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5. Market Conduct


Review of Financial Products and Providers: Insurance

[ Last Updated 1 November 2006 ]


Within this section …

270. The market conduct section covers four areas, which will be discussed under individual headings. These are:

  • Insurance Contracts – duty of disclosure, and remedies for non-disclosure and mis-statements;
  • Registration of assignments and mortgages of life policies;
  • Insurance intermediaries and agency; and
  • Product Disclosure.

271. We intend that the proposals and options below, which all relate to insurance contracts and their formation, be included in one piece of legislation.

5.1 Duty of Disclosure and Remedies for Non-Disclosure & Mis-Statements

5.1.1 Purpose

272. As recommended by the Law Commission Report 87: Life Insurance,143 the legislation governing insurance contracts in New Zealand, which is currently contained in a number of Acts, needs to be gathered together under one Act. Also, the current legislation does not meet the Government's objectives for the insurance regulatory regime, particularly regarding the promotion of well-informed insurance policyholders and to deter, detect and minimise the risk of unfair or fraudulent conduct (see problem identification in the Introduction section of this discussion document). This section relates to the uncertainty and misunderstandings around consumer disclosure to the insurer and the disproportionately harsh outcomes the remedies impose for non-disclosure and mis-statements by policyholders.

5.1.2 Background

273. There are deficiencies in New Zealand's insurance contract law, as noted by industry participants, professional bodies, the judiciary, the Law Commission and Government. A key area of concern relates to non-disclosure and mis-statements. The Law Commission Report 87:Life Insurance, annexed a draft Insurance Contracts Bill, which includes (as clauses 14 and 15) provisions in relation to non-disclosure that substantially reflect the recommendations of the Law Commission Report 46: Some Insurance Law Problems.144 Issues regarding mis-statements (contained in the Bill as clauses 9 to 13) are also discussed in this paper.

274. The Law Commission Report 87 (at para 8.40) stated that it viewed clauses 14 and 15 as provisional measures aimed at providing redress for policyholders145 who can be affected disproportionately by the insurer's remedy of avoidance for non-disclosure. They noted that there may be some merit in reviewing the preferred approach once the Australian Treasury's review of the Insurance Contracts Act 1984 (Cth) had occurred, which is now the case.146

275. In its response to the Law Commission's Report 87, Government agreed to consider the insurance contract issues identified. Hence, as part of its current Review of Financial Products and Providers, MED has undertaken to complete the review of insurance contract law relating to non-disclosure and mis-statements in consultation with stakeholders through the Insurance Advisory Groups and through the release of this discussion paper.

276. Feedback from the Advisory Groups is that the Law Commission has correctly identified the problems with the existing law, but while much of the Law Commission's preferred approach has merit, some aspects might not be optimal for either insurers or policyholders. The Law Commission's reports set out the current position in relation to non-disclosure and the position for mis-statement is as set out in the Insurance Contracts Bill (largely the current position unchanged), so these will only be briefly stated here. A number of cases which discuss the boundaries of the duty of non-disclosure have been considered in this review.147

5.1.3 Criteria

277. The criteria used for reviewing insurance contracts legislation in relation to non-disclosure and mis-statements are as follows:

  • Facilitate economically equitable outcomes such as remedies proportionate to breaches of the duty of disclosure and mitigating risks of bargaining inequality;
  • Proposals and options should minimise costs and not create barriers;
  • Provide transparent options that will enable market participants to clearly understand their respective obligations;
  • Promote requirements which are consistent with other proposals and options for an insurance regulatory framework; and
  • Relevant parties should be accountable for their actions and have access to appropriate dispute resolution processes.

5.1.4 Proposals

278. Problems have been identified with the current law in relation to insurance contracts regarding the duty of disclosure by policyholders and the remedies for non-disclosure and mis-statement, as set out in the introduction section of this paper.148 In addition, the Insurance and Savings Ombudsman has advised that during the five years from 2000 to 2005 non-disclosure and mis-statement accounted for 24 percent of all complaints investigated by her office.

279. In order to address these issues officials propose the following.

5.1.4.1 Duty of Disclosure and Remedies for Mis-Statement and Non-Disclosure

280. The Law Commission's approach (which is set out in greater detail in the Law Commission's Report 87149), is proposed, with the exception of carelessness being removed as a circumstance where the insurer has the right to avoid the contract, and the addition of more granulated remedies where the right to avoid does not apply. The proposal applies to both non-disclosure and mis-statement. It is intended to:

  • Clarify the duty of disclosure;
  • Align the position for non-disclosure and mis-statement;
  • Set out when the insurer's right to avoid exists; and
  • Specify what remedies are available where the right to avoid does not apply.
Proposal - Leave the Duty Unchanged, but Impose Limitations Relating to Remedies

281. The approach preferred by the Law Commission dealt with the duty of disclosure in relation to non-disclosure only. It did not cover mis-statement. The proposal set out here is that the Law Commission's preferred approach regarding the duty of disclosure and the insurer's right to avoid a contract in relation to non-disclosure should also apply to mis-statement. It should also apply equally to life and non-life insurance. Hence, the clauses set out in the Insurance Contracts Bill relating to mis-statement and non-disclosure would need to be redrafted to fit with the proposal set out here, if it is adopted.

282. It is proposed that the duty of disclosure be retained but the rights of an insurer to avoid a contract of insurance due to non-disclosure or mis-statement be limited to four circumstances.150

283. The four circumstances where the insurer's right to avoid the contract is retained are:

  • In the case of fraud. A mis-statement or non-disclosure is fraudulent where, for instance, the insured making the statement or failing to disclose does so intentionally or recklessly.
  • Specific answer to a specific question put by the insurer. Where the mis-statement or non-disclosure is contained in an answer to a specific question expressly put by the insurer, and is substantially incorrect and material. An answer to a question would be substantially incorrect and material where, for instance, the difference between what is stated or failed to be disclosed and what is actually correct would have influenced the judgement of a prudent insurer in fixing the premium or in determining whether the prudent insurer would have taken or continued the risk on substantially the same terms.
  • Where the insurer seeks to avoid the contract within 10 days of the risk first attaching. This caters for market practice of interim cover to allow time for the insurer to ask questions. The time allowed may need to be longer than 10 days.
  • Where the contract is for reinsurance. Where the contract relates to reinsurance the parties are deemed to know the duty and have ability to discharge their disclosure obligations.

