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Persistency – The hidden danger

In the spirit of keeping advisers informed and aware of the issues facing their industry, Club Life will publish a series of articles highlighting industry issues and their likely affect on advisers and their clients. The issues raised are those that Club Life executives and managers have collectively experienced throughout their extensive time in the New Zealand Industry and are real issues facing many of today’s companies. With the knowledge and experience contained within the team and with no legacy issues, Club Life is well positioned to manage the majority of these industry issues. Welcome to the first of our articles.

Friday, January 31st 2003, 2:14PM

by Naomi Ballantyne

Recipe for disaster
  • Take one assumption that policies written will stay on the books for an historical average length of time. Use this assumption to project the present day value of the company (profit).
  • Mix that with a large quantity of upfront commission that is only recoverable if policies do stay on the books for the assumed time frame.
  • Combine that with a market where risk-only policies are now the norm and underlying risk price changes are totally transparent to the client.
  • Mix in a moderate amount of advisers who sell largely on price – creating a price focus for clients.
  • Blend it with an environment of escalating claims costs that are driving prices continuously upwards.
  • Bake long enough for customers to reach price saturation resulting in lapses or re-written business.
  • Voila we have the perfect recipe for life assurance disaster.

In this industry a very small but sustained deterioration in persistency experience for a company, forces a change in future assumptions that can result in substantial write-downs of present day value or profit. The frightening truth is that persistency experience for the whole industry actually has been steadily deteriorating. Life companies are in turmoil, how should they react to this new paradigm?

Should they reduce upfront commissions to lessen the financial losses on non-persistent business? Will the potential corresponding reduction in new business production have a greater or lesser impact on present day profits?

Should they more aggressively communicate directly with customers with a view to addressing twisting by advisers? Will this lead to increased costs and possibly alienate advisers causing a reduction in new business volumes?

Should they move away from ‘Risk-Only’ products and revert to ‘Whole of Life’ type products to smooth price fluctuations for clients? Will this lead to similar ‘cash-value’ problems as the first time round? Will clients buy such products in today’s investment climate? Are high upfront commissions sustainable when applied to cash-value type products?

Should they increase passive income to better reward advisers for servicing their clients? Where will this extra commission expense be funded from? Will upfront commissions have to reduce to counter it? How much is enough to make a difference to persistency?

Should they offer better loyalty rewards to customers to entice them to stay? How much will this cost and what impact is it likely to have?

It is clear that for each and every strategy there is either a corresponding increase in expenses or a potential loss of new business production.

The dilemma is picking the right strategies so that the end gain exceeds the potential losses.

If all companies adopted the same strategy at the same time the potential to lose new business would be minimised, however this is extremely unlikely to occur and would probably also attract the attention of the Commerce Commission.

This problem is not unique to New Zealand and has been addressed by other markets in different ways. The reality here is that companies must do something. To bury heads in the sand is a death sentence for those companies facing this issue.

No-one wins in an environment where previously sound, competitive companies are run out of the business by rampant lapse and cancellation rates.

Advisers who do not see this problem as theirs most definitely will when their provider choices dwindle. Alternatively they stand to suffer the consequences when the rules of the game are changed unilaterally by companies trying desperately to counter a deteriorating persistency rate.

The only win-win outcome for companies and advisers will come from frank and open discussion between these parties about the causes of the problem and the potential solutions. This is an issue the whole industry needs to face up to.

Club Life has a policy of adviser involvement in its key decision making processes and has established a track-record of regularly soliciting feedback from all of its advisers regarding key issues and opportunities. Persistency is a key driver of value for Club Life and as such has been taken into account in all strategic decisions.

Naomi Ballantyne is the chief executive of Club Life.


Naomi Ballantyne ONZM, is the Managing Director at Partners Life.

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