NZ FMA releases thematic review for add-on insurance and extended warranties

The New Zealand Financial Markets Authority – Te Mana Tātai Hokohoko (FMA) has published the findings of its thematic review of add-on insurance products and extended warranties, providing valuable insight into how the regulator expects insurers to comply with the Conduct of Financial Institutions (CoFI) regime and the fair conduct principle. The review focused on whether insurers’ product design, distribution and oversight arrangements support fair consumer treatment and outcomes in practice.

The review signals increased supervisory focus on product governance, intermediary oversight, consumer understanding and product value. While the FMA acknowledged improvements in conduct frameworks since CoFI’s introduction, it identified several recurring concerns.

 

Background

Add-on insurance products, including mechanical breakdown insurance (MBI), guaranteed asset protection insurance (GAP) and consumer credit or payment protection insurance (CCI/PPI), have faced ongoing regulatory scrutiny due to concerns about product value, consumer understanding and point-of-sale sale practices. Following engagement with insurers and industry stakeholders, the FMA found that these products are often sold in commission-based environments where consumers are making multiple financial decisions under time pressure, increasing the risk of poor consumer outcomes.

 

Key findings from the review

Distribution

The FMA identified oversight of intermediated distribution as the area requiring greatest improvement. While insurers generally had onboarding and training arrangements in place, the regulator found limited evidence of structured, risk-based oversight. Monitoring often relied on relationship management, rather than formal assurance or testing.

The review also highlighted sales practices that may not support informed decision-making, including objection-handling techniques (where a consumer shows hesitation to buy) and approaches that risk by creating pressure or influencing consumer choice. The FMA emphasized that insurers remain responsible for consumer outcomes, even when products are distributed by third parties.

Insurers should strengthen oversight of intermediaries, implement structured monitoring frameworks, ensure training addresses conduct risks and product suitability, and maintain oversight arrangements that are appropriately independent from commercial objectives.

Product reviews

The FMA found that insurers generally collected information on claims, complaints, cancellations and loss ratios (the portion of premiums paid out as claims) but could not always demonstrate how that information was used to assess product performance and consumer outcomes. Product review processes were often reactive, insufficiently documented and lacked clear escalation triggers.

Of particular concern were persistently low loss ratios for certain GAP, CCI and PPI products. In some cases, loss ratios (the amount paid out to consumers compared to premiums received) were below 20%, and as low as 3-6%, raising questions about whether consumers are receiving meaningful value from these products.

Insurers should maintain documented product review frameworks, establish clear review thresholds and escalation pathways, and ensure product performance data is used to drive timely remediation and product improvements.

Consumer outcomes

A recurring theme throughout the review is whether consumers are achieving fair outcomes in practice. The FMA found limited evidence that insurers consistently assess whether consumers understand the products they purchase, including key features, exclusions, eligibility requirements and policy obligations. Instead, insurers largely relied on disclosure documents, policy wording and sales scripts to support informed decision-making.

The regulator expressed concern that consumers purchasing add-on products are often doing so within broader transactions, such as vehicle purchases and financing arrangements, where they are required to make multiple decisions in a limited period of time. According to the FMA, these circumstances can significantly reduce consumers’ ability to properly assess product suitability and understand policy limitations.

Insurers should assess whether consumers receive meaningful information and support throughout the sales process, consider product suitability more actively, and obtain greater assurance that consumers understand key product terms and limitations.

Complaints

The FMA identified complaints as an important source of conduct-risk insight but found that complaints data was not consistently used to improve products, sales practices or governance arrangements. Complaints information was not always prominent or easily accessible, and the regulator cautioned against viewing low complaint volumes as evidence of positive consumer outcomes.

The review also found that complaints data was frequently disconnected from product governance and conduct risk frameworks, limiting insurers’ ability to identify and address emerging issues.

Insurers should ensure complaints channels are visible and accessible, consistently record and analyse complaints, and use customer feedback, complaints and claims data to inform governance, product reviews and conduct-risk management.

Extended warranties

The FMA also devoted specific attention to extended warranties.

Importantly, the regulator stated that, depending on their structure, extended warranties may constitute contracts of insurance and therefore fall within the scope of the CoFI regime. The FMA found insufficient evidence of oversight, governance and conduct risk management arrangements in relation to extended warranties and expressed concern that these products may not receive the same level of scrutiny as more traditional insurance products.

Insurers offering extended warranties are expected to assess whether existing governance and monitoring arrangements appropriately reflect the potential for consumer harm and align with fair conduct obligations.

Looking ahead

The thematic review closely aligns with the FMA’s 2026/27 Financial Conduct Report (FCR) and provides a practical illustration of how the regulator is applying its conduct priorities to the insurance sector.

The review reinforces the FCR’s focus on product design and consumer outcomes, with the FMA scrutinising whether add-on insurance products continue to meet consumers’ needs and deliver meaningful value in practice. The review’s findings on weak product review processes and low loss ratios directly reflect the FCR’s emphasis on ensuring products are designed and monitored with consumer outcomes in mind.

The review also mirrors the FCR’s focus on remuneration conflicts and complaints. Consistent with the FMA’s concerns in the FCR about commission-based incentives driving poor consumer outcomes, the review identifies intermediated distribution and sales practices as the clearest area requiring improvement. Similarly, both publications emphasise that firms should not rely on low complaint volumes as evidence of good outcomes and should instead use complaints data as a key source of insight into conduct risks and product performance.

Taken together, the review provides a roadmap for how the FMA is likely to supervise insurers under CoFI, with a particular focus on distributor oversight, product value, consumer understanding and governance frameworks that can demonstrate fair outcomes in practice.

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