Life insurance churn and burn

Concerns about churning of life insurance policies have emerged, with increases in risk-writing by advisers coinciding with a rise in attrition rates for insurance companies across the industry.

Asteron general manager Jordan Hawke said there had been increased movement of business across the industry, with advisers taking advantage of the dip in share markets to review clients' insurance policies. Hawke said while advisers have every right to review clients' policies, churning is an unsustainable practice and one which would eventually see insurance premiums rise as insurance company profits are eroded.

AIA Australia chief Damien Green said his group is concerned about lapse rates in the independent financial adviser space. Green is wary about what he described as unsustainable business practices, with the "level of hypercompetitive pressure" in both the retail and wholesale insurance markets an issue "the industry ought to be very careful about".

Insurers are undoubtedly motivated to reduce lapse rates due to the time it takes to recover profit from the high costs of implementing a policy. But the competitive settings insurance companies have in place cannot be overlooked as part of the problem.

Hawke said offers such as improved takeover terms and fewer medical questions create incentives for advisers to shift business.

Dexx&r managing director Mark Kachor said it is difficult to quantify what role upfront commission payments and short responsibility periods play in encouraging churn.

Dexx&r research found attrition rates for policies placed predominantly through adviser channels were up to 15.21 per cent in June this year, from 12.48 per cent in June 2008.

But ING risk executive Gerard Kerr said advisers are not the primary drivers of lapse activity. Kerr said a survey of 300 clients conducted by ING earlier this year found 45 per cent of lapses were the result of affordability issues, with adviser recommendations being the cause of only 15 per cent of lapses.

As such, the industry's focus should be on continuing to enforce the value of the cover during the life of the policy and maintaining communication with clients.

Hawke said Asteron is trying to add value to insurance policies so that they are not simply regarded as a deferred benefit. Green said he wanted to work with both advisers and competitors to address the issue.

He said advisers "play a critically important role that ought to be respected", however, there were "certain aspects and features [of the adviser space] that probably require some focus and debate".

Where adviser behaviour is of concern, Hawke said Asteron worked with the advisers' licensee to resolve the issue.

According to Dexx&r, at June 2009 AIA had the highest attrition rate, at over 26 per cent, with Tower and Colonial ranking second and third at over 17 per cent.

Those with the lowest attrition rates were AMP (11.67), Aviva (12.82) and MLC (13.62), although both AMP and MLC were up compared to June 2008. ING's attrition rate held relatively steady over the year at over 14 per cent.

Attrition rates include all discontinued policies as a percentage of in-force premiums.