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ISI worms out of churning policy review

The Investment Savings & Insurance Association (ISI) review of anti-churning policy has resulted in, “the board coming to the realisation that it’s not something we are really capable of regulating.”

Tuesday, July 12th 2011, 7:37PM 17 Comments

by Benn Bathgate

The Replacement Policy Advice (RPA) is designed to stop advisers and life companies churning policies.

An ISI spokesman said that while the review promised by new chief executive Peter Neilson was still ongoing - and talks with members had taken place - "I think with the regulation of the industry the board are coming to the realisation that it's not something we are  really capable of regulating."

"It's a tricky one, we're still trying to work through what we can do," he said.

Neilson announced he had been asked to review the RPA at the Life Brokers Association conference in May.

"Due to a number of factors, policy churn within our industry is high. Many policies that are replaced are done so for reasons other than client interest," he said.

"ISI accepts that people have legitimate reasons to replace policies, but we want to ensure they do so for the right reasons, and make the decision armed with all the relevant facts. That was what  the ISI wanted to achieve with the new RPA process."

Brokers Good Returns have spoken to have expressed concerns about so-called ‘churn' in the wake of new adviser regulations that place the client interest at the fore, with some suggesting insurance providers concern with the issue is out of step with their regulatory requirements to ensure clients have the best policies.

Nielson alluded to this issue in his LBA speech, saying "the fact is that our industry is now subject to new rules of engagement when it comes to offering financial advice, and the underlying principle is that we must all place the interests of the client above all else."

Benn Bathgate is a business reporter for ASSET and Good Returns, email story ideas to benn@goodreturns.co.nz

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Comments from our readers

On 13 July 2011 at 8:03 am Bazza said:
The ISI members created churn by setting the rules of the game. They have had the power to change the rules at anytime, but could never agree on how. Disputes Schemes and Regulators will now determine when and if 'Churn' is happening and the client is not being put first. Can the ISI members now look at more positive activities that benefit all participants in the industry? Or is just going to be a body that reports industry figures?
On 13 July 2011 at 1:31 pm Iceman said:
Unbelievable! The powers that be will deal severely with an unqualified person who attempts to give some intelligent advice about a Whole of Life contract, but will smile benignly on the most blatant churning which the churner alleges to be "in the client's best interests".
So nothing has changed - churning will continue unabated; it is just that the churners will be more educated than before.
On 13 July 2011 at 2:49 pm Bronwyn said:
So the ISI is now admitting that their replacement policy advice initiative WAS all about stopping churn? At a meeting held last year with the ISI chairman and dealer group management to challenge the RPA process, the ISI categorically denied the RPA was about preventing churn and was actually to mitigate poor claim outcomes resulting from the increased incidence of non-disclosure when policies are replaced. Now that we know the ISI was indeed focussed on addressing churn (albeit with a flawed approach) perhaps their focus should turn inward and involve some analysis on what is causing churn in the first place. Or will they side step what would inevitably be a difficult but potentially transformational body of work by deeming it to be outside their terms of reference? At the end of the day, the ISI's efforts of the last 12 months indicate a waste of time and energy from some very intelligent people - time and energy that might have been better directed at improving consumer perception of industry.
On 13 July 2011 at 2:56 pm Liz Tentoo Wisdom said:
Hardly surprising that bank staff churning out low cost policies have not heard of RPA !
On 13 July 2011 at 3:26 pm Andy said:
The answer is simple; remove the reward for churning. That simply involves regulating the horrendously large up-front commissions and go for spread or as-earned commissions. Therefore it will make sense to keep the clients interests in perspective, review the client regularly (or lose it) and will promote a better business model and more sale-able asset in the future. It will also allow proper funding to recruit new advisers into the industry without having an environment of having to constantly sell new policies (or churn!) to stay in business.
It is a win-win situation for companies, individuals and clients. I believe it will also get rid of the cowboys and headstone writers!
On 13 July 2011 at 4:50 pm Amused said:
As Bronwyn rightly says a whole lot of intelligent people committing time and energy but not accomplishing much of anything. Advisers could be forgiven in recent days for questioning whether some of the associations that represent our industry are working hard or hardly working.
On 14 July 2011 at 7:54 am declan said:
We should all be working to build trust and help customers. The ISI is not perfect but works to help protect consumers from poor claim outcomes. Those advisers and agreggator groups bagging the ISI may be better spending their energy working to re-build trust. Replacing business is a complex issue - often there are clear customer benefits but the potential for poor claim outcomes. Lets try and work with bodies like the ISI - they are no longer a quasi sheriff role usurped by FMA and Reserve Bank)but do have an important role to help build trust and engage with stakeholders.
On 14 July 2011 at 11:55 am Terry said:
Andy is spot on with his comments and until this issue of excessively high up front commissions is addressed nothing will change. In my view the industry, primarily the provider companies, have shown over the years by increasing up front commissions that it is incapable of making changes therefore a Govt regulatory invironment seems the only option.
On 14 July 2011 at 3:58 pm Churn or Advice? said:
Surely when I review my client’s needs I should be offering them the option to change to a better policy or a cheaper policy that is the equivalent to their existing cover? If I don’t then I’m not acting in the client's best interest?
The poor claim outcomes resulting from the increased incidence of non-disclosure when policies are replaced surely must not lay solely at the feet of the adviser. The client completes the prop, the client signs the prop, the client signs a RBA so if the policy is clearly better in the eyes of the adviser (and they can justify why they recommended it) and then the client lies or misleads the new insurance company surely is not the advisers fault. They were doing the best by their client after all by offering them a better or cheaper policy.
Let’s see what happens when some of the bank advisers replace the client’s policy with an inferior product. What will the ISI do then?
On 18 July 2011 at 10:01 am Lindsay said:
Of all the "new policies" that are written - 85% are old ones churned
If anyone believes that these are not purely for commissions - then advise what planet you are on
All it is doing is loading up the costs
The risk to the client is too great, it should therefore be stopped
No-one but the broker gains. It would be rare for a prior policy to be that inferior or costly to justify the Churn
Replace a material damage policy any time you like
Replacing a health related policy is plain dumb and mostly dishonest
On 18 July 2011 at 11:14 am Ron Flood said:
Lindsay, there can be many reasons that old policies are replaced and commission in theses cases is irrelevant when the main reason is to enhance to cover the client has. The actual replacement statistic is most likely closer to 50% than 85%.
As far as driving up the costs, I again draw attention to the case of a 40 year next birthday male non smoker applying for $500,000 in 1990 with Royal & Sun Alliance. The premium was $785 per year

