New Zealand life insurance advisers’ commissions should be cut to 50% upfront and a 20% trail on new business, a report commissioned by the country’s Financial Services Council (NZFSC) says.

In an equivalent to the Australian FSC’s Trowbridge report, actuaries Melville Jessup Weaver say commissions on replacement policies written within seven years of inception should be zero, unless the premiums are higher, in which case they should be capped at 50%.

The report recommends banning volume payments, either in cash or kind.

“A cap on the dollar amount of commission payable has been included as a way to avoid substantial conflicts of interest in absolute dollar terms, recognising that at this level of premium the customer should be encouraged to pay separately for advice on a fee-for-service basis,” the report says.

However, it says commissions have a role to play in providing life insurance.

“The payment of commissions by insurers to advisers is justified by the importance of life insurance to the community... including extensive evidence that consumers rarely buy adequate life insurance protection without the support of a consultant.”

But the report then argues commissions do not aid a well-functioning, competitive market.

To reduce churn, the report recommends two questions be inserted in every life insurance policy application.

The first asks: “Is this policy intended to replace existing insurance? If yes, do not cancel your existing policy until you have received the new policy document and you are happy with it.”

The suggested second question and commentary is: “Are you replacing your existing policy because it has been recommended to you to do so?”

A “No” answer to both would show the insurer the policy replacement is being driven by the customer, not an adviser.

If the client says yes, the adviser should confirm with the insurer that they have met a number of conditions and acted in the client’s best interests.

This best-interests statement would have to be provided to the client.

The report says if the insurer believes changing the policy is in the client’s best interests, it would have to waive any waiting periods.

It would also have to “waive any adverse consequences arising should the customer mis-state their true medical condition at the time of the application, unless it was substantially incorrect and done fraudulently”.

The report calls for the Financial Markets Authority to introduce policy replacement regulations.

Although commissioned by the NZFSC, some of the association’s members have rejected the report.

The paper features a prominent disclaimer saying it is independent and its views are not necessarily those of the FSC or its member companies.

Some companies have argued the report goes beyond its brief, and includes topics that should not have been covered.

NZFSC CEO Peter Neilson says the findings highlight the need to address incentive structures for policy replacement, but he insists advisers still have a role to play.

“Advisers play a key role in the industry when they provide impartial advice to customers on their insurance needs and place the business appropriately with one or more insurers,” he said.

“[However], conflicts of interest over remuneration… can compromise the impartiality of both the advice and the insurance placement, and that is the issue the industry has funded the report to address.”