284. The overall intent of limiting the duty of disclosure to these four circumstances is that for the insurer to retain the remedy of avoidance they will need to shift their emphasis towards asking appropriate questions. Reference in the second exception to "specific question" is intended to prevent reliance on a general "catch all" question for the purposes of avoidance.151

285. Removing the duty of disclosure entirely from the consumer and replacing it with a requirement that the insurer ask all relevant questions of the insured in order to extract necessary information, has been discarded as an option152 because it presents several problems.153 These include that the length of proposal forms and complexity in contract formation would likely increase, there would be double handling of new contracts by insurers who granted interim cover to allow themselves time to ask specific questions, and the burden of the duty should not simply be shifted from one party to another, as that approach would not present appropriate incentives for bilateral disclosure.

286. Under this proposal the retention of the duty is preferred (albeit in a limited form) because the information asymmetries regarding personal information are such that there should be a positive incentive on insureds to make disclosure when seeking insurance. Removing the duty to do so distorts the incentive, and fails to place consumers on adequate notice of the possible effect of non-disclosure.

287. The proposed approach provides the insurer with the option of how far they wish to go in asking questions. If they wish to retain the remedy of avoidance they will need to have specific and detailed questionnaires. Other insurers may take the approach of short-form questionnaires accepting that the restitution remedies (discussed below) will apply to matters not covered by the questions listed. Hence, the proposed approach balances out the incentives between the insured and the insurer.

288. It is also proposed that the insurer or any one required to ensure product disclosure is made to the insured would be required to warn policyholders about the duty of disclosure and consequences of non-disclosure and mis-statement prior to entering into the contract.154 Failure to make this disclosure will attract penalties, and will prevent an insured from exercising any right of avoidance. It seems fair that if the insured is not put on notice as to consequences, the insurer be estopped from exercising any such rights.

289. The warning requirement is proposed because in practice, insurers in New Zealand already inform customers of the duty of disclosure. For instance, the voluntary industry code, the Fair Insurance Code, requires that members of the Insurance Council of New Zealand advise customers of the need to provide complete and accurate material information. For life insurance, the Practice Guidelines issued by the Investment Savings and Insurance Association do not require members to warn policyholders of the duty of disclosure, although in practice most do so. We believe it is helpful to build on this market discipline. Hence, the proposal above is merely giving regulatory backing to the industry recommended best practice approach.

290. However, the warning cannot be used alone since despite the industry initiatives, the incidence of innocent non-disclosure and mis-statement remains significant and provision of a warning without further attention to the duty and/or remedies for its breach appears not to provide a solution to the problems identified, nor does it meet the Government's objectives under the insurance regulatory framework.

Proposal – Remedies Other than Avoidance

291. The approach to remedies proposed by the Law Commission only related to non-disclosure, which required review because none were contained in the insurance legislation. Remedies for mis-statement, as set out in the current legislation, were not looked at. The proposal set out in this paper considers the remedies for non-disclosure and mis-statement should apply equally, and equally to life and non-life insurance.

292. It is proposed that where the right of avoidance is not available to the insurer (i.e. none of the four circumstances apply to the mis-statement or non-disclosure), the insurer may invoke a remedy which follows the restitution approach (referred to below). These remedies will apply where:

  • The insurer is not entitled to avoid the contract, and in the circumstances a reasonable person ought to have known that the undisclosed or mis-stated fact would have influenced the judgment of a prudent insurer in relation to that insurance contract; or
  • For life insurance, an incorrect statement of the age of the insured.

293. The restitution remedies that will apply to the insurer are:

  • Declining to accept the risk on any terms – i.e. exclude a particular risk prospectively, or cancel the policy prospectively;
  • Accepting the risk only at a higher premium;
  • Accepting the risk on different terms regardless of the premium; and
  • For life insurance age mis-statements, the formula in clause 13 of the Insurance Contracts Bill will apply.

294. Note that this approach will still leave an insurer with the right to avoid the contract where a non-disclosure or mis-statement was contained in the answer to a specific question, which was substantially incorrect and material, as a circumstance for avoidance noted above. Also, where the contract could be avoided by the insurer, the insurer will be able to voluntarily adopt the restitution remedies rather than avoiding the contract. A general "catch all" question can still be used, but the restitution remedy with apply instead of the avoidance remedy.

295. The restitution approach includes elements of the proportionality approach,155 but the range of available remedies is broader. The insurer's restitution remedies under the proposal are designed to put the insurer in the position it would have been in had disclosure been made or not been mis-stated. The restitution remedy is dependent on the response the insurer would have made if it had known the undisclosed or correct material.156 For example, if a policyholder of health insurance had not disclosed a condition (but had not acted fraudulently and had not been asked a specific question regarding it), and the condition gave rise to a claim, the insurer would be liable to pay the claim (assuming coverage more generally applied). Where in the circumstances a reasonable person ought to have known that failure to disclose the condition would have influenced the judgement of a prudent insurer in relation to that insurance contract, the insurer may reassess the risk and:

  • Deduct any adjusted premiums from the claim amount;
  • Exclude that condition from future cover; or
  • Cancel the policy.

296. Problems with adopting the restitution approach entirely are that it does not consider the issue of fraud on the part of the insured or specific answers to specific questions put by the insurer, where avoidance may still be an appropriate remedy. It has also been noted that the approach, as in force in Australia, introduces the need to make and prove difficult hypothetical and retrospective assessments of the insurer's likely response to an insured having disclosed a matter. The insurer in effect is able to retrospectively underwrite the risk at the time of claim. However, feedback we have received on this point is that such assessments are not really that difficult for an insurer to make, and retrospective underwriting is not a general practice a prudent insurer would follow.

