'Churning' should be addressed at the underwriting stage
Underwriters should exercise the whip hand when it comes to dealing with churning in life insurance.
That is the analysis of Synchron, which has claimed that in order to address the issue of 'churning' the responsibility should fall on the underwriter to determine whether to continue with an insurance policy.
"When an existing policy is to be replaced, and the replacement is within a specified time - say five years - we propose it should fall to the underwriter to request a copy of the statement of advice (SOA), determine whether the advice is appropriate, and if not, decline the case on the basis of a moral hazard," said Synchron director Don Trapnell.
"It would ensure that the consumer is not impacted in any way and would actively protect the interests of the consumer."
Trapnell said Synchron had put forward the proposal to a number of life insurers but some of them had argued that underwriters could not be expected to assess SOAs.
He said this was "a nonsense" and that the insurers were not sold by Synchron's proposal because it did not help them with the "unrealistic" lapse rate assumptions they made in their premium rating structures.
Trapnell also criticised the Financial Services Council's (FSC's) policy to address churn, saying that it put blanket restrictions on all financial advisers, rather than targeting those advisers who were not working in the best interest of their clients.
"In a market where products are constantly being reviewed, benefits enhanced and premiums revised, it could be argued that it would be negligent for an adviser not to review their clients' existing cover and recommend replacement (business) within five years, where appropriate," he said.
"In our opinion, despite its protestations of innocence, the FSC is jumping on the churning band wagon in order to grasp the opportunity to redirect the industry's remuneration model to suit their own members' ends."
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