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MJW report scores a D

[OPINION] Despite all the money spent on the MJW report and all the discussion the authors had with people in the life insurance industry its conclusions are flawed. Unfortunately though some may take the findings seriously.

Monday, November 23rd 2015, 6:44AM 12 Comments

by Philip Macalister

Good on the life insurance company members for having a crack at trying to solve the issue of churn in the industry. Pity about the outcome though - the controversial and already discredited Review of Retail Life Insurance report written by Melville Jessep Weaver.

The report is a fail when it comes to achieving the goal. And the Financial Services Council, was the wrong body to try and solve the issue. 

It is abundantly clear the authors rushed the report and don’t fully understand what they are writing about.

There is only one graph in the report that is repeated many times. This appears to be one of the key premises its conclusions are based on.

Basically it compares lapse rates around the three distribution channels namely; IFAs, bancassurance and direct.

Because there is an IFA spike around the three-year mark, a point in time after the commission claw-back period ends, there is churn.

The key “problem” the report tries to address is that the current remuneration model for advisers leads to poor outcomes for customers.

There is not a single skerrit of evidence in the 70-plus pages to prove that customers of advisers are getting a poor outcome.

And to be very clear MJW use the term adviser to represent IFAs and the term consultants to cover IFAs, direct sales and bancassurance.

Many would contend customers of the latter two groups get poor outcomes as the sales people only have one product to sell.

Other key premises the report makes that are incorrect: By inherence the life insurance industry isn’t a well-functioning, competitive market place. Sorry MJW it is intensely competitive and life companies are constantly developing new product with consumers’ needs at the centre. Here some recent examples; Sovereign’s Progressive Health, there has been a wealth of new product in medical, particularly since nib came into the market. Asteron and its heart attack definition. Partners Life has been a product leader since it started. The list goes on and on.

MJW is correct that commissions can cause conflicts of interests. There is little doubt about that. The question is how to manage them. Slashing commissions and driving advisers out of business, especially when there is an under-insurance problem in New Zealand, isn’t the answer.

MJW contends if churn was brought under control then consumers could expect to see a 10-15% reduction in premiums “in the future”.

Again there is little evidence to support this. Premium pricing is a complicated business with lots of inputs. Considering its make up and that life companies are still adjusting to taxation changes, I for one would not bet on seeing a 10-15% reduction in premiums.

To illustrate the report is poor and rushed it has inaccuracies about the make up of the industry, for instance saying the IFA came out of life insuance company background; that the PAA and IFA have disciplinary processes and that the FMA has a code of conduct for advisers.

Yes churn is a legitimate issue. How much of this churn is for the advisers’ financial interest versus the clients’ interests? No one knows.  Answer that question first then deal with the small number of churners. Leave the rest of the industry alone to get on and do what they do best – protect New Zealanders.


What the MJW report recommended. Plus Minister's response

Partners, OnePath and Asteron have their say

Blog: Philip Macalister scores the report a D

What FSC members wanted

Advisers say not fair

 DOWNLOAD Full Report here

Tags: Churn MJW Report

« The time is up for the FSCMJW missed their chance »

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Comments from our readers

On 23 November 2015 at 8:46 am kmacnz said:
I suppose then that both MJW and John Trowbridge (and the Australian FSC) have come to the wrong conclusion?

On 23 November 2015 at 9:39 am dcwhyte said:
Even a cursory glance will confirm that Trowbridge came to the conclusions that ASIC (not FSC Australia) required. MJW has replicated Trowbridge's flawed conclusions based on insignificant statistical research and no empirical evidence whatsoever, as pointed out in Philip's article.
On 23 November 2015 at 10:49 am w k said:
was plagiarism involved? just wondering.
On 23 November 2015 at 11:09 am Backstage said:
I agree David and it feels like the FSC are running around with a solution looking for a problem... why hasn't someone sat down and clearly defined what the problem is and if there is 1.

It seems to me most insurers who have greater than an A- Credit Rating are profitable and stable.. perhaps start with what is churn... real churn and then perhaps try and quantify the actual percentage and how many advisers are "actively" engaged in real churn... and as we know the new insurer does not turn away "churned" business despite the focus of the wombats from MJW focussing on the adviser.
On 23 November 2015 at 11:41 am Dirty Harry said:
@kmacnz YES! Yes they have. I don't understand how that can be difficult to comprehend.
Unless, that is, one is inclined to agree with, participate in, and prefer some anti-adviser agenda. Then it's easy to understand.
On 23 November 2015 at 11:50 am Majella said:
Real "churn" is easy to spot.