297. The circumstance of carelessness as a right to avoid the contract has not been adopted because the proposed regime seeks to encourage insurers to ask specific questions to best enable insureds to make proper disclosure, and apportions the risk for failing to do this depending on whether the insured has asked specific questions. Therefore, there is no need to address the degree of care with which the insured has acted.

298. Concerns have been raised about whether adopting the restitution remedies would cause policyholders to "game" the process by hoping the insurer will not pick up the non-disclosure and mis-statement. This "hope" will render the non-disclosure or mis-statement fraudulent. This is also a problem under the current law. Therefore, the response is the same under this proposal as it is under existing law, i.e. where the insurer picks up the fraudulent non-disclosure or mis-statement the remedy of avoidance will apply.

Questions for Submission

Q34. Do you agree with the proposal for the duty of disclosure and remedies?

Q35. Should the interim cover circumstance giving the right to avoid be limited to 10 days or a longer period?

Q36. Should the Contractual Remedies Act apply in addition to the proposal above, or where circumstances exist that are not captured by the avoidance or restitution remedies?

Q37. Should the duty of disclosure be limited and the restitution remedies apply to consumers only, leaving the avoidance remedy in place for business policyholders?

Q38. What are the costs and benefits of this proposal?

5.2 Registration of Life Policy Assignments and Mortgages

5.2.1 Purpose

299. The registration system for assignments and mortgages of life policies does not currently meet New Zealand conditions. It requires the paper policy documents to be sent to the insurer for registration, and for the policy document to be physically held by the assignee or mortgagee (interest-holders) in order to make a claim under the policy. This is in contrast to the:

  • Electronic registration of property security in New Zealand; and
  • Evidence of agreement and retention of documents rules under the Electronic Transactions Act 2002.

300. The aim is to provide a system under the new insurance regulatory regime that better meets the needs of stakeholders, so they can have confidence in the priority they obtain where life policies are assigned or mortgaged to third parties, and no longer have to hold paper policy documents.

5.2.2 Background

301. The Life Insurance Act 1908 contains the recording and priority rules of the current paper-based registration system for interests in life policies. Interests in life policies are generally taken by lenders in support of loans to customers. The Law Commission's Report on Life Insurance157 was not tasked with reviewing the sections in the Act that relate to the registration system; hence the Bill retains them without amendment. However, given the current system is largely unused158 (because interest-holders take the risk that their failure to register with the insurer will not result in loss – though this does occur159), and that electronic retention of documents is standard practice, the approach set out in the Insurance Contracts Bill warrants reform.

302. Part 4 of the Insurance Contracts Bill (which are sections 41-63 of Part 2 of the Life Insurance Act 1908) deals with interests in life policies. The sections set out that in order for interest-holders to obtain legal priority, assignments and mortgages of life policies must be registered with the insurer concerned.160 This gives the interest-holder legal priority against the insurer and third parties, thus giving higher security value to the life policies for use as security in lending transactions, which reduces the cost of funds.

303. Assignments and mortgages of life policies are exempted from registration where they are taken by the entity that is also the insurer under the policy.161

304. Interests in property in New Zealand (real and personal) can be registered, but these exclude insurance policies. There are a number of registries, which apply for particular types of property.162 The bulk of registrations for security purposes relate to land under the Land Transfer Act 1952 and personal property under the Personal Property Securities Act 1999 ("PPSA").

305. In considering the approaches taken by other jurisdictions, we have particularly focused on those with a similar approach to personal property security interests as New Zealand. This is because one option looked at was to include interests in life policies under the PPSA. In that regard Canada is the closest163 (for life insurance policy interests, those with particularly similar personal property security legislation to New Zealand are Ontario, Saskatchewan and Manitoba164).

306. In Canada, the general approach is that since insurers hold title record systems for life insurance policies, the interest-holder can give written notice of their interest to the insurer concerned, which is recorded on that system.165 The noting of the interest on that system triggers the priority status of the interest-holder.

5.2.3 Criteria

307. The criteria used for reviewing the registration system for assignments and mortgages of life policies are:

  • A registration framework which will not significantly alter existing market practices;
  • Facilitate a flexible approach that will enable innovation and account for future market developments;
  • Consider the best practice of jurisdictions with similar personal property security interest registration systems.
  • Promote a consistent framework which minimises the differences between interests in life and non-life policies;
  • Provide clarity and security of interest-holder priority; and
  • Establish a framework that allows registration in a simplified manner, which does not incur unnecessary cost.

5.2.4 Proposal - Notice Procedure

308. It is proposed that the interest-holder in a life policy will send the insurer a notice of assignment or mortgage.166 There will be an exemption from the notice procedure where the entity taking the assignment or mortgage of the life policy is also the insurer under the policy.

309. Interest-holders would be able to move to electronic storage of policy documents, since the original policy document would no longer be required for registration or claim purposes. Feedback is that many interest-holders would be able to continue with existing internal procedures, with only some having to change their approach to the adoption of the "written notice" process (which could also be done electronically). Removing the requirement for a paper policy will enable disclosure by the insurer to be done electronically in accordance with the Electronic Transactions Act 2002.

310. Under this proposal, insurers will have direct knowledge of the interest so that claims under the policy can be paid in accordance with the interest. Also, the insurer will be able to contact the interest-holder where the policy has lapsed due to non-payment of premiums where it is in the interest-holder's interest to meet the payment in the place of the customer in order to protect the security position.

311. The procedure is the same process as used for general insurance policies, e.g. in relation to home loans, and it is less costly overall than registration on the Personal Property Securities Register (PPSR). However, the notice procedure would mean there is no public or centralised register to search for pre-existing interests.