Fast forward to 2011 and that same cover now costs $485 with Asteron (formally Royal & Sun). This represents a 38% reduction in cost for client's. In 1990 there was a much lower rate of churn than today.

Taking this to the extreme, could the facts I have given actually show that higher churn has resulted in lower premiums?

Even I can dream up a stupid statement.

Finally with regard replacing health policies, it is plainly dumb for a perfectly healthy client to keep their cover with a company that steadily increases their premiums when they haven't claimed and have no health issues.

Honesty doesn't just lay at the feet of the advisor.Product providers who don't pass back enhancements to all policy holders have only themselves to blame if their client insures elsewhere.

On 18 July 2011 at 5:05 pm Simon said:
Lindsay, as far as churn goes with respect to straight "life" policies I tend to agree with your comments. Unless there is a sizeable difference in premium each month one would have to question the wisdom of an adviser jumping the client to another provider. However when it comes to income protection or health insurance (both of which statistically are most likely to be claimed on) I find the majority of the people that come to me for insurance are ill served by their current provider and have never been made aware of what else is available in the market! Simple things like paying out an income benefit to a client at the start of the month and having built in TPD represent a clear advantage to a policy holder if they are with an insurer who does not offer these benefits. As Ron rightly says health insurers that do not pass on product enhancements to their policy holders as other more comprehensive insurers enter the market only have themselves to blame. Inevitably our clients will all claim upon their health policy at some stage of their lives so provided they have not suffered any health issues subsequent to the earlier policy been issued I think we have a responsibility as advisers to see our clients with the very best provider available.
On 19 July 2011 at 9:45 am Lindsay said:
My comment for both Simon and Ron - I said "health RELATED policy" not Health policy. Life TPD IP in the main.
My figure 85% come from 2 prominent insurers - one of which is mentioned specifically in Ron's comment
1990 premiums were at the edge of the move to Term. Just past the unbundling era. Insurers were really against Term as their main thrust had always been WOL
The average life of a policy is 5 - 7 years and I put that down to Churning.
Health Insurance covers are right out of the mix as health insurance changes with the times and the premiums reflect the high claims costs and the changing private provisions - let alone the providers income stream.
Life and TPD really don't.
I challenge any Churner, even if the figure is as Ron says 50% - to show how these clients benefited from the Churn on any Life or TPD contract
On 20 July 2011 at 10:20 am Majella said:
"Churn" - could someone please clarify for me? does this refer to ALL replacement business, or specifically (as I understood it) to the event wherein the originating adviser moves an existing client to a different provider, and thus get paid again? while botrh are equally questionable, the latter is where the greatest risk (to the adviser) lies.
On 25 July 2011 at 5:12 pm AntiChurn said:
I support Lindsay's comments!

Figures I've seen from one main insurer suggests around 75% replacements.

I've had a family member affected by churn - their adviser churned them to get some more commission, but in the process left them without health cover while one of their kids needed a private treatment. They ended up being out of pocket, while the adviser was laughing all the way to the bank.

I find it completly perplexing that someone could think that churn could lead to lower premiums!
On 25 July 2011 at 9:53 pm Ron Flood said:
Anti churn I suggest you keep an open mind. I have recently replaced cover costing a client $7,200 per year with cover costing $5,100 per year. Same benefits (life & trauma), no exclusions, client fully disclosing their medical history and premium projections indicating they will not reach the $7,200 mark for at least 4 years.
The new cover has an A+ independant rating and some benefits were in fact better than the existing cover.

Clients are shopping around and if you don't do it for your clients they will move their business elsewhere.
On 28 July 2011 at 12:42 pm Ylife said:
Nice Ron : )
Commenting is closed

 

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