The Financial Markets Authority (FMA) – Te Mana Tātai Hokohoko has published a review of add-on insurance and extended warranties, highlighting the need for stronger oversight of sales and distribution channels to support fair consumer outcomes.
The report, Add-on insurance and extended warranties review, examines how insurers design, distribute and oversee products such as mechanical breakdown insurance, guaranteed asset protection insurance, payment protection insurance and extended warranties. While these products address relatively small and specialised markets, they share common characteristics, including complex features, significant exclusions and limitations and distribution through highly intermediated sales channels.
Michael Hewes, Director Credit, Deposit-taking, Insurance and Advice, says insurers cannot outsource the responsibility for fair consumer outcomes.
“Where products are sold through intermediaries, insurers still need robust systems, controls and monitoring to ensure consumers are treated fairly. We saw a recurring gap between the policies, processes, systems and controls insurers described and how they operated in practice.
“New Zealanders should be supported to make informed decisions about the products they purchase and have confidence those products are likely to meet their needs and objectives,” says Mr Hewes.
The review identified four key areas of concern:
- Sales practices and distribution arrangements may not consistently support informed consumer decision-making
- Consumers may purchase products that do not consistently meet their needs, objectives or expectations
- Consumers may purchase products without fully understanding them
- Insurers are not consistently identifying and responding to emerging conduct risks.
Distribution oversight was the area where industry uplift is most needed. Insurers described onboarding and training arrangements for intermediaries, but the review found limited evidence of monitoring and oversight proportionate to the risks associated with commission-based and intermediated sales models.
The review also found insurers could make better use of complaints, claims and product performance data to assess whether their products continue to deliver value and meet consumers’ needs and objectives.
Alongside the significant opportunities for improvement, the review found insurers have taken steps to embed requirements of the Conduct of Financial Institutions regime, with some firms demonstrating mature approaches to product governance, complaints management, consumer communications and the use of product performance data to improve consumer outcomes.
The FMA has provided targeted feedback to participating insurers and expects the wider sector to consider the findings and assess whether similar issues exist within their own operations.
Read the full report here: Add-on insurances and extended warranties review