312. The option of bringing assignments and mortgages of life policies under the PPSA167 was considered; however, several problems were identified. These included that:

  • Permanent transfers would still be required to be processed by the insurer even if the paper policy document is dispensed with (so the system could not be removed entirely);
  • The insurer might still pay out claims to beneficiaries under the policy rather than the interest-holder because they had no actual knowledge of the security (registration in the PPSR is not notice of the existence of a security,168 it merely effects priority); and
  • Some of the interests taken over life policies are by the same entity which issued the policy, therefore, registration in the PPSR would have required the addition of unnecessary process costs.

313. The transfer of life policies will also need to be reformed so that presentation of the paper policy document is no longer required. The identification of the policyholder who is the transferor could be adopted, in line with processes applied to the transfer of other assets, for instance, motor vehicles.

Questions for Submission

Q39. Should the existing system be retained, or replaced by the notice procedure?

Q40. What are the costs and benefits of the notice procedure proposal?

5.3 Insurance Intermediaries and Agency

5.3.1 Purpose

314. Clarification is needed regarding whether an insurance intermediary is the agent of the insurer or the agent of the consumer. Determining agency will assist in locating where the responsibility lies for the activities of an insurance intermediary during contract negotiation and formation, and provide important transparency for consumers regarding what rights they have and against whom. It will also provide transparency of an insurance intermediary's duties and obligations in situations of a breakdown in the relationship between the consumer, intermediary and insurer.

5.3.2 Background

315. Insurance intermediaries169 play an important role in the insurance sector, using expertise and skill to match prospective consumers with insurance products that meet their personal financial needs. This function can mitigate the magnitude of the earlier identified market imperfections of asymmetric information and complexity of information about insurance products and providers. The use of insurance intermediaries will also bring the benefit of reduced transaction costs involved in information search for both the consumer and the insurer.

316. It is important that insurance intermediaries possess the requisite competencies and incentives to discharge their function. The Financial Intermediaries discussion document provides conduct and disclosure options for a range of intermediary categories. The purpose of which is to facilitate the consumer's assessment of whether the advice provided is impartial, and to ensure competency of intermediaries. Proposals in this paper are not intended to overlap with the options outlined in the Financial Intermediaries discussion document as the discussion here only relates to the establishment of agency to determine the location of responsibility for insurance intermediaries actions.

5.3.3 Current Position

317. The three main areas insurance intermediaries are involved in during the formation of an insurance contract are:

  • Insurance Intermediary agency for contract negotiation and formation;
  • Receipt of premiums from policyholders and claims money from insurers; and
  • Investment or tailored financial advice.

318. The last category, investment advice or tailored financial advice, is covered in the Financial Intermediaries discussion document on financial intermediaries, so is not addressed here.

5.3.3.1 Insurance Intermediary Agency for Contract Negotiation and Formation

319. The Insurance Law Reform Act 1977170 sets out when an insurer is responsible for the conduct of those who negotiate the sale of their products during the contract formation process,171 although the agency relationship can at times be unclear. For instance, it is clear that where insurance products are purchased directly from an insurer, the insurer is responsible for the actions of its employees in relation to the contract negotiation and formation process. However, it is less clear whether an insurer is responsible for the actions of an insurance intermediary involved in the sale of the insurer's product.

320. The lack of clarity around whether an insurance intermediary is acting on behalf of the insurer as its agent is due to the wording of section 10 "Salesmen etc to be agents of insurer" of the Insurance Law Reform Act 1977. The section refers to a representative:

…who acts for the insurer during the negotiation of any contract of insurance, and so acts within the scope of [their] actual or apparent authority, shall be deemed, as between the insured and the insurer and at all times during the negotiations until the contract comes into being, to be the agent of the insurer.

321. A representative is defined as including a person "entitled to a commission or other valuable consideration from the insurer". The problem is in determining when an insurance intermediary is "entitled to a commission". Feedback has been that most insurance intermediaries receive a commission or other valuable consideration from the insurer. However, in the absence of a formalised contractual relationship it is difficult to determine whether they are entitled to receive a commission, or whether the bill for services rendered to the consumer is paid by the insurer by tacit agreement with the consumer (as occurs with mortgage brokers).

322. This can cause confusion for consumers and create problems where there is a failure in the contract negotiation and formation process, which is caused by the insurance intermediary. This is further exasperated by there being no specific legislative requirement for the insurance intermediary to disclose their agency status to the consumer. Also, the consumer may be unaware that in using an insurance intermediary in some cases means they will have no recourse against the insurer for a failure in the contract negotiation and formation process, since the intermediary is the agent of the consumer, not the agent of the insurer.

5.3.3.2 Receipt of Premium or Money and Agency

323. There is a definition of agency for another purpose – the receipt of premiums from consumers and the receipt of claims money from insurers. The Insurance Intermediaries Act 1994172 states that when a premium is paid by a policyholder to the insurance intermediary in relation to a contract of insurance that has been arranged or affected by the insurance intermediary, the liability for the policyholder to pay that money to the insurer is deemed to have been met. This means the contract is formed once the premium is received by the intermediary regardless of whether it is ever passed on to the insurer. Also, where the insurance intermediary receives claims money from an insurer to pass onto a policyholder the insurer's liability for the payment is not deemed to have been met until the money is received by the policyholder.

324. This legislation is designed to protect the consumer's interest in the policy where the premium or claims money paid to the insurance intermediary does not make it to the intended final party. Therefore, an insurance intermediary who originally was deemed to be the agent of the consumer (for the purpose of arranging the contract), becomes the agent of the insurer for the purposes of receipt of the premium and receipt of claims money.

5.3.4 International Position

325. In most jurisdictions the majority of insurance policies are not sold by insurers but rather through intermediaries.173 Hence, the clarity of the agency relationship is then important. In response, these jurisdictions have implemented legislation to transparently determine when an intermediary is the agent of an insurer. This is generally done on either the basis of contract or remuneration.

326. In Australia agency, for the purposes of information, notices and reasons, is defined in the Australian Insurance Contracts Act 1984 by way of a binder.174 In Canada insurance intermediaries are regulated at Province level. In the province of New Brunswick175 any person who for compensation, solicits, effects, or negotiates insurance on behalf of any insurer will be deemed to be the agent of the insurer. Conversely, if that same person transmits an application or negotiates an insurance policy for another person they are deemed to be agent of the insured. Individuals authorised by the Superintendent are deemed to be agent of the insurer.

