesn’t receive anything resembling commission, I’m extremely sensitive to this. But I think it’s a myopic view.
I think Consumer focuses so much on being anti-commission that it has lost perspective on the actual goal – of good consumer outcomes. In doing so, I think Consumer is being anti-consumer.
Historically, I’ve tried to ignore Consumer’s statements, and thought that the poor quality of its analyses spoke for itself. However, there are consequences:
It’s a trusted organisation, and when it makes bold statements, it’s more likely to be believed than other organisations.
It’s findings end up in articles in national publications – for example, a 2019 article explaining that “New Zealanders unconvinced insurers have their interests at heart”.
Representatives of Consumer NZ often end up in positions of power. As a concrete example, Sue Chetwin is a member of the board of the Financial Markets Authority (FMA), which regulates advice related to insurance and certain types of insurance company conduct. At the time of her appointment she was CEO of Consumer NZ.
My relationship with personal insurance and why I take these views
I am a financial planner. I don’t receive commissions in any way, shape, or form. I operate my business and advice process via the cleanest, most consumer-friendly business model I have been able to come up with.
As part of my advice process, I discuss personal insurance with clients.
However, I am not a personal insurance adviser. I don’t recommend specific products. I don’t help people with underwriting, and I don’t provide assistance at claim time.
I know more about personal insurance than most people. But when it comes to my own personal insurance arrangements, I use a specialist adviser to ensure I have the right arrangements in place.
I recommend that almost all of my clients, close friends, and family members, do the same. For most people, I think it’s folly to arrange these insurances directly.
Personal insurances are complex
The reason I engage an adviser, and recommend that others do, is because it’s complex.
Comparing income protection policies, for instance, is nothing like comparing dishwashers. The number of variables, nuances, and things that aren’t documented in the policies – such as underwriting policies for certain types of activities and pre-existing health issues – are extremely wide.
For you, a smaller dishwasher might be appropriate for you, and I might want a bigger one. There is a degree to which even decisions relating to simple consumer products need to be personalised. But with insurances, it’s personal all the way down.
To provide good personal insurance advice on this ever-changing topic involves an enormous commitment of time and energy.
I engage an adviser because I don’t have the time or energy to do it myself. And I’m in a better position to do this than most people.
Insurance is different to many other goods and services
Insurance products are different to most other products. Especially those that Consumer is well-known for testing and reporting on.
There aren’t many other products or services where the most likely, and best-case, scenario is that you pay a lot of money and get nothing tangible in return.
It’s almost like these types of insurance are designed to be dissatisfying: you have to go through a long process to put it in place, and then pay lots of money on a regular basis.
IF you get a tangible benefit from an insurance policy, it’s often long after you take out cover. There’s administration involved. And the payout is likely to be overshadowed by whatever else that’s going on in your life to trigger your eligibility for the payment.
Nor are policies offered in the same way as items in a retail store. With a vacuum cleaner, there may be a sticker price, and so long as it’s in stock and you’re prepared to pay the price, it’s yours. With insurance, you need to apply, and it’s not a given that you’ll get the service. Even if you can get the insurance, there might be conditions attached (exclusions relating to pre-existing health issues) or you might have to pay a different price to other people (for example, higher premiums if you’re a smoker).
Insurance companies also have a bad reputation in general. They’re often seen as trying to deny claims at any opportunity. The truth of the matter is that insurance companies aren’t like this. They’re in the business of insuring people, and paying out when agreed. Insurance contracts are contractual arrangements. There are external dispute resolution schemes. In fact, most of them like to advertise how much they pay out to customers.
Having said that, they can’t pay out every time someone makes a claim. As the saying goes, they have to “trust but verify”. They have to be careful about paying claims, especially large ones. If they don’t, they will need to charge higher premiums or be even stricter in terms of who they cover (and who they deny cover). It’s a difficult balance.
Consumer’s “Fair Insurance” campaign
Consumer’s website includes a “Fair insurance” page that can be accessed under its prominent “Investigations & consumer rights” menu.
It turns out, consumer has a campaign to “fix the insurance market”. Based on the prominence it gives to this campaign on its website, it appears to be a priority for Consumer, up there with campaigns relating to safer sunscreens, ending unfair gift card expiry dates, and encouraging more items to be built to last.
