I want to talk about life insurance churn. This is the practice of selling existing clients new life insurance policies that are not needed, or not in the best interests of the client, so an adviser can get a new commission or other incentives.
It is a blight on the insurance industry and one that needs to be rightly addressed.
However, what is concerning me more is the misreporting of this unethical behaviour, following a recent Financial Markets Authority (FMA) report on the issue.
While I do not support this practice, let’s get some facts straight about why this practice occurs, and who is really responsible.
So let’s get blunt about it. Some facts from the report:
- Most of the churning was done by Registered Financial Advisers (RFAs) – 86% of RFAs, and only 36% of Authorised Financial Advisers (AFAs) churned life policies.
- The market growth for life insurance was 2%, yet insurers noted an increase of 11% to 13% of new policies.
- There are approximately 34,000 advisers, of which there are less than 2,000 AFAs.
- The majority of churn was written by about 200 advisers (with earnings over $200,000).
- Around half of all advisers earned less than the minimum wage in commissions from life policies in 2014.
- When overseas trips were offered as incentives, life insurance policies were more likely to be churned.
- Commissions and commission clawback options are set by life insurance providers.
So what do these facts tell us?
Authorised Financial Advisers are bound by a code of ethics and controls set by the FMA.
Registered Financial Advisers are not.
It’s a simple equation, RFAs can do what they like without any checks on them, and the FMA has little power over their business practices.
Most RFAs churn business at will, and I would suggest that most of the high-earning churn advisers are RFAs primarily interested in their back pocket, and not about their clients.
My assertion here is that, in most cases, life policies do not need to be rewritten every three years after the commission clawback period has ended.
A readjustment of existing cover may be all that is needed (however, there has been a case for rewriting cover completely where a provider’s premiums have become completely out of line with the general market, but not total books being rewritten).
Insurance providers also drive habit by way of the clawback period ending after three years, and offering high commissions, as well as offshore conferences, as incentives.
The providers are as much to blame as the advisers are. Sadly however, the FMA will probably look only at the advisers being the problem.
Yet the problem is two-fold, with incentives being set by the provider, and then poorly regulated advisers (usually RFAs) are taking full advantage of this problem. This is all at the expense of unsuspecting clients who may be losing critical benefits on the way through.
So what are the solutions?
Firstly, RFAs need to be regulated the same as AFAs, as the statistics clearly show that AFAs are less likely to churn life policies due to tighter controls.
Secondly, commissions and clawback options need to be reviewed.
Some commission payments are excessive in my mind. Yes writing a life policy and processing it through a provider for an adviser is an expensive and time-consuming process. However, commissions need to come down, but not to the extent some are advocating (writing a $1,200 premium life policy can actually cost an adviser to process on a time-calculated basis).
Clawback provisions need to be extended to discourage advisers from churning policies. Offshore conferences in my mind are only small issue as they are a byproduct of the two real issues – commission and clawbacks.
It is not the adviser who is the problem. Currently, poor regulations and provider incentives are driving poor behaviour by advisers, and consequently creating this problem.
Therefore it is up to both the regulators and providers to address these two problems if churn is to be reduced and ultimately stopped altogether.