327. The approach adopted in the United Kingdom focuses on an appointed representative regime.176 An appointed representative is a person (including a firm) who is authorised in writing to carry on regulated activities on the behalf of an authorised insurer.

5.3.5 Criteria

328. The criteria used to assess the proposals for the clarification of an insurance intermediary are:

  • Establish a transparent definition which will clarify where agency lies and provide clarity as to individual's rights and obligations;
  • Promote a framework which will not significantly alter existing market practices for the delivery of insurance products and minimise the costs of change;
  • A flexible regime that will account for future developments;
  • Facilitate economically equitable outcomes where industry participants do not have to unfairly bear the costs of others actions; and
  • Consider international frameworks in the assessment of proposals for the New Zealand insurance sector.

5.3.6 Proposals

329. Feedback from industry is that it is unreasonable that the insurer should bear the cost of an intermediary's failure to conduct themselves appropriately during the contract negotiation and formation process on the basis of entitlement to a commission or other valuable consideration only. At the same time, the policyholder should be informed as to whether the intermediary they are dealing with is acting as the agent of the insurer or as their agent, since this has consequences regarding who they have would have recourse against where there is a failure in the contract negotiation and formation process caused by the intermediary. Therefore, a conclusive system of determining an insurance intermediary's agency status should be set out in insurance legislation.

330. The existing position regarding receipt of premiums and claims money as set out currently in legislation works and is well understood by industry, therefore, does not require substantive review.

331. The two proposals to deal with agency issues are as follows.

5.3.6.1 Proposal - Intermediary Agency at Contract Negotiation and Formation

332. The proposal is that agency177 for the purpose of contract negotiation and formation be determined on the basis of written178 authorisation by a licensed insurer.

333. For an insurance intermediary to be the agent of a licensed insurer, the insurer must have confirmed with the intermediary in writing that this is the case. This will move the focus away from entitlement to a commission or other valuable consideration, to a focus on appointment certainty.

334. Where a written authority is not in place the insurance intermediary will be deemed to be the agent of the consumer.

335. Appointment of an agent by an insurer will not restrict the agent from acting as agent for other insurers. The authorising insurer will only be responsible for the conduct of the insurance intermediary in relation to the insurer's products.

336. Hence, there are three categories of insurance intermediary agent that apply during contract negotiation and formation. They will be:

  • Exclusive Agent. The insurance intermediary is the authorised agent of only one insurer;
  • Non-exclusive Agent. The insurance intermediary is the authorised agent of more than one insurer; and
  • Consumer Agent. The insurance intermediary is the agent of the consumer.

337. The insurance intermediary will be required to disclose to the consumer whether they are the agent of the insurer or a number of insurers, or the agent of the consumer during contract negotiation and formation and the general effect of that agency status. Failure to disclose this will attract penalties.

338. The effect of the agency status is that it will determine where responsibility lies for failure to comply with product disclosure by the insurer, failure of the intermediary to correctly pass on the consumer's disclosure to the insurer, and failure of an intermediary to appropriately assess the needs of a consumer.

339. The Financial Intermediaries discussion document addresses issues regarding independence and places disclosure obligations on intermediaries, tailored for the different categories of intermediaries, to facilitate a consumer's assessment of whether an intermediary is providing impartial advice and acting in the consumer's best interest. It will also deal with the levels of competency and skills required. The categorisation of intermediary relates to the type of service provided, and proposes that different levels of service must comply with particular requirements. The categorisation in that paper is intended to operate in conjunction with an insurance intermediary's particular agency status referred to above. Further work done on this agency issue will be considered in conjunction with the Review of Financial Intermediaries once submissions on the discussion documents have been reviewed.

340. It is proposed that agency for the purposes of product disclosure and consumer disclosure will work as follows:

  • If an insurer provides product information to an insurance intermediary who is a consumer agent then the insurer will be deemed to have fulfilled its obligations, and only the insurance intermediary will be held responsible for any failure to disclose. This means that because the consumer in this instance only has recourse against the intermediary there may not be an ability to recover. This is the current position under the Insurance Law Reform Act 1977, which is being retained. The requirement for intermediaries to disclose their agency status and the effect of the status, is the mechanism for warning consumers prior to dealing with a consumer agent. Since the insurer has not agreed to the intermediary being their agent, and hence have no control over them, they should not be held responsible for the intermediary's actions in this regard;
  • If an insurer provides information to an insurance intermediary who is the insurer's agent, it will have the same effect as if the insurer were disclosing to itself. Hence, if disclosure is not made by the insurance intermediary to the consumer, both the insurer and the intermediary will be held responsible. Since the insurer has appointed the agent to act on their behalf they will be held responsible for their actions in this regard;
  • Where an insurance intermediary is the insurer's agent, the insurer is liable for the intermediary in relation to product disclosure information only during contract negotiation and formation. Also, where the consumer provides information to the insurer's agent the consumer will have met their duty of disclosure to the insurer. If the insurer's agent fails to disclose this information or misinterprets it to the insurer, the insurer will not have the right to remedies for non-disclosure or mis-statement caused by the failure of the insurance intermediary; and
  • Where an insurance intermediary is the consumer's agent, the insurer is not liable for the insurance intermediary in relation to disclosure of product information during contract negotiation and formation. Also, where the consumer provides information to the consumer's agent the consumer will not have met their duty of disclosure to the insurer if the intermediary fails to disclose or mis-states the information to the insurer. Thus, the insurer will have the right to remedies for non-disclosure or mis-statement against the consumer caused by the failure of the insurance intermediary. The consumer's only recourse for this will be against the insurance intermediary.

