New Zealand life insurers are paying the highest commissions to financial advisers in the world and the nation's Reserve Bank is concerned about the conduct risk it is creating.
According to the Reserve Bank of New Zealand's latest Financial Stability Report, in 2016 New Zealand-based life insurers paid financial advisers commissions of about 20%. This is well above Mexico and Hungary which rounded out the top three at 13% and 12% respectively.
The RBNZ said much of this comes down to a reluctance to adapt to changes in the market such as technology and the movement to online product distribution, instead relying on the traditional adviser sales channel.
Taking a leaf out of Australia's book, the report states that such high commissions is creating a potential conduct risk, incentivising advisers to recommend changes to clients about coverage that are not in the client's best interests.
"Such activities can compromise the efficiency of the sector, because policyholders may not be matched with the best policies, and ultimately end up funding high commissions through high premiums," the report reads.
The country's Financial Markets Authority and the RBNZ are currently undertaking a review of the conduct and culture of New Zealand's life insurers with a final report to be issued in January 2019.
The review was initiated following issues raised at Australia's Royal Commission, with the FMA and RBNZ sending a joint letter to the chief executives of New Zealand's life insurers requesting information about how individual organisations are identifying and addressing conduct and culture issues.
At the same time, the two entities reinforced their ongoing focus on soft commissions in life insurance and incentives in vertically integrated institutions, as well as predicting a deepening of their focus on governance and culture within financial services firms.