Replacement life insurance policies mostly compromise policyholders’ best interests, a review by New Zealand’s Financial Markets Authority (FMA) has found.

The regulator is now considering action against a small number of providers, because the review suggests they may not be meeting their legal obligations.

“Insurance replacement business is a high-risk transaction,” the regulator says.

“Potential harms include customers being overinsured or underinsured, and customers being sold a policy with less favourable terms such as exclusions or increased premiums, which may affect their ability to claim on the policy at a later date.”

Customers only realise their predicament when they try to claim, it says.

The FMA examined 11 “qualifying financial entities” or large companies selling life insurance in New Zealand.

While most have processes to identify when customers are being advised to replace insurance, these appear to be aimed at reducing legal risk, the review found.

Less than half of the companies reviewed informed customers that replacing life policies could lead to worse cover or loss of benefits.

“We are concerned that a number of firms are not recognising or treating the risks to customers in replacement insurance transactions,” FMA Director of Regulation Liam Mason said.