5.3.6.2 Proposal – Receipt of Premium and Claims Money

341. It is proposed that the position set out in the Insurance Intermediaries Act 1994 (as retained in the Insurance Contracts Bill179) regarding the receipt of premiums and claims money, be repealed and re-enacted in the new insurance contract legislation. The wording suggested in the Insurance Contract Bill, with appropriate wording updates that reflect proposed money handling regulation discussed in the Financial Intermediaries discussion document, should be used.

Questions for Submission

Q41. Are the above proposals appropriate for the New Zealand insurance intermediaries market?

Q42. What implications will these have for existing market practices?

Q43. Is this an ideal approach for providing clarity as to when an intermediary is the agent of the insurer or agent of the consumer?

Q44. What are the costs and benefits of the proposal?

5.4 Product Disclosure

5.4.1 Purpose

342. The intention of this section on product disclosure is to explore whether the implementation of a mandatory product disclosure framework is appropriate for the New Zealand insurance sector. The options provided below are designed to facilitate feedback through submissions which will enable officials to undertake more targeted consultation following assessment of the submissions and further research.

343. Options discussed below are focused at enabling consumers to be more informed about the products they are purchasing and to facilitate a consistent disclosure framework so as to aide greater capacity to undertake product comparisons. This should facilitate consumers being able to assess the appropriateness of insurance products for their personal needs and provide confidence to participate in the insurance sector. Subsequently this will facilitate a more efficient allocation of resources and more effective pooling of risk.

5.4.2 Background

344. As the providers of insurance products only have incentives to produce information to a certain point, consumers can experience difficulties in obtaining all the necessary information to make informed choices.180 Therefore, a consumer may be unaware of all of a product's features and what risks the insurance product covers. Consequently, consumers may enter in to products that do not meet their financial needs and expose them to potentially financially debilitating events.

345. In addition to the asymmetries of information, for some insurance products, the information can be highly complex and non-expert consumers are unable to translate this information into something meaningful for their decision-making process. For example, when determining the adequacy of a health policy the consumer may need to know the cost of cardiac surgery in a private hospital or angiography services (or predict what these might be at some time in the future). Without a clear understanding of costs like these it makes it difficult for the consumer to determine how the benefits of the product will meet their individual financial needs.

346. Currently, those life insurance products which contain an investment element are required to comply with the disclosure frameworks of the Securities Act 1978 and the Securities Regulation 1983 but there is no insurance specific regulatory product disclosure framework applying to risk-based insurance products.181 While insurers may be complying with their relevant association codes and standards, some insurers do not belong to any industry association. Consequently, there is a lack of regulatory consistency and a lack of certainty that consumers are being given the basic information they need to make informed decisions to enter into insurance policies.

347. The Fair Trading Act 1986 and the Consumer Guarantees Act 1993, which is general legislation, imposes standards of service and remedies for product failure. For example, reasonable standards of care and skill are required to ensure products are fit for purpose. Self-regulation has resulted in the development of disclosure rules which are generally followed by industry. For general insurers, the voluntary Fair Insurance Code requires that members of the Insurance Council of New Zealand provide customers with information which allows the customer to select the cover that best suits the customer's needs. For life insurance, the Practice Guidelines issued by the Investment Savings and Insurance Association do not set out disclosure requirements, although in practice most life insurers do disclose product details and information regarding the duty of disclosure required of policyholders.

348. After assessing the general legislation which imposes some requirements on an insurer and the self-regulatory frameworks we do not feel that these frameworks go far enough to sufficiently inform consumers about the suitability of a product for their needs. The options below attempt to account for the existing information required through self-regulation and industry codes and incorporate the frameworks for product disclosure included in the Securities Act 1978 and Securities Regulations 1983, and the Credit Contracts and Consumer Finance Act 2003 (CCCFA).

349. We are interested in whether the options below accurately reflect the scope of information already provided by industry and whether the disclosure frameworks of the Securities Act and CCCFA could be valuably applied, with adjustments, to the providers of insurance products. Also, whether this will assist in promoting well-informed consumers.

5.4.3 Criteria

350. The criteria used for determining whether insurance product disclosure requirements are necessary and what a framework should involve.

  • Assessment of whether consumers are currently well informed about the insurance products they purchase and whether that information is accessible and readily understood;
  • A disclosure framework which provides targeted information in a short-form format and gives consumers a greater ability to compare products from different providers;
  • Disclosure which provides consumers with accurate and readily understood information in a timely manner so that informed decisions can be made about the appropriateness of the product for their personal needs;
  • Accounting for existing practices and development of a framework which will minimise the cost of change and compliance;
  • Provision of clarity of market participants' respective obligations to disclose product information to consumers while not imposing unnecessary compliance costs; and
  • Ensure that those parties responsible for product disclosure can be held accountable for failure to fulfil their obligations through appropriate redress and enforcement.

5.4.4 Options

351. The options outlined below are addressed at a high level. We are to do further work and consultation on this area in order to provide details for informing proposal selection. At this stage, we are interested in receiving feedback on whether a product disclosure regulatory regime is required for insurance in order to meet the Government's objective of well-informed insurance policyholders, and whether the options set out below provide an appropriate regulatory framework for this.

5.4.4.1 Application of Requirements

352. A product disclosure framework would set different product disclosure requirements for different times over the duration of the insurance contract. The distinct time periods could be for example:

  • Pre-contract formation;
  • On formation of the contract, or within a specified time period following formation;
  • On renewal;
  • For mid-contract changes; and
  • Requests for information.

353. Setting different requirements on this basis would assist in ensuring the consumer receives a minimum level of information for decision-making purposes at key points in the insurance contract. This is consistent with the approach taken in other jurisdictions, such as Australia and the United Kingdom.182

5.4.4.2 What should be disclosed?

354. Internationally there are a variety of approaches regarding what must be disclosed about an insurance product being sold. Some jurisdictions take a highly prescriptive approach to ensure clarity and transparency while others are more flexible and principles based promoting innovation and market development. Current disclosure frameworks in New Zealand adopt a flexible approach to product disclosure, although there is nothing that currently applies to risk only insurance products.

