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.”
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