Most financial advisers are opposed to the Financial Services Council’s proposed Replacement Business Framework measures, with many concerned that the medicine may prove worse than the malady.
The reforms designed to stop the practice of insurance “churn”, as proposed by the FSC in a recent consultation paper, have divided the industry, with many experienced life-risk specialists warning they may result in unintended negative consequences for clients.
Churning is the practice of canceling a client’s existing insurance policy and replacing it with a new one in order to generate additional commission for the agent.
However, clients who are retiring, those who want to reduce or discontinue cover, or those who want to place business with another adviser create a grey area where lapsed and reinstated business has nothing to do with churning.
A Guardian Advice survey of its authorised representatives found 71 per cent of advisers did not agree with the FSC’s definition of replacement business; 88 per cent did not agree with five years being the right timeframe for replacement business; and 78 per cent did not agree with the proposed remuneration level on replacement business.
Based on those views, Guardian has submitted a response to the FSC’s consultation paper on its Replacement Business Framework.
“We believe that only a small proportion of advisers arbitrarily churn business,” says Guardian Advice head Simon Harris.
“However, we recognise this was an issue flagged by the government when developing the Future of Financial Advice (FoFA) reforms, and we applaud the FSC for taking a leadership stance to address churn.
“As a risk-focused licensee aligned to growth-oriented advice businesses, we wanted to give our advisers a voice on this important issue and an opportunity to shape the outcome of the proposed Replacement Business Framework.”
Recent research reveals …
The group’s survey results suggest that the FSC has some way to go to convincing advisers about its proposed replacement business focus.
Asteron Life recorded a similar result when putting forward the independent adviser view in its submission.
Executive manager of the life-risk specialist, Mark Vilo, says the company wanted to understand the real implications of the FSC’s framework on replacement business for advisers as a whole.
“We collected the valid concerns of a think tank of 70 advisers to fully represent their views in our submission,” he says.
“It’s important for the government to listen to the actual practitioners out there wearing their shoes out, providing advice to Australians on insurance.
“Churn is not something practiced by most advisers. But for those advisers that replace business where it is genuinely in the best interest of their clients, we need to ensure that their businesses are able to survive, particularly in the current economic environment where cash flow is an issue for most advice practices.
“Overall, the industry needs to take a collective approach to deal with replacement business, otherwise, structurally, this industry will be unsustainable.”
Proposals from the “big end of town”
Key reforms under the FSC’s proposed Replacement Business Framework include:
| Only level commission on replacement business to be made available to advisers from life companies;Establishment of a consistent two-year adviser responsibility period, with 100-per-cent commission clawback if the policy lapses or cancels with an insurer within one year, and 50-per-cent clawback in the second year;The removal of “takeover terms” (that is, banning the practice of the relaxation of the standard underwriting process for replacement business) for a policy or a group of policies transferred by an adviser between insurers. |
Mark Dunsford, director of Dunsford Financial Planning, told Professional Planner Online he is continually disturbed by the FSC, it’s chief executive John Brogden and their misrepresentation of the use of the word churning in the life insurance industry.
“This organisation is made up of life insurance executives only, without representation from the AFA, FPA or any financial advisers specialising in the risk field,” he says.
“Brogden continues to push the life-insurance-company line – that churning is a major issue. The average life insurance company experiences an average lapse rate between 9 per cent and 14 per cent, which has been the industry experience for the past 30 years.”
Dunsford believes the bigger issue is that the FSC is attempting to change the way life insurance advisers review their clients’ risk-insurance needs.
“John Brogden, through the FSC, has pushed the idea of no upfront commission for a life insurance policy that has been held for under five years, in addition to a two-year-responsibility period,” he says.
“Not only does this discourage advisers to review existing life insurance plans, but it means that life companies that become uncompetitive due to bad claims, lack of product upgrades, poor administration and underwriting fundamentals will maintain business they don’t deserve.
“Their whole modus operandi is around making life insurance products more profitable for the life-insurance company.
“This hinders our major industry issue, which is the major under-insurance that Australians have, which again puts massive strains on our already overburdened welfare system.
“How can you get a balanced approach to this discussion when it is so heavily weighted by the big end of town, who are only looking for higher profits from the products they manufacture?”
I am currently handling a trauma and an IP claim for a client I inherited 12 months ago.
His trauma policy was written some time ago and is a closed product. His eligibility for a claim under his existing policy is very grey and will almost certainly be declined. Under the current policy (same insurer) he would be eligible.
Now, whilst this client was unable to be re-written due to pre-existing conditions, I would have seriously considered it when I inherited him.
The FSC’s proposed anti-churning policy will replace one adviser conflict of interest (unnecessary policy replacements) with another (dis-incentive to replace policies where appropriate).
In my opinion, the consequences for clients of the latter (sub-standard policies) is far greater than the former (which haven’t been quantified).
surely 40 years in this industry has taught me a lot more that some politician making comments without thought – if i can only spend an hour of my time giving them improved options with the latest products out there i am certain they will consider the options – is that “churning” ?????” i have had clients on claim a few months after they moved to an improved product – they and their families are absolutely satisfied with my service and my renewal process
I have been in the Life Insurance industry for 40years -commenced in south africa in 1972 – australia in 1982 till now. I have constantly seen changes and improvements to the products offered by Insurers. On each renewal i feel obliged to advise my clients of any changes and to advise them of new concepts eg the payment for life premiums by the insurer for the remaining years of the contract by TAL if a trauma claim is triggered -if i do not offer them options available i am not doing my job as promised to my client and risk loosing them to another adviser who offers them “new options” This is not “churning” but keeping the industry competitive and the advisers alert -my interest is not the Insurance company ” the go between” the client and the re assurance provider BUT THE CLIENT THEMSELF – so forget the word “churning” and focus on an improved product and imagine that if the client had a claim would their family not been better of ????
regards pyar singh
If you make your product competitive then you really won’t have a problem. How can you call this churning when if comparing apples v apples and client has had policy X for 3 years and gets his renewal calls your office and said that this is expensive and you do some quotes and find that Company Y is say $400 cheaper. As long as the clients health is good and not canceling the old one until new is in place. Tell me is the client wouldn’t be happy with you? He would say your doing a great job. Times are tough out there thanks for saving me $400. Choice recommends people shop around for the best deal with house, car insurance etc. Dont blame the advisers for doing the right thing for the clients.
Your article states “Churning is the practice of canceling a client’s existing insurance policy and replacing it with a new one in order to generate additional commission for the agent”
That definition is straight out of the 1980’s and is insulting to the vast majority of advisers who do the right thing for their clients. Why not mention former company names such as Occidental, Oceanic, Regal Life, Nat Mut, Aetna and Capita as they hold about as much relevance today also….
In MOST advisers worlds churning would be defined as “The practice of canceling a client’s existing insurance policy and replacing it with a new one in order to generate additional benefits and/or improved definitions as well as reducing their premiums…”?
So the second definition produces a win for the client, a win for the new insurer, a win for the adviser with the only loss being with the former insurer who had not managed to keep the business. What is so wrong with that exactly?
The problem arises where the client has been poorly advised or did a DIY initially, committing to a policy not worth the paper it was printed on. I have come across this regularly. These “no medical” at the outset policies that are being heavily touted now will be the major issue where the medical is assessed at claim time seriously delaying payouts.