355. Insurance products can be highly tailored for a specific consumer. Consequently, a challenge for a product disclosure regulatory regime is to take account of this aspect without making the requirements overly complicated. A prescriptive approach to product disclosure would potentially impose unnecessary regulatory burdens due to the variety of permutations. Also, some insurance products (e.g. life) include an investment element, so must already comply with the disclosure framework contained in the securities legislation.

356. There are, however, certain minimum information categories and primary details which a consumer needs in order to be well-informed for decision-making purposes. These could be set out in legislation. For example, it is important that the consumer receive product key terms, and customer specific product information (eg relating to price, payments, term of policy, excess on claims, renewability, cancellation rights etc).

5.4.4.3 How should disclosure be made?

357. The key to effective delivery of disclosure is that consumers receive the information by commonly used methods and in an easily accessible format, without restricting innovation in the market. The methods and channels of delivery of insurance products can vary significantly:

  • Channels include intermediaries and insurers; and
  • Methods include over the phone, face to face (e.g. in branch or through mobile managers or agents) or remotely (by post, electronically – internet and fax).

358. Other jurisdictions have adopted a variety of approaches to deal with the channels and modes of delivery that are either highly prescriptive or principle-based. Since products sold in New Zealand reflect the methods and channels above, it is important that any regulatory approach to product disclosure account for this. It is also important to consider the wider legislative framework that deals with contractual agreement in New Zealand, such as the processes for receipt and agreement under the Electronic Transactions Act 2002.

5.4.4.4 What format should product disclosure take?

359. To facilitate comparability of insurance products it is common practice internationally183 to prescribe a consistent format in which the required information about the product being sold is delivered to the consumer. A consistent framework is more likely to provide clarity to insurers on how to present the information and certainty to consumers regarding the minimum level of information they are supposed to receive.

360. Some pieces of legislation adopt a safe-harbour approach which establishes a standard framework but provides capacity for an insurer to adopt an individualised framework at their own risk.184 Hence, model forms or templates could be developed and contained in legislation. The model form may be combined with the policy document of the product or given separately. They could contain two parts; customer specific information and product key terms, which are outlined as follows.

  • Customer specific information. A model form for customer specific information would need to include a summary of only consumer specific particulars, based on template headings. These could be similar in nature to those adopted under the CCCFA, but adjusted to reflect insurance product features. For example:
    1. Full name and address of insured and any policy beneficiaries (if any);
    2. Full name, address and telephone number of insurer;
    3. Premium – the amount of the premium to be paid either in one lump sum or by instalments, including the dates and frequency of payment(s);
    4. Other fees;
    5. Total cover amount – the total amount the policy covers;
    6. Term of the contract, including the start and end dates;
    7. Renewal rights;
    8. Special conditions and exclusions;
    9. Cancellation rights and process;
    10. aims process; and
    11. Any requirement to notify change of circumstances.
  • Product key terms. A model form for the minimum product terms a consumer would need to receive would be a summary product terms, based on a series of template questions. These could be similar in nature to those required under the securities regulations, but adjusted for insurance product features. For example:
    1. What sort of insurance is this?
    2. Who is it right for?
    3. What will it cover me for?
    4. What are the main exclusions?
    5. How much do I pay?
    6. What period does the payment of the premium cover?
    7. What must I tell you? And what happens if I don't tell you something important?
    8. How do I make a claim?
    9. How do I cancel the policy and what happens if I do?
    10. 10. What do I do now?

361. The model forms would be developed having regard to international practices, in consultation with industry and then tested through consumer groups, to facilitate the optimal information disclosure outcomes. As noted above, similar forms would need to be developed to apply to the other disclosure occassions, such as renewal and mid-way contract changes.

5.4.4.5 When should product disclosure be made?

362. The disclosure would have to be done within certain timeframes. For example, it may be that for initial disclosure the information would need to be given in writing before the contract is entered into and where this is not reasonably practicable, given orally and then given in writing to the policyholder after the contract is formed. Similar timing rules would be developed for the other disclosure times, such as renewal and mid-way contract changes.

5.4.4.6 Who should be responsible for product disclosure?

363. The responsibility for product disclosure would need to lie with the insurer. Where the contract of insurance is arranged through an agent of the insurer or consumer, the issue of responsibility may need to be adjusted to reflect the different relationships which apply.185 Discussion of this issue is contained in the Insurance Intermediaries and Agency part of the Market Conduct section. Further work will also be done on this once the review of the submissions on the Review of Financial Intermediaries discussion document is completed.

5.4.4.7 What powers should the enforcement authority have?

364. The Securities Commission would be given similar powers regarding product disclosure for risk-based insurance products as it has for securities.186 These include inspecting and obtaining information, prohibiting advertisements, making corrective orders for breaches and in circumstances of extreme or persistent breaches the power to seek a management banning order. Also, the Registrar of Companies would be given similar investigation and enforcement powers to those used for securities, such as187 inspections, prosecuting offences for contravention of the product disclosure requirements, and for misleading statements in advertisements or disclosure documents, statements or forms relating to product disclosure requirements.

365. Consideration of how the product disclosure requirements for an insurance product with both an investment element and a risk-based element will need to be made, so that there is certainty for consumers as to the information they need to make well-informed decisions on the insurance product.

Questions for Submission

Given that further detailed work and consultation is yet to be done on this area:

Q45. Should there be product disclosure requirements for insurance that are contained in legislation?

Q46. Is the product disclosure framework set out above a move in the right direction for the insurance sector, or is a different approach to the framework required?

Q47. What would be the costs and benefits of an insurance product disclosure regime?

143 New Zealand Law Commission report 87: Life Insurance, November 2004.

144 New Zealand Law Commission, Report 46: Some Insurance Law Problems, May 1998

145 Reference to "policyholder" in this document means the “insured”.

146 See Review of the Insurance Contracts Act 1984 (Cth); Final Report on Second Stage: Provisions other than section 54 ("Report of the Review Panel") Australian Government Treasury, June 2004. We understand that the Australian Government Treasury is consulting with the insurance industry and other interested parties on draft wording for legislation consequent upon the Report of the Review Panel.