Stepping back, I’m simpatico with its aims. I think more could be done to provide better outcomes for Kiwi consumers with respect to insurance.
I don’t doubt Consumer’s intentions one bit. But the road to hell can be paved with good intentions.
I disagree with the way Consumer is going about achieving better outcomes. I think its approach is counter-productive, and ultimately working against good outcomes for consumers, especially in relation to personal insurance.
Firm conclusions should rest on firm analysis
Consumer’s “Fair insurance” campaign page and its page where it discusses recent Insurance provider satisfaction survey results are fine, when you read them superficially. But engage your critical faculty even a little bit, and I’m pretty sure you’ll find quite a lot to be desired.
The methodology used by Consumer is opaque and appears to be extremely unscientific. I’d even argue that aspects are misleading, if not deceptive.
This “Fair insurance” page refers to Consumer’s “latest survey”. However, it doesn’t provide any information about the survey, such as its methodology. We have to take Consumer’s statements at face value.
The document includes some breadcrumbs:
- While talking about advisers, it refers to research being conducted “with Consumer NZ members”, but it’s ambiguous whether this is from the same survey or some other type of research. Assuming that the survey comes from feedback provided by Consumer members/supporters, I’ll also note that they (myself included) are probably not fully representative of the general population.
- There is a note at the bottom of a “Satisfaction of life insurance customers” chart referring to a survey of Consumer members with 2,426 respondents. Whether it’s the same survey discussed elsewhere is unclear. I suspect it’s a different survey because it uses a different scoring methodology than elsewhere. (It relates to rankings from 0 to 10 rather than ratings such as “disagree”, “neutral”, “somewhat agree”, “strongly disagree”, and “unsure”.)
- The Insurance provider satisfaction survey (a different page, probably updated more recently), which was published in December 2021, says that 6,111 Consumer NZ members and supporters participated in that survey. Frankly, I think the survey results are pretty questionable – a number of respondents, for example, state that their insurer is Sovereign, which hasn’t existed for a few years. They shouldn’t be in any doubt that they are insured by AIA, not Sovereign. If they can’t say who their insurer is, can we trust their assessment of that insurer or their other answers?
Some fundamental things that consistently seem to be unclear or conflated:
General insurances, such as house, contents, and car insurances, versus personal insurances, especially the more complex personal insurances such as income protection, trauma/critical illness, and total and permanent disability insurance. (In fact, it uses the term “life insurance” in a way that makes me wonder whether it’s referring to life insurance only, or whether it’s using it as a cover-all term for these other types of insurance.)
Insurers, who issue insurance policies, and advisers who provide advice in relation to to these policies. I’ll talk more about this distinction later.
The “Fair insurance” page makes some curious comments and draws some questionable conclusions. For instance:
- It concludes “Trust in insurers is low”. However, it derives this from the question “I trust insurance companies to give me good advice”. I don’t necessarily trust insurance companies to give good advice (which is why I think non-aligned advisers are important), but I trust them to pay claims where appropriate. The latter point is more important.
- Another question is “I clearly understand the terms and conditions of my insurance policies”. This presupposes that a clear understanding is aligned with good consumer outcomes. Insurance is complex, and as much as this would be ideal, I’m not sure if it’s a reasonable standard. (Again: another good reason for seeking advice.)
- Consumer concludes that “Only 8% [of survey participants] thought insurers always offered fair terms”. I have two issues with this statement. For one, it cherry-picks from the data. Only 8% of people said they “strongly agree” that insurance companies have fair policies – after factoring in those who somewhat agreed or are neutral, less than half (45%) actually disagreed that “Insurance companies have fair policies”. Only 8% of people said they “strongly agree” with this. More importantly, however, is the presupposition that consumers who haven’t thought deeply about insurance can determine what is “fair” or not. This is a topic for another article, but what seems unfair is often different to what is unfair.
- 24% of participants reported experiencing a problem with their insurer, with the most common complaint being that a claim was unreasonably declined. Lots of people who are declined think the decision was unreasonable, whatever the outcome. There are a external dispute resolution schemes that can be used in this case.
