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Churn in Australian watchdog's sights

Advisers churning client policies will be under increasing scrutiny from Australia's Securities and investments Commission over the next year.

Friday, May 31st 2013, 3:45PM 17 Comments

ASIC's senior executive leader of its financial advisers team, Joanna Bird, said the regulator had seen widespread instances of churn across the sector.

It first raised it as an issue of potential concern last year. That's despite Australian advisers generally earning less upfront commission than their Kiwi colleagues, and more trail.

“We intend to do a project on life insurance churn and it will have three parts,” Bird told a Money Management Risk Issues panel discussion. “First part will be speaking to insurers and trying to get data on the extent of the problem and how we can work with insurers to try and deal with the problem. Another part of the project would be a more traditional approach - reviewing advice given and looking at the policies that were switched. We’re also doing work in relation to marketing and promotion of direct insurance. This is a complex problem and we’ll try and attack it from all angles."

But the Association of Financial Advisers said insurers would have to co-operate by sharing data on policy lapses.

Chief executive Brad Fox said: “The company that actually knows whether the policy is being replaced is the receiver of new business - not the loser; the loser just gets the cancellation,” Fox said. “That may be why some are not willing to share the data - because they’re the ones benefiting.”

He said the AFA would re-engage with the Financial Services Council to try to resolve the issue.

Australia's Financial Services Minister Bill Shorten had written to the Financial Services Council, telling it that the industry needed to self-regulate.


« TOWER shareholders in for another paymentGovt should regulate commissions: Naylor »

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Comments from our readers

On 31 May 2013 at 8:25 pm billy the broker said:
well well well.....!!
On 1 June 2013 at 7:59 am Paul said:
I hope they take a good hard look at the banks they are the ones with cheap premiums and substandard policies targeting and churning existing business on price and not explaining to customers how much cover they are losing. Bring this to NZ pronto
On 4 June 2013 at 10:14 am Lindsay said:
The way to keep this honest is to only pay commission on any increase premium to the industry. Then we will see how many are in the clients best interest.
On 4 June 2013 at 1:19 pm Mike King said:
Lindsay, that would STILL be all of my replacement business, but I'll be doing as much work - as I am obliged to if acting in best interests - for a fraction of the rate that new business brings in. In fact, much of the replacement business would therefore be for free if the client's cost is reduced (as it often is). I get a little tired of the 'holier than thou' commentators. Yes, I agree that blatant 'churn' is one thing, but doing the right thing can often mean an obligation to survey the market on benefits and price, and then to have a medical assessment made (by way of an application, or often two to different issuers) before any decision can possibly be made on whether to actually make the change, with the underwriting outcome being of the greatest weight. So I should do all this for free, right?
On 4 June 2013 at 1:47 pm Jeff said:
@Lindsay. So what happens when you review a potential clients needs which shows a decreased need for the levels of some cover(s) but better terms and lower price with a different Company (and for all the sceptics out there - on the basis of no loss of features or benefits to the client) - how under a commission model does an adviser get remunerated when the clients premiums decrease??????
On 4 June 2013 at 2:58 pm Lindsay said:
To Jeff and Mike - simple - charge the client a fee and if the client is as impressed with the work you are doing as it appears you are, the client will gladly pay it. !
On 4 June 2013 at 3:36 pm Jeff Goldsworthy said:
@Mike King - Agreed totally.
On 4 June 2013 at 3:43 pm Jeff Goldsworthy said:
To Lindsay - fair point on the fees but not all people are able to, or prepared to pay the fee for advice. There is a changing mindset required by both the public and the adviser on fees and this will evolve however in the interim, there must be a realistic compromise. I do grow a little tired of the churn button being pushed when we advisers are genuinely working for the clients best interests however no doubt, there will be those who will disagree with me.
On 4 June 2013 at 6:25 pm Lindsay said:
Following on from Jeff Goldsworthy. The fee thing is the problem, and if we are to be professional people, it needs looking at.
When I go to my Doctor, specialist, dentist accountant, lawyer, optometrist, vet, hairdresser, toe nail cutter - I expect to pay. When I go to my Financial adviser - I don't. Why ?. Surely it is not because we are less professional.
Even when I get a real estate drop out to sell my house I expect to pay.
On 4 June 2013 at 7:34 pm Ron Flood said:
After just reading Michael Naylors' comments regarding Government intervening and setting commissions and Jeff's comments above, I suggest the following may solve a lot of problems.

If you replace cover without an increase in new annual premium, you would get 20% level commission, as earned,for the duration of the contract.

