The Australian Securities and Investment’s Commission (ASIC) has given its clearest indication yet that reform is coming to the life insurance industry and that it is happy to police this sector. However, some risk advisers are far from happy, accusing the regulator of double standards. In a speech earlier this week, ASIC commissioner Peter Kell said he supported industry initiatives to deal with churning, the excessive switching of life insurance policies by financial advisers and brokers.
The Financial Services Council (FSC)’s attempt to self-regulate appears to have stalled after its decision to abandon an application to the Australian Competition and Consumer Commission (ACCC). In February FSC chief executive John Brogden announced his organisation had abandoned its application to the ACCC to obtain class order relief from sections of the Trade Practice Act.
This was a necessary step for the FSC to implement its proposed framework including anti-churn measures.
“If you don’t think financial advice on life insurance is a problem area for ASIC and for industry, please think again,” said Kell. “A number of our major surveillances resulting in licensing conditions, enforceable undertakings and, most seriously, licence revocations, involved evidence of significant amounts of inappropriate advice on life insurance.”
The life insurance stall
Kell said the regulator had identified four types of problematic advice on insurance policies, including two that raise red flags for churning: replacing a client’s life policy regularly with little or no demonstration of why the new policies are an improvement on the old, and replacing client life policies with more expensive life policies with little or no additional coverage.
“Why does this behaviour occur?” asked Kell. “Commission-based incentives in remuneration combined with inadequate compliance do not align the interests of the adviser with the client.”
While ASIC chairman Greg Medcraft has publicly stated its support for the industry to take a lead on addressing collective market problems, where possible, through self-regulatory or co-regulatory frameworks, Kell acknowledged that more work was needed.
A common industry position
“It has been disappointing, then, to see these developments stall in the life insurance area,” he said. “It’s a demonstration of the difficulties in achieving a common industry position, even if it should ultimately benefit consumers.
“People have observed that such a framework would, from a legal perspective, be anti-competitive. Yes, that’s the point! There are problems or market failures in any industry that can only be addressed by collective responses. Australia’s competition law allows for the formal approval of such arrangements if they are in the public interest, and there are many examples right across the economy. In financial services it’s why we have successful examples of cross-industry arrangements, such as the banking code, general insurance code, e-payments code, etcetera.”
Kell added that it was implicit from the beginning that the decision to carve out life insurance from the FoFA-conflicted remuneration provisions envisaged a self-regulatory initiative to address the issue of churning and clawback.
“Let me be clear – ASIC is not the owner, designer or driver of any such initiative. But, given our experience, we would welcome an effective self-regulatory framework,” he said.
“In the absence of an industry-led initiative, and given our experience with poor advice on life insurance, ASIC considers life insurance sales to be a risk area for non-compliance where high levels of switching are apparent. In particular we have a concern to ensure that life insurance switching is compliant with the best interests duty in the FoFA era. Life insurance switching will therefore be an area of focus for us, especially if potentially poor practices are not addressed through self-regulatory mechanisms.”
Lack of evidence
However, Synchron director Don Trapnell believes it is impossible to take self-regulation further without accurate figures from life companies on replacement business. “We are obviously very concerned that ASIC believes churning is a problem and also a little bit baffled,” he said. “One of the reasons Synchron was so opposed to the introduction of a Financial Services Council churning policy was that we believed there was no evidence to support that a culture of systemic churning exists among advisers.”
In an industry driven by statistics, compiling evidence of churning should be a relatively simple task, Trapnell said, and yet to his knowledge no life company has yet run the numbers.
“There is a question on every life insurance application that asks ‘Does this application replace an existing policy? If so, how long has that policy been in place?’ It would be easy to conduct analysis of this question and present this as evidence to decide whether or not we actually have a problem, but to date, to the best of our knowledge, no one is tracking this question.”
Trapnell said that despite Synchron consistently calling for the statistical evidence, the FSC and the life insurance industry did not provide it.
“In September last year I attended an industry forum at which FSC chief executive John Brogden apologised to advisers for calling them churners and acknowledged there was no evidence to support that a culture of churning exists,” he said. “If the FSC or the industry has since provided the evidence to ASIC, advisers need to see it.”
