High rates of life insurance policy lapses and “churning” are largely the fault of product manufacturers, not financial planners, says the head of a large non-aligned dealer group.
“The definition of a lapse is still unclear. And the more we’ve looked at this over the last six to 12 months, the more you can see that the issue is driven by the product manufacturers themselves, not the advisers,” says John de Zwart, managing director, Centrepoint Alliance.
His comments come just a week after the federal government issued its response to the Life Insurance Framework via a statement from Assistant Treasurer Kelly O’Dwyer.
The Trowbridge effort
De Zwart was part of the industry’s first recent attempt to respond to the regulator’s concerns about high rates of poor life insurance advice, the Life Insurance and Advice Working Group, chaired by John Trowbridge.
He says a lack of certainty around life insurance prices is, in many cases, the reason some policyholders and their advisers switch to different product providers within the first few years of a policy being put in force.
This is something he says was quite clearly evident in a number of submissions the Trowbridge inquiry received.
In one case, a client’s life insurance premium increased by 20 per cent, prompting them to approach a broker for a new quote.
“They came back with a 30 per cent reduction on his new life insurance premiums. Both were with the same product manufacturer, and the same policy type.
The pricing problem
“The issue is that product manufacturers are pricing new business at one rate, and then repricing it in two to three years,” de Zwart says.
He concedes there is “a certain logic to it – if a life insurer has a tranche of clients it takes this year, then over the next two to five years, the better lives [insured] will seep out to cheaper products.
“The poor quality that lies in that book will remain there, so in five years’ time, the claims experience on that book will be different to a book that has only been in place for one year,” de Zwart says.
To help address this problem, on Tuesday this week, Asteron announced it would hold off on premium increases inside the two-year responsibility period.
De Zwart believes it is likely other insurers will follow this lead.
“I think it’s heading in the right direction. We are moving towards more of a professional, less replacement type of business across the industry.
“I think there’s been a bit of an awakening among the product manufacturers that the model needs to change … I think you’re going to see simpler products, or simpler underwriting.”
However, he also suggests the viability of risk-only advisers will decline over time.
“More life insurance is going to be written in hybrid businesses. Whether you will have pure life insurance specialists any more … I suspect it’s going to be a combination of investments, mortgage broking and insurance done in-house – which is a more robust business model.”