Principal of Dunsford Financial Planning, Mark Dunsford, says life insurance companies will need to put consumers ahead of profits if they ever want to get serious about addressing lapse rates and churning.
I have noticed that Bill Shorten and The Financial Services Council (FSC), have put their heads together yet again in an attempt to make professional life insurance planners responsible for an issue originally created by life insurance company executives.
To set the scene, let’s understand that the FSC is made up of life insurance executives. The FSC has no representation from the Association of Financial Advisers, Financial Planning Association or senior financial advisers, all of whom offer advice and have been specialising in this field for decades before the FSC was formed.
Headed by John Brogden, the FSC continues to push the life insurance company line that churning is a major issue. From my 31 years’ experience, life insurance companies over that time have experienced an average lapse rate between 9 per cent and 14 per cent, which still continues today. Note: this has not increased.
Be clear about the cartel
The cartel of insurance executives that sits on the FSC has one clear agenda: to make life insurance products more profitable for their shareholders (although it attempts to dress this argument in many different ways). This in no way benefits the consumer.
In the early 1980s, I worked as a first-option agent with Legal and General. That company’s lapse rate Australia-wide was around 12 per cent. This was in the days of the tied-agency system, in which advisers wrote all their business with one company. My own individual lapse rate was 7 per cent. The key point here is that even with placing all of my business with one company, there were “business offs” for various reasons.
Life companies can’t accurately monitor these changes. For example, they can’t track the difference between clients retiring, clients who wish to cease cover, clients who want to reduce cover, clients who wish to place business elsewhere with another adviser or clients who had made a claim. A lot of lapsed business is due to these reasons.
The process of experience
The term churning can be used if a client has been moved from one insurance provider to another, without any improvement to their policy or levels of insurance. In my experience, 99 per cent of advisers and their practices don’t work this way.
As a licenced financial planner who works exclusively in the life insurance area, the normal review of a client’s needs involves spending an hour to complete a fact finder, followed by an analysis of the client’s total needs. This would include spouse and children in a normal domestic situation. We would review the current levels of cover they have, including superannuation. We would construct a statement of advice that would leave the client in the same net position from a financial point of view should they suffer a major health event. I would protect this typically with four types of insurance: life cover, total and permanent disability, trauma and income protection.
Once these levels of cover have been diagnosed, this is then run through a sophisticated risk research program that indicates, in order based on price and product, which insurer offers the best solution. From there the appropriate insurer would be recommended.
The big end of town
As a life insurance broker, today’s current market of increasing premiums is a clear demonstration of the advantage of a free market. Some premiums have increased by up to 30 per cent and many insurers are now non-competitive. Under the FSC’s agenda, these insurers would maintain business to the detriment of clients as they would be locked in to uncompetitive pricing.
Life insurance companies have brought about most of the increase in lapses over the years and knowingly use unscrupulous advisers to move large volumes of business from one insurer to another. The life companies know who these serial churners are and they should be black-balled from the industry, together with placing a cross against the life insurance company which accepts that business.
How can you get a balanced approach to this discussion when it is so heavily weighted by the big end of town that is only looking for higher profits from the products they manufacture?
Spot on Mark Dunsford, FSC and Shorten dressing up issues of churning to suit their own agendas. Dont forget how anti adviser and pro Industry Funds Shorten is so anyway he can stick the knife into advisers he will. Hope he looses his seat in parliament come September.