I recently was dealing with a diary farmer prospect who had some older Tower policies. These had not been reviewed in 4 years and circumstances had changed significantly.

Once my "authority for information" was notified to the clients, the brokerage holding the existing policies got in touch and said, basically, "we know these policies are getting a little outdated and we will review them for you shortly".

What arrived by way of "review" was a brief letter and an illustration from a different insurer, with the exact sums insured as they had under their Tower/Fidelity plan - I mean, to the DOLLAR (such as "Life $424,181").

The Company recommended was the exact one I was also recommending, but this clown (in Wellington, quite distant from their clients) hadn't even bothered to include the RD1 discount of 20%.

Blatant transfer of business from one carrier to another with NO advice or REVIEW of needs, or updated disclosure, or a comparison between the old & new policies.

Funnily enough, I later heard that Fidelity has now cancelled that brokerage's agency - so, this was possibly not the first time they'd played this particular game.

That certainly is REAL churn should be quashed. The insurer, if an app had arrived, with such weird numbers quoted, surely would have seen a red flag. What level of responsibility should the Insurers bear in terms of assessing this sort of behaviour, and possibly rejecting such applications?
On 23 November 2015 at 12:27 pm Dirty Harry said:
Ahem, Majella: Your Partners agency is showing. The RD1 thing is well known...

This is not "churn". The client benefits from significant product updates.

It's poor advice, yes. Failing to meet pretty much all of the code standards at once, indeed.

I also understand the RD1 discount is a value add the adviser can offer, and pay for, through significant commission discounts. Good on you for using it and offering it. And it sure makes the incumbent look pretty silly expecting full pay for no work. I trust you have explained everything, including the commission pre/post 20% and secured a happy new customer and a couple of referrals?

"Real churn" is almost impossible to spot on a case-by-case basis. Especially when the incumbent is pre-disposed to call it churn, and the new adviser will call it genuine replacement.

Where one insurer or brokerage transfers an entire book from one insurer to another, at 200% of the entire book's premiums? That is totally obvious CHURN. And there have been far too few consequences for it.

Similarly, "Blatant transfer of business from one carrier to another with NO advice or REVIEW of needs, or updated disclosure, or a comparison between the old & new policies" happens ALL. THE. TIME. in branch banking. Just remember which Banks and Insurers have not quit the FSC.
On 23 November 2015 at 1:01 pm RiskAdviser said:
@Majella I'd be careful about using 'weird' numbers for judging replacement business. My cover levels for clients never come out with nice round numbers, ever! When you're accounting for tax and other situational considerations the clients number are the clients numbers and they are often weird.

In the case cited, clearly an attempt at conserving the business by the existing adviser, knowing they haven't done a very good job at servicing, which is more the issue resulting in you talking to them.

Given they recommended moving to the same provider you had recommended, is it churn?

Potentially if they didn't restate the client position and cover levels were substantially different, on the basis things were the same, because they haven't asked, they are justified in providing a comparison in this manner. Many professional advisers take this approach in their standard review process, here's your cover and here's what the rest of the market is doing, we might need to consider company xyz.

Under the RFA requirements the only requirement is a disclosure document, the rest is strongly recommended but optional. Not offering the 20% discount and the subsequent reduction in commission, may not be part of that brokerage's offering or the agent may not have been authorised to offer it, many brokerages don't offer or play the discount options.

Also too, remember if they were happy and had been looked after you wouldn't have got in the door.
On 23 November 2015 at 2:58 pm innocent bystander said:
MJW maybe forgetting who their market is, the author may have alienated their market as advisers to insurance companies and wouldnt that be poetic justice. I am sure a business such as MJW understand completely the concept of profit as I am sure they have junior staff being charged out at senior staff rates and at a much higher rate than the actual cost and if like any other professional practice will add in things like "disbursements" that may or may not exist, if there is an industry that could pass back cost to NZ small business' it is so called professional accountancy and legal practices humping us like they do annually. The accountancy industry could be well served by capping their margins and fees to small business in NZ, What about that Mr Chamberlain ?

