Public consultation has begun as part of the review process.
A discussion paper has been released, which asks submitters what effect sales incentives such as commissions have on consumers.
It said feedback was requested on whether incentives in all sectors of insurance were causing poor outcomes for purchasers.
The paper points to examples of pressure-sales tactics seen in Australia and asks whether there is evidence of similar problems here. It also references mis-selling in the UK and Australia and asks whether insurers or advisers are selling unsuitable products in New Zealand.
"A wider harm from insurance churn is that if larger commissions are paid by insurance providers to intermediaries for replacement business then these costs are likely passed on to all purchasers of insurance through higher premiums," the discussion paper says.
"Further, a focus on replacement business limits the time spent on sales to new customers, who may gain benefit from life insurance."
Faafoi said insurance had an important role in New Zealand.
"A well-functioning insurance system, where all parties can transact fairly and with confidence, is vital to ensure insurance continues to serve all New Zealanders.
“But there are significant problems with New Zealand’s insurance contract law which are undermining the effectiveness of our insurance markets and impacting those who do not receive the support they anticipated from their insurance policies.
“I have heard, for example, that consumers are sometimes not covered for losses or unable to claim for important needs like health treatment because they innocently did not disclose seemingly unrelated matters to the insurer.
“This is really tough for people who genuinely believe they have met their requirements and are later unable to rely on benefits of insurance. So onerous disclosure requirements are one of the issues we need to consider and, I hope, an issue that will be addressed in feedback from submitters.”
New Zealand’s insurance law was outdated with legislation spanning six different Acts, some more than 100 years old, he said.
“The world has moved on and some parts of the law – like the disclosure obligations consumers face – no longer strike the right balance.
“Experiences following the Christchurch earthquakes – and more recently issues highlighted by the Royal Commission over in Australia – have also highlighted the need to look at whether greater regulation of insurer conduct is required. I will be considering the regulation of insurer conduct as part of the review.
“Insurance affects nearly everyone so I encourage everyone with an insurance story to let us have their views.”
