Thousands of consumers may be millions of dollars out of pocket because insurance companies have improperly put their commercial interests ahead of clients.
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The Financial Markets Authority (FMA) has looked at the advisory and selling practices of 11 insurance companies and says three may face action for not helping consumers choose the best life and health insurance policies.
"We are concerned that a number of firms are not recognising or treating the risks to customers in replacement insurance transactions. Processes seem to be set up to manage the risks faced by the firms, not to help customers, " FMA's director of regulation Liam Mason said.
The main problem is when consumers renew or change their life and health insurance policies, and whether companies were advising clients about higher costs, increased risks, or reduced benefits and coverage.
"It is disappointing that despite the risks to consumers, some insurance providers do not identify insurance replacement as a particular area of risk. We are now considering regulatory action where our findings suggest a firm is not meeting its legal obligations," he said.
Name and shame
Mr Mason would not identify the firms until the report has been discussed with them, but said action could include naming and shaming, a requirement to change their practices, and an administrative fine.
Six of the companies surveyed had some measures in place to reduce the risks to clients, but only two had what the FMA called high quality procedures aimed at helping consumers.
Parliament is currently looking at law changes to require better practices and standards of financial advisers, which Mr Mason said would answer many of the concerns raised by the report.
He said consumers also need to be more aware and ask questions of sales people and advisers when they are changing their life insurance arrangements.
Shortcomings accepted
The Financial Services Council, which covers the life insurance industry, acknowledged the sector's failings.
"We don't shy away from the fact that the findings of the review are mixed and that there is a clear challenge from the FMA for the industry to improve practices related to replacement insurance transactions," the council's chief executive, Richard Klipin, said.
One of the biggest life insurance providers, AMP, said it had changed its approach several years ago, and is confident it's offering a good service to customers.
"We've made sure we're not participating in what I regard in some cases as a bit of a merry-round-go of replacement business in the industry," New Zealand managing director Blair Vernon said.
Earlier this year the FMA took insurance companies and agents to task for the "soft commissions", such as overseas trips, holidays and other gifts, being offered to advisors for selling their policies, which might compromise the advice they give consumers.