If you replace business with an increase in annual premium, you would receive 20% level on the old premium amount and then get to choose upfront or level on the balance.

Michael's argument is that the high up front commissions is an incentive to replace business. Level commission on replacement my be the answer?

On 7 June 2013 at 6:49 pm Dr Mioke Naylor said:
RFA, Johnny and Mike - who asked in their responses to my comments in the last article - "what is the problem"? Well, this is the problem. If the NZ insurance industry does not get itself organised and drastically cut upfront commissions then the FMA will do it. I doubt that govt bureaucrats will offer as good a solution as the industry could offer.
My impression is that there needs to be upfront commission, trails and fees to pay for adviser costs. Clients are not yet at the stage of seeking out insurance advisers to ask for cover and then paying for the advice. But how would the FMA see it? Getting the public to see insurance advisers as "professionals" will be a long process. It took the accountants 40 years.
On 8 June 2013 at 9:19 am billy the broker said:
@Lindsay, can you briefly explain how you go about remunerating yourself via fees??
@Ron, why just 20% renewal?? Its all about the income stream after all, Asteron and Fidelity pay far higher why not those type of numbers? I feel retention of business will be much higher if a broker was picking up a higher renewal and would probably cherish that client more as opposed treating them like a churning option.Wrote one the other day, not an overly big monthly premium $120 per month, an internal conversion so there was some replacement. Now the renewal(in this case it would have been 5%) would have been a joke if I had taken full up front commission, instead I now get $40per month ongoing. Now that is a sensible option in my view. Maybe some are just a bit to blinkered to contemplate the tell me???
On 11 June 2013 at 10:49 am Ron Flood said:
Billy, once you increase the renewal payments it makes 'churning' an attractive option once again.
On 14 June 2013 at 1:25 pm bestwoman said:
Can anyone tell me definitively what "churn" means? It can't mean properly recommending a client replace an existing policy, which no longer stacks up, with a better one, because that is an adviser's obligation. I recently did a very in-depth comparison of product benefits between two of the bigger players and was totally dismayed at the how poorly the one provider's products compared:even where it had common benefit features they were almost always inferior and often significantly inferior. I could find NO objective reason to recommend it. Any adviser who comes across a client with a policy with such inferior benefits is duty bound to make his or her client aware of these weaknesses so that they can make an informed decision about continuing with or replacing that policy. Any adviser who does not offer their client this advice is failing to look after their client's best interests.

So, can we please define "churn": simply lumping the replacement of policies only to earn an adviser another round of up-front commission with proper replacement of policies which benefits the client is surely not the intention of an industry with the best interests of its clients at heart.
On 14 June 2013 at 9:02 pm billy the broker said: its a catch 22...don't think so..the churn/twist is only done for the large upfront that is on pay for the car, office, ego, overseas trips etc etc...depends what company is flavor of the month...the offenders are not the broker, but the beast who feeds them.....I've spoken about this before....this puppy I'm putting to bed yet again....maybe it should go full circle and be tied agents ala Provident Life days...bit archaic but may work..
On 15 June 2013 at 3:29 pm Barry Read said:
I'll have a crack at a definition; Churn is the where a business sets up its processes to systematically review clients policies (every two - four years) with the purpose of looking to replace the clients cover and using the reasons of better cover or cheaper premiums to justify the change (And in some cases this may be a good thing?).

It's the intent that is the difference between Churn and replacing cover because it is inadequate or no longer fits a client's needs or circumstances as a result of a review.

The problem is with the carriers though not the advisers, in my humble opinion.

The carriers improve the policies every year, play with the premiums, reward new sales more the retention and pay full commission on business, that replaces other companies existing covers (Yet don't pay it when advisers replace their own older covers with their own new ones??).

In the end though the industry loses because all it does is inflate the cost of insurance for our clients and policyholders.

The carriers set up the playing field, trained the players, and are now not happy about how the game is being played and is hoping the new video ref will pull them up, if they can figure out the difference of course.
On 17 June 2013 at 12:47 pm Concerned Stakeholder said:
Well said Barry - the key to any advice is "is it in the clients best interests". If it is and the adviser gets to earn more commission then it's still OK as long as it's not out of proportion to the advice provided and this is where it gets tricky.If it's the same adviser then there is a compelling argument to suggest a lower rate of upfront or dare I suggest a fee for service, after all you've already been paid once for the first policy. Replacement business in itself is not the issue it's the high commission payments. So who is going to lead the way? There are advisers out there who I know will dial back the upfront etc. as they see this as the "professional" thing to do. What do you do? We either need more rules of behave professionally the choice is yours.

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