Risk advisers fear the value of their businesses will fall if proposed anti-churn measures are introduced, as speculation intensifies around the real motivation for commission clawbacks.
The life insurance industry’s capacity for self-regulation will face a stern test over the coming months as the Financial Services Council (FSC) ponders its next move amid mounting opposition to its vision for the sector.
While the FSC recently watered down the initial measures proposed in a Replacement Business Framework consultation paper, the industry has been left with more questions than answers.
Mergers and acquisitions corporate advisory firm, Radar Results, says feedback from risk advisers suggests the proposed anti-churn measures are both unnecessary and likely to reduce the value of their business.
Industry sources have also suggested to Professional Planner Online that the churning focus is merely a ruse by the life companies to pass more risk onto the adviser at a time when rising lapse rates are causing internal recalibrations of policies and premiums.
With a proposed start date of July 1, 2013, the anti-churn measures will see a commission clawback for a three-year period, potentially leaving advisers doing a lot of legwork to set up a client’s insurance plan, only to have that revenue lost with early cancellation.
Churn return
“It’s ludicrous and I can’t see it working. I’ve spoken to many risk advisers and to be honest, they were shocked with these recommendations,” says the founder of Radar Results, John Birt.
“Particularly with the allegations by the FSC that churning of insurance policies is rife. Thirty years ago there were big problems with churning but today, the advisory industry is a lot more professional.”
The industry body clearly intends to remove the practice of churning from the industry but is hedging its bets by adding that it “does not discourage advisers from reviewing their client’s insurance needs and replacing their policy where it is in their client’s best interest to do so”.
However, it seems the key components of the framework, such as a consistent responsibility period and clawback mechanisms, are no longer up for debate.
This means that where an advised policy lapses within three years of commencement, a three-year adviser responsibility period will apply.
A tiered commission clawback provision will be introduced as follows: 100 per cent of remuneration paid by an insurer to an adviser if the policy lapses within the first year; 75 per cent of remuneration paid by an insurer if the policy lapses within the second year; and 50 per cent of remuneration paid by an insurer if the policy lapses within the third year.
Wider debate
Director of dealer group Synchron, Don Trapnell, an outspoken critic of the FSC’s proposals, says the issue of churning is obscuring the larger debate on overall remuneration within the life insurance industry.
“From the beginning, this whole process has assumed there is wholesale churning in the industry,” he says. “Unfortunately the data being used is deeply flawed and it feels like they [the FSC] are just plucking figures out of the air.”
Radar Results says insurance-based financial planning practices have increased in value over the past six years, particularly since the global financial crisis. Advisers wanting to sell their planning practice today can command up to three times recurring revenue (RR) for the risk component of their business, particularly if it’s in a capital city and the age of the insured clients is around 45 years.
“When you sell your planning business, the purchaser would like some surety around the revenue, and would generally pay the purchase price over a year or two,” says Birt.
“With a clawback provision attaching to all new insurance policies from next year, the responsibility period offered by the vendor would have to increase to maybe three to five years.
“It’s interesting that the FSC have proposed the new anti-churn measures won’t apply to advisers who operate on a fee-for-service basis and who provide life insurance advice.”
Commissions retained
Zurich’s national manager, sales strategies and research, Marc Fabris, also believes there is much that still needs to be discussed.
“Zurich has been resolute in its position that the retention of commissions is crucial to ensuring that risk advice is as affordable as possible, to as wide a range of consumers as possible,” he says.
“We disagree strongly with comments recently reported in the media that an accelerated move towards fee for service – as a possible outcome of the latest FSC proposal on adviser remuneration – is unequivocally in the best interests of consumers.”
After more thought on this extremely important discussion i have some concerns
whyare Insurers allowed to offer commissions varying from 100%to 140%?
are we not encouraged to do annual reviews to consider what developments exist in our industry and what new and improved products are available?
eg i had a client who had a $2m life and a $1m trauma -i moved them after 1 year to a company that offered the client an opportunity to have a “double crisis” where if a trauma claim was triggered their life premium component was waived -they were happy to effect that contract -if a trauma claim was triggered on their old policy the client would have to pay $500per month , increasing annually, to maintain that portion of the benefit, and could perhaps not be in a position to earn as well in view of the health change!! will the govt subsidise that payment!! i think not -is that churning?or providing an improved productoption-
why pay an upfront of 120% , then 10% then another 10% over 3 years ? pay us 50%per annum without any form of clawback!!increase the renewals if applying the clawback and give us an option
regards pyar
as a risk writer for almost 40 years i wish to add the importance of giving the client an opportunity to review his/her life portfolio annually and to keep the companies providing “better rates” and products – we may be tying them down for 3 years and restricting their choice of company and then what ? a major exodus to a company providing improved and more competitive benefits as a result of profitability -perhaps wind down the commission a bit -or make the commission a flat rate per year and encourage those who have the business on the books for 5 years to have an improved increase on their renewals to say 30%
regards pyarsingh
Probably 75% of the risk insurance premiums I place are of a “tax deductible ” nature,
Fee for advice is not, on insurance premiums, so therefor this also needs to be entered in to any advice equation.