I find it interesting that the second-equal most common problem identified with insurance was “expensive premiums”. Is insurance expensive? Yes. Is it often worth it? Yes.
Consumer undermines advisers in a questionable way
Under the heading “Advisers failing to deliver”:
“Consumers who buy insurance through an adviser or broker are more likely to feel they’re getting a raw deal.”
It includes a chart indicating that life insurance customers who purchased directly from an insurer found policies easier to understand, were more satisfied with customer support, and were more satisfied with price.
Instead of the statement above, I think a more accurate version would be:
“Based on our unrepresentative sample, and drawing questionable conclusions from cherry-picked data, we have confirmed our bias that consumers feel like they get a raw deal from advisers or brokers.”
This section prompts a lot of questions:
- Apparently, consumers who use an adviser think that policies are less easy to understand than those who go direct. Could responses to “Policy is easy to understand” be predictive regarding whether someone uses an adviser? My guess is that someone who thinks (admits) that insurance policies are complicated is more likely to seek advice than someone who thinks they’re not (whatever the truth of the matter).
- On a related note, what is “Policy is easy to understand” measuring? An adviser might help someone understand a policy, but that doesn’t make the policy easy to understand in the first place. On top of this, advisers might be recommending policies that are, objectively, more complex. It’s not always true that more complex = more bad. In fact, sometimes, complexity is necessary. I’d take a more wordy policy that has narrow, nuanced exclusions compared to a shorter policy with much broader exclusions any day.
- Could it be that a portion of respondents who took out insurance via an adviser did so after trying to take out insurance directly, but ended up having to acquire insurance via an adviser? If so, wouldn’t this be responsible for a portion of bad feelings associated with insurance?
- With respect to customer support, what does this refer to? Customer support from the adviser, or from the insurer? Could it be that a portion of people who acquired insurance via an adviser did so after having trouble trying to buy directly and rate customer support from insurers poorly?
- What proportion of respondents have made a claim? Are there differences in satisfaction regarding people who have and haven’t made a claim?
- What proportion of respondents who received insurance advice received it from an adviser who has relationships with lots of insurers, or someone who is an “adviser” but is tied with a single insurer?
I’d love to see the actual data. What proportion of respondents went direct versus went via an adviser? Were these the only questions asked about advice, or have published responses been cherry-picked? The charts only include “the proportion of respondents who scored their provider 8, 9 or 10 on a scale from 0... to 10” – what is the distribution of results?
With respect to the survey, were terms defined? For example, what is “life insurance”? Is it just life insurance specifically (which pays out if you unexpectedly die), or is this a coverall term for other types of policy, such as income protection insurance? As a reader I can’t be sure: were respondents aware of this distinction, or were they all providing answers based on differing understandings?
“We have met the enemy and it is commission”
After sharing this questionable data, Consumer explains:
“Why the difference? Insurance brokers typically work on commission. In the life insurance industry, these commissions can be as high as 200% of the premium. Bonuses for meeting sales targets and other incentives can also be paid.
“Commission-based selling inevitably raises the risk an adviser will put their interests ahead of the consumer’s. Our research suggests commission-based selling is leading to less satisfied customers.”
I have two main points:
- I don’t like commission either. But I believe that Consumer NZ’s aversion to commission has been myopic.
Let’s say we could click our fingers and ban commission for insurance advisers. The first-order consequences might be clear: advisers will need to change their business models, and on the face of it, these business models would be more consumer-friendly.
But let’s remember the law of unintended consequences, and try to think of the second- and third-order effects. My guess is that it would become infeasible for many insurance advisers to continue to operate. In large part, this is because many consumers would blanch at the idea of paying professional fees for uncertain outcomes, and decide to DIY. For those who can adapt to fee-based arrangement, commercial realities would mean they’d work with a narrower range of people. Specifically, those who have easy underwriting characteristics, won’t require a lot of back-and-forth with insurers, and/or who are in a position where they can wear a fair amount of uncertainty regarding how much time the process will take and how much it will cost.