Surely the Compliance reviews would pick up so-called churning. I know for a fact that if I move a product for little or no benefit to the client, I put my License in danger, as my Dealer Group will come down on me like a ton of bricks….as they should
The unspoken truth is that, the life companies don’t report on it because a large number jobs within them (new business, BDMs, underwriting, admin and additional management in those areas to oversee it all etc. etc.) rely on churning to exist. Its an industry wide issue and therefore there is no incentive for them to publicise the stats, if indeed, they are kept at all but in the same breath insurance companies have the hide to complain about their lack of sustainability…go figure!!
If you look at APRA stats, growth in individual risk premium (i.e. exclusive of group business) income has averaged around 12 p.a. but they note that indexation and aged related premium rate increases, account for the bulk of it [8 to 10% p.a.] which means that real growth [i.e. after inflation] is essentially flat.
So if there is no (or very little) real growth, how do all those providing insurance advice survive? They shift clients to another insurer as soon as the responsibility period is finished because that’s what the insurers incentivise them to do.
So its a bit hard to solely blame the advisers given that remuneration policy is the key driver of behaviour but me feels the days of easy money might be looking a bit numbered!!
Slowly but surely the perks are getting rolled back while it mean there will be casualties, in the end the consumer will win which will be good for all.
Given the absence of hard data in relation to life risk churning, I applaud ASIC’s recent surveillance and look forward to reading about what action was taken against the miscreants.
However, until then, and even with this information, there is no evidence that churning is a wide-spread problem let alone a problem requiring government intervention.
Mr Kell says that “comission-based incentives in remuneration combined with inadequate compliance do not align the interests of the adviser with the client”.
I would extend that and say that all of the methods of remuneration combined with inadequate compliance do not align the interests of the adviser with the client.
I would also say that comission-based incentives in remuneration combined with adequate compliance does align the interests of the adviser with the client.
Mr Kell says that “financial advice on life insurance is a problem area”. I’d be interested to know how Mr Kell came to that conclusion and, if that is the case, why more life risk advisers haven’t been investigated and disciplined. Furthermore, I would like to know why Mr Kell doesn’t believe that FOFA changes are adequate to deal with inappropriate advice, particularly under the “best interests” provisions.
Mr Kell concedes that any initiatives in relation to risk insurance would be anti-competitive. Given the lack of data, I would be interested to know why Mr Kell thinks the public interest would be best served by reducing competition.
In particular, even if churning was as big an issue as Mr Kell believes it is, why he thinks that the consequent increase in premiums would be in the public interest or whether other measures could be taken that did not reduce competition: such as identifying and banning churners. The ACCC’s decision to not restrict general insurance in response to the Government’s attempts to standardise the definitions of ‘flood’ in 2008 is instructive as to their attitude to restricting competition. As there is no data on churning and little on the impact of competition on premium costs it is hard to imagine that they would be able to make an informed decision.
Mr Kell considers “insurance sales to be a risk area for non-compliance where high levels of switching are apparent”. I agree but am not convinced that churning is systemic or widespread. I am also uncertain as to why ASIC believes that the FOFA provisions are not adequate to deal with “non-compliance”. Surely if “high levels of switching are apparent” it should be an easy matter to identify the churners. If the adviser is then unable to justify that switch surely it is then a straight forward matter for ASIC. I am confident that such action would have the support of all ethical, competent risk advisers.
As an anecdote, the worst bit of risk advice I have seen recently involved the failure of an adviser to review and upgrade a client’s trauma cover resulting in very poor outcome for a client. Had this client had a more recent product the outcome would have been very different.
Don is spot on. ASIC, FSC please adhere to the know your product and know your client rules before making sweeping industry regulatory advice. Surely the insurance companies know the level of churn. They already stop the main culprits. ASIC please provide details also.
Thus let us all know exactly how many policies are churned = know your product.
And also please have details of who the churners are = know your client.
Until you have this information I believe it should be illegal to provide advice to the industry.