The FSC measures are an attack on ALL risk advisers, and not just those few in the habit of churning. It disturbs me that a Government believes it can legislate hundreds of advisers out of an income, for doing a job that is sorely needed.
Clients needs and situations can change dramatically and quickly and good advice given today can be inappropriate within months, let alone three years, if advisers and clients don’t keep up or regularly review.
Why should income earned for appropriate advice today, be revoked up to three years after the fact, due to a change in circumstances beyond their control, and on occasion, even the client’s control?
I am personally more than happy to work in an industry without upfront commissions, and have hybrid and level commission options only to still deliver the best recommendations to my clients, whtout the ‘threat’ of clawbacks well into the future.
If the FSC implements this write back structure, they then need to put some further rules in place, e.g. Insurers are not allowed to increase premiums more than a set percentage over previous years premiums, other wise once the policies are in place, premiums will increase dramatically in the second year and advisers will not / cannot do anything about it.
Secondly, what is the scenario if another adviser re-writes the client within the 3 years, why should the original adviser cop the write-back, therefore the churn has not been stopped if it is done by another adviser.
I think that the FSC needs to re-think some of these issues, if they don’t they will then open up other problems that they will find harder to control.
The insurance institutions already know exactly who churns and they cut them off from upfront commissions. They already manage the churn problem very effectively.
Dear FSC – What happens if my income protection client dies in 2nd or 3rd year – do i still get a write back because obviously i have not done my job properly and let my client die??
The fact the FSC represent all the institutions and the institutions these days own 90% of advisers, this allows the institutions to try to call ALL THE SHOTS and DON’T HAVE TO GIVE A DAM ABOUT ADVISERS.
C’mon Advisers C’mon – get of your butts and get off the institution teat and then we can have a voice on our own.
Sadly the insurance industry is going through, what appears to be its final stage, ARMAGEDDON. Especially in reference to sustainng & maintaining an Adviser Network of any calibre.
Historically Australians have been SOLD Life Insurance as against BUYING Life Insurance.That is a fact.
The general adult population of Australia is underinsured, or have no insureance what soever, other then a “poultry” amount attached to an Industry or Retail Fund that their Employer provides. And most people grumble about having that.
The main source of NEW insurance is provided by Advisers. Hence the reason why Insurers, change, adapt enhance & improve their products & pricing to attract their fair share of the market in a cyclical manner over and over and over, via this channel.
To attract Advisers, a high remuneration reward has always been provided by the insurers. Remember the Insurers have control over pricing and remuneration. We are just the “puppets” Now the “Puppetmasters” don’t want to play the game anymore, because we have a new batch of IMBECILIC politicians wanting to “beat their chest” and show that they again are going to harass a tarnished industry full of Insurance Churners and people who have the greed of their own pocket as their vested best interest at heart.
If that is the case, which I doubt, don’t lay the blame on us & penalise us for the wrong doing of a few.
Australia is still a Democracy, and a Capitistic Society. Yet we have a present Communistic thinking Goverment, wanting to change ALL that.
I could “waffle” on for longer, but my main point is that as an Adviser, my Duty of care is to the client, and to always try and offer the best product, policy’s and pricing for my client’s needs. And to insure that I am constantly reviewing and doing just that.
I am yet to have a widow or a claimant harass me over a claim in reference to what they have been paid. And the peace and the relief of NO monetary pressure in their time of need, is just unquestionable.
That my friends is a fact.
I am proud to be a Risk Insurance Provider, and know that “MY” client’s are adequately protected and cared for. That is a WIN for my client.
And YES, I am paid handsomely for what I do, but that is a WIN for me.
WIN, WIN. Nothing else I can say.
what does not mean
“It’s interesting that the FSC have proposed the new anti-churn measures won’t apply to advisers who operate on a fee-for-service basis and who provide life insurance advice.”
do not RISk advisers provide Life insurance advice ?????