FMA finds add-on insurance loss ratios as low as 3% to 6%

Source: FMA, Add on insurance review highlights insurers' responsibility to deliver fair outcomes (MR No. 2026-35)

The FMA's review of add-on insurance names distribution oversight as the area needing most uplift. The same commission-based, intermediated mechanism sits under a life and health book eight times larger.

By Henry Smith · Regulation · 2026-08-20

Some add-on insurance products in New Zealand pay out between 3 and 6 cents in claims for every dollar of premium collected, and the Financial Markets Authority published that finding on 20 August 2026 (FMA, Add-on insurance and extended warranties review, page 11, retrieved 20 August 2026). The regulator names distribution oversight, not product design, as the area where industry uplift is most needed.

We read the public documents. We were not briefed and we spoke to nobody.

What the FMA actually published

The FMA released a thematic review of add-on insurance and extended warranties, covering mechanical breakdown insurance, guaranteed asset protection, consumer credit and payment protection insurance, and extended warranties on household goods. It identified nine insurers underwriting these products and included seven in the review, including all of the larger providers (FMA, pages 5 and 6, retrieved 20 August 2026). Based on customer volumes the insurers reported, the FMA estimates approximately 500,000 policies are in force across these products.

The review identified four areas of concern: that sales practices and distribution arrangements may not consistently support informed consumer decision-making; that consumers may purchase products that do not consistently meet their needs, objectives or expectations; that consumers may purchase products without fully understanding them; and that insurers are not consistently identifying and responding to emerging conduct risks (FMA media release MR No. 2026-35, retrieved 20 August 2026).

Michael Hewes, the FMA's Director of Credit, Deposit-taking, Insurance and Advice, is quoted as saying the review saw "a recurring gap between the policies, processes, systems and controls insurers described and how they operated in practice". On distribution, the report says 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 report adds that oversight was often not independent: in some cases the individuals responsible for overseeing intermediaries were also responsible for driving sales performance.

The loss ratio finding is narrower than the headline suggests. The FMA says GAP, CCI and PPI products showed consistently low loss ratios, in some cases below 20% and as low as 3% to 6% for certain products. It does not name the insurers, the products or which figure belongs to which.

What a 5% loss ratio costs the person who bought the policy

The FMA does not put a dollar figure on any of this. The Commerce Commission's 2021 review of motor vehicle financing and add-ons does publish the underlying counts, and the two can be joined.

Over the three financial years to 31 March 2020, the Commission recorded 88,301 CCI/PPI policies sold for $91 million in retail premiums, and 75,339 GAP policies for $39 million (Commerce Commission, Motor vehicle financing and add-ons review, page 17, 10 November 2021, retrieved 20 August 2026). The Commission published the totals and the counts but not the quotient. Dividing one by the other gives an average retail premium of about $1,030 for a CCI or PPI policy and about $518 for a GAP policy. That arithmetic is ours.

Product	Policies sold, FY18 to FY20	Retail premiums	Average premium per policy
Mechanical breakdown insurance	298,116	$312m	$1,047
Repayment waivers	118,345	$106m	$896
CCI and PPI	88,301	$91m	$1,031
GAP insurance	75,339	$39m	$518

Policy counts and retail premium totals from the Commerce Commission (page 17, retrieved 20 August 2026); the per-policy column is our division of one by the other.

Apply the FMA's stated range to that average. A CCI or PPI policy costing around $1,030 and running at a 3% loss ratio returns about $31 in claims across the whole cohort that bought it. At 6% it returns about $62. At the 20% ceiling the FMA describes as the upper end of its low-ratio group, it returns about $206. The two figures come from different periods and different data sets, so treat the result as an order of magnitude rather than a price. It is still the number the review implies and does not state.

The same four concerns, already found in life and health

The FMA studied add-ons. The mechanism it criticised is not specific to car yards. Every one of the four concerns has a documented precedent in life and health insurance, in the FMA's own reports.

The FMA's 2026 add-on concern	The equivalent finding in life and health
Sales practices and distribution may not support informed decisions	Advisers were offered overseas trips as sales incentives; policies no longer subject to clawback were 2.2 times more likely to be replaced if trips were offered (FMA, 2016, page 13)
Products may not meet consumers' requirements and objectives	Product quality scores were "only a minor factor" in whether a life policy was replaced; commission type was the most significant factor (FMA, 2016, page 13)
Consumers may purchase products without fully understanding them	Inconsistent disclosure of the actual commission payable to the provider and the individual adviser, and of clawback treatment (FMA, Financial Conduct Report 2026/27, financial advice section)
Insurers not consistently identifying emerging conduct risks	Most insurers had processes for managing incentive conflicts but "their approaches vary" (FMA, June 2026)

All four sources retrieved 20 August 2026. The mapping is ours; the FMA does not draw it.

The scale difference runs the other way from what the coverage will imply. The add-on review covers roughly 500,000 policies. The Financial Services Council counts 4.00 million life insurance covers in force as at 31 March 2026, against 3.31 billion dollars of annual premium (FSC, Spotlight on Life Insurance, March 2026, published 8 June 2026, retrieved 20 August 2026). The FSC is an industry association and the data is its members' own returns. Even so, the ratio is eight to one. The distribution model the FMA has just told seven insurers to fix sits under a life and health book eight times the size of the one it reviewed.

What it means for cover you already hold

Three practical consequences.

If your life, trauma or income protection cover was arranged through a bank branch, a mortgage broker or a car dealer rather than through an adviser you chose, you are in the channel the FMA describes as highest risk. Ask who was paid, and how much, for placing it. The regulations entitle you to that: when the nature and scope of advice becomes known, a financial advice provider must disclose, for each commission or incentive, when it will be given, who gives it and to whom, and its amount or value or how that would be determined (Financial Markets Conduct Regulations 2014, Schedule 21A clause 5(2)(d), retrieved 20 August 2026).

If you hold mechanical breakdown, GAP or payment protection cover bought at a point of sale, check whether you already hold the same protection elsewhere. The FMA observed situations where consumers who already held similar cover were still encouraged to buy.

If you have an extended warranty on an appliance, the FMA has now taken the view that under specific arrangements extended warranties can be contracts of insurance and fall within the CoFI regime. That is a change in reach, and it means the same fair conduct obligations apply to a retailer's warranty desk.

The honest limits

This piece was written on the day of publication. There is no secondary coverage of this release to weigh against the primary document, so everything above comes from the FMA's own report and media release, or from documents the report cites.

The FMA does not say which products carry the 3% to 6% loss ratios, or which insurers. It does not publish a distribution of loss ratios, only the low end. It gives no equivalent figure for life or health insurance, and neither the FSC nor the Reserve Bank publishes a claims-to-premium ratio for the life sector on a comparable basis, so the comparison in this piece is of mechanism and scale, not of value.

The Commerce Commission data is five years older than the FMA's and covers a different set of firms. Averaging its premium totals across its policy counts is arithmetic on published figures, not a market price, and the average conceals a wide spread.

Nothing in the FMA's review says any life or health insurer is doing what it criticises in add-ons. It says the sector should assess whether similar issues exist within their own operations, and that is what we have taken it to mean.

Sources

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