The end result is that many people would have to DIY arranging their insurances. More consumers would also end up in a position where they need to advocate for themselves with insurances when they need to make claims. To the extent that advice would be available for less advantaged people, it would probably only be available from... the insurers themselves, or individuals/organisations aligned with the insurers.
Which is a worse situation than where good advisers have relationships with multiple insurance companies and can place their clients in the best products on the market for their needs, even if they receive commission.
The current system of commission isn’t a great one. But from my perspective, it’s the least-bad of other options. I haven’t been able to come up with a better one; nor am I familiar with anyone who has done something different, either locally or internationally. The international evidence I’ve seen is that the scenario I described above is what plays out. I think the current arrangement results in better consumer outcomes than a simple world where commission doesn’t exist.
Being negative about advisers because they receive commission when there don’t appear to be good alternative remuneration structures isn’t being pro-consumer. If it reduces trust in advice, it’s anti-consumer, because it will result in worse consumer outcomes.
- In any case, new legislation is expected to pass in the near-term future which will ban a variety of the worst sales and volume-based incentives. This bill is often referred to as CoFI, or more formally the Financial Markets (Conduct of Institutions) Amendment Bill (CoFI).
After CoFI, some forms of commission will remain. However, after extensive consultation, these remaining commissions have been determined to be less likely to result in bad consumer outcomes than those that have been banned.
My message to Consumer NZ
You are a trusted organisation. I value what you do, and want you continue sticking up for Kiwi consumers. But when it comes to insurance, you need to up your game.
I say this as someone with similar values to your organisation. I say it as someone who doesn’t receive commission or have skin in this game – apart from wanting good outcomes for my own clients who I refer to specialist advisers (and get nothing in return for doing so, except peace of mind that they’re in good hands), and Kiwi consumers in general.
If you’re going to get stuck into insurance, your organisation needs to develop your expertise so you make a positive difference to Kiwi consumers. You need to strengthen your methodology and be careful about the conclusions you arrive at.
As an example, at the end of the “Fair Insurance” page, you describe “What needs to change”. I’m ambivalent about some of these comments. However, I will observe that recent developments appear to have been overlooked. For example:
- The Financial Services Legislation Amendment Act 2019 (FSLAA) has been introduced, which amends the Financial Markets Conduct Act and updates the regulatory regime relating to financial advice, particularly insurance advice.
- The Financial Markets (Conduct of Institutions) Amendment Bill (CoFI) – which will ban a variety of sales and volume-based incentives – is nearing the end of its legislative process.
- An insurance contract law review is also underway, which will touch on some of its other concerns, such as fixing unfair terms and dealing with disclosure (to the extent that these changes are entirely necessary). (Admittedly, this review appears to have been delayed significantly due to COVID-19. It would be great for Consumer to push for more progress to occur.)
At the moment, you’re making the situation worse. You are paving a road to hell with good intentions.
Messages I would love to see Consumer embrace
- Insurance is an area where people require advice. There’s no way I’m going to do it myself. There’s no way I’m going to encourage a close friend or family member to do the same. A consumer organisation shouldn’t be sending a message that encourages people to DIY for a range of products that are this complex.
- I agree that some advisers are failing to deliver. Instead of making blanket statements about advisers in general failing to deliver, Consumer should focus on what distinguishes advisers that deliver good outcomes for clients versus those who don’t.
- Consumer NZ is in a great position where it can educate consumers on what insurance is, and why the might need it. It would be great if Consumer used this position to equip its members to have more informed conversations with advisers, and be confident that they aren’t being sold unnecessary policies or more cover than they need. Don’t scare them away from seeking advice.
- It would be incredible if Consumer NZ knowledgeably agitated for more effective enforcement of already-existing legislation. There is always scope for better regulation, and better regulation has been implemented in recent years, and is in the process of coming into force. But often, the issue isn’t whether regulatory options are available, but whether they are enforced and whether the relevant authorities are sufficiently resourced and motivated to do so.
Could more be done to improve consumer outcomes relating to personal insurance? Yes.
Does Consumer have the right intentions? Yes.
Is Consumer effectively pushing for improved consumer outcomes in relation to personal insurance? In my assessment, the answer is a clear no.
At least, not at this point in time. The good news is that it has the potential to change.