Policy proposals to combat insurance churn

Different policy proposals are being suggested by the insurance industry to combat churn, but they have not been universally accepted. Who should be responsible for efforts to reduce churn is also up in the air.

The most developed proposals are those aired by the Financial Services Council (FSC), which suggested banning takeover terms, and establishing a responsibility period for risk advisers.

Any insurance policy that gets churned within one year should have its commissions entirely refunded to the client, while any policy churned within two years should have its commissions partly refunded, the FSC said.

Asteron canvassed industry opinion on the proposal with a survey sent to 5000 financial advisers.

More than half of the 300 respondents said removing takeover terms would not reduce insurance churn, but a two-year responsibility period would.

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Financial advisers in the survey also suggested reducing the amount of upfront commissions to fight the problem.

However, speaking from a personal point of view, RI Advice national manager for risk insurance Col Fullagar said the two-year responsibility period proposal probably wouldn’t work.

A more effective solution would be for life insurance companies to put more trust in remuneration systems that reward the right activities, he said.

Fullagar suggested that if lapse rates exceeded a certain level, only level commissions should be made available to the financial adviser responsible, with the money saved being paid as a higher rate of remuneration to those advisers doing the right thing and avoiding churn.

In other words, the life insurance companies already control the levers that can combat churn effectively, and they should be using them rather than having policy controls imposed from above.

While the government has now announced it will scrap, after concerted opposition, a proposed ban on individual risk insurance commissions in superannuation, the proposed government ban on group risk commissions still remains.

The government will also work to introduce uniform claw-back provisions in life insurance.

Fullagar noted that if the current system had been property addressed, the need for government pressure to move risk to fees wouldn’t be necessary.

The FSC has thus far declined to provide any response to industry scrutiny of their proposals other than to say that they are working with insurance and financial advice members on the details of their churn policy.

Patron Financial Advice general manager Robert McCann rejected the idea of binding standards and suggested financial advisers and life companies should work more closely to build a sustainable industry.

“The life insurance industry is perfectly capable of weeding out any bad apples on its own merit,” he said.

Nick Fife, director of risk practice Fife Financial Services, agrees that both financial advisers and life insurance companies had policy tools at their disposal to combat churn.

Fife told Money Management that he is aware of some insurance companies that have refused to continue doing business with financial advisers because of churning on their behalf.

More than 50 per cent of the Fife FS client book is written on level policies, removing another temptation for financial planners, Fife says.

Many financial planners may be scared away from selling a level policy instead of a stepped one, not only because of churn but also because of the difficulty of selling a higher premium to a client.

However, they should never be afraid of telling a client what the true cost of an insurance policy is, Fife says.