147 See, for instance, State Insurance General Manager v McHaleheld [1992] 2 NZLR 399; Economedies v Commercial Assurance Co Plc [1998] QB 587 (CA); Quinby Enterprises Ltd v General Accident Fire & Life Assurance Corp PLC [1995] 1 NZLR 736; McFarlane v State Insurance Office General Manager (1989) 5 ANZ Ins Cas 60,887; New Zealand Insurance Co Ltd v Forbes (CA) 178/86 22 August 1988; Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501; Going v Farmers Mutual Insurance Association (CP 17-99) HC Whangarei, O'Regan J, 17 February 2003; Benjamin v State Insurance Ltd (1998) 10 ANZ Ins Cas 74,654 (CA) Assicurazioni Generali SpA v Arab Insurance Group The analysis relates to non-marine insurance. The Marine Insurance Act 1908 (MIA) is a code in respect of marine insurance. However, section 18 of the MIA, which sets out the law relating to non-disclosure under marine insurance, accurately reflects the law relating to non-disclosure under non-marine insurance, except perhaps as regards the issue of constructive knowledge

148 See generally: New Zealand Law Commission, Report 46: Some Insurance Law Problems, May 1998; The [England and Wales] Law Commission and the Scottish Law Commission, Insurance Contract Law: A Joint Scoping Paper, January 2006. Also, this was the feedback from the Advisory Groups.

149 New Zealand Law Commission Report 46.

150 This proposal is the one preferred by the Law Commission in relation to non-disclosure. See New Zealand Law Commission Reports 46 and 87.

151 New Zealand Law Commission Report 46.

152 In accordance with consultation with the Advisory Groups.

153 New Zealand Law Commission Report 46.

154 In Australia the insurer must make the policyholder aware of the general nature and effect of the duty of disclosure Insurance Contracts Act 1984 section 22.

155 The proportionality approach is where the policyholder bears any loss resulting from the greater cost to the insurer of the increased risk attributable to the non-disclosure or mis-statement.

156 We note that this is a variation of the approach taken under section 191 of the now repealed Accident Insurance Act 1998, and In Australia the remedies for non-disclosure and misrepresentation are aligned.

157 New Zealand Law Commission, Life Insurance Report 87, November 2004.

158 As ascertained from discussions with several New Zealand banks and finance companies.

159 Through delays in payment from the insurer because they are not aware of the assignment or mortgage, or the funds are paid the deceased estate so cannot be paid to the assignee or mortgagee until probate has been obtained, or where the policyholder fraudulently obtains a replacement copy of the policy document (using the declaration process contained in the legislation), which is then assigned or mortgaged to another lender and is registered with the insurer, hence taking priority.

160 This is required to be done by producing the policy document, already endorsed with a statutorily prescribed memorandum (signed by the parties to it, e.g., transferor and transferee, assignee and assignor, or mortgagee and mortgagor, as applicable) to the insurer for endorsement. The policy and memorandum are then returned to the transferee, assignee, or mortgagee to hold. Re-transfers, re-assignments, and discharges of mortgage are processed in the same way.

161 See section 43(3).

162 For instance, Land Titles Office, Personal Property Securities Register, Fishserve, FASTER Share Security Interest registries, Ships Register, Fonterra Dairy Shares Security Interest Register.

163 However, Australia and the UK are looking at adopting a similar regime, see article on Overseas Approaches by the Australasian Legal Information Institute at Australasian Legal Information Institute website

164 These are all based on art. 9 of the US Uniform Commercial Code published in 1951 by the National Conference of Commissioners of Uniform State Laws and the American Law Institute as model legislation which was eventually enacted by all of the states.

165 Section 200 Insurance Act 1990, Ontario, section 162 Insurance Act of Saskatchewan, and section 177(1) Insurance Act of Manitoba.

166 As can occur under section 130 Property Law Act 1952.

167 By removing their exclusion from section 23(e)(vi) and covering under the definition of intangibles in section 16.

168 Section 20 PPSA.

169 "Intermediary" for the purpose of this discussion is any individual or firm who undertakes an intermediation role. That is they bring consumers and insurers together.

170 See section 10 Insurance Law Reform Act 1977, which has been updated and inserted as clause 104 "Representatives of insurer are agents of insurer" in the Insurance Contracts Bill.

171 Recommendations regarding responsibilities for agents are intended to equally apply to employees. See The Law Reform Commission, Insurance Agents and Brokers, Australian Government Publishing Service, Canberra 1980.

172 See section 4 Insurance Intermediaries Act 1994.

173 See IAIS, Report on Insurance Laws, Regulations and Practices in IAIS Member Jurisdictions, October 2005.

174 See s 71 of the Australian Insurance Contracts Act 1984.

175 The regulation of insurance intermediaries is undertaken at a state level. This definition of agency relates to New Brunswick and is outlined in the Insurance Act (I-12).

176 See ICOB 1.6.1 and MIGI 9.2 of the Financial Services Authority (UK) Handbook.

177 An agent will include an employee.

178 Which may be electronic in accordance with the Electronic Transactions Act 2002.

179 Annexed to the Law Commission Report 87.

180 An insurer will only have the incentive to produce information about their products until the net private benefits exceed the costs of producing that information. Unfortunately the public benefits of the information exceed the private benefits but the insurer does not want to internalise those extra costs. Further discussion of this issue can be found in standard economic literature on externalities.

181 However, investment-based products, as debt issuers must comply with the securities regime.

182 See Australian approach under the Insurance Contracts Act 1994, and the United Kingdom the Financial Services Handbook at www.fsa.gov.uk

183 For example, Australia, Canada, and the United Kingdom.

184 For example, the CCCFA.

185 This is consistent with the Australian approach under the Insurance Contracts Act 1994

186 These powers are in addition to those applying in relation to the issuing of securities.

187 These powers are in addition to those applying in relation to the issuing of securities.


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