Secondly, what this self proclaimed expert in this matter ( Chamberlain ) forgets is there are 2000 advisers running their own business ,large or small they are contributing to their community somehow every day, being it renting an office, filling the car up, the local printer, phone shop, IT Business, cafe, car park or any such other expense they incur, when the insurance companies get their hands on the reduced cost of distribution, mr chamberlain shouldn't be fooled into thinking the consumer will get much of that, the ozzie based shareholders will take that with open arms and spend it on a new beach house on the sunshine coast and there will be less advisers contributing to their local economy.

Who will be the first insurer to risk implementing the recommendations, good luck to them !!! Unless they are regulated to cap commissions, no one in this market will jump first, and how exactly do you regulate any business to the point of controlling pricing, margins , distribution cost and the like. I reckon I could buy shoes, food and clothing cheaper if they regulated the retailers and capped their margins as well. That isn't going to happen so leave us alone Mr Chamberlain.

Did they actually speak to anyone at the front line ? mr chamberlain didn't ring me to see how many clients I had churned in the last 12 months, if he had, I would have been able to show him the figures he is reporting to be miles away and the recommendation that were made to replace any business written were valid, required, researched, diligently managed and in accordance with code std One.

Mr Chamberlain would have us advisers arranging insurance for mums, dads and business owners and then have the insurance companies sit back and not enhance the product proposition for the client knowing the client was stuck there, out the door would go innovation, product development and enhancements and most likely pass backs, how on earth could that be in the clients interest.There should be open and honest intent form the insurers to be 100% competitive all all life stages of any policy, be it 6 months or 6 years old.

All the claimants that I have had over the years have cared less how much I am paid, they certainly didn't give the money back or grizzle at me for being paid too much, they were delighted for the advice, how the processed was managed and the result when they needed it, if the insurance companies are remaining profitable by paying the levels of commission they are and the other participants such as the clients are happy enough to meet the premium commitment and the adviser can make a living along the way, then leave us alone Mr Chamberlain.

Yes, lets look at "churn" or replacement business and the rules around that, lets ensure that the industry is responsible and professional enough to do the right thing, maybe be accountable to someone other than the accepting new insurer to justify being paid an up front, but as a responsible industry,maybe we can do that without the intervention of an outfit that clearly doesn't understand terms of engagements and initial instructions.

I didn't come into the business to receive the upfront commissions, the up front commissions helped me get into the business and and stay in it, without it , I most likely wouldn't be here, the insurance companies have determined how they remunerate to best position their offer and if they couldn't afford to pay the terms, then they wouldn't offer them. My belief is that intervention to disrupt the model needs no intervention from Government or chamberlain, self regulation from the participants is the only option.
On 23 November 2015 at 4:23 pm RiskAdviser said:
@innocent bystander, hear hear! Thank you!
On 23 November 2015 at 5:01 pm Justalifeinsurancesalesman said:
Commission is the cost of doing business the life insurers would otherwise have to fund to get the business on the books. If not paying commission the alternative is an office filled with salaried agents, heavy advertising, sponsorship etc. This is very expensive to do.

My simple maths for my fixed costs for an average client that I do business with looks something like this: (your costs will be different)

1 hour @ $100.00 for marketing costs prospecting, phoning, securing client appointment

1st meeting 1 hour @ $150.00 (often afterhours and at clients home)

Travel time say $50.00

Preparation of SOA / Research say 2 hours of my time @ $150.00 = $300.00

PA's time charged out at $50.00 per hour to prepare quotes, pricing the market, typing letter, SOA etc @ 2 hours = $100.00

2nd Meeting 1 hour @ $150.00 (again likely to be afterhours)

3rd Meeting to do the applications (or 2nd meeting extended by an hour) = 1 hour @ $150.00

Travel time $50.00

PI Insurance $25.00 per client on average

Miscellaneous disbursements, Disputes resolution costs, compliance costs, rent, running of office $200.00

Managing the underwriting process 1 hour of my time @ $150.00 and probably 2 hours of my PA's time following up requirement, chasing Doctors etc = $250.00

So the Grand Total is $1525.00 plus g.s.t.

Kiwis are not prepared to pay a fee of $1525.00 plus g.s.t. for insurance advice and are likely to prefer the DIY approach only adding to the underinsurance problem.

So if you ran with the MJW 50% commission on a $1200.00 API you would get $600.00 for something that costs you $1525.00 to deliver.

You could only afford to deal with clients paying $3050 API. Anyone paying less than that you would be losing money and would need to push towards the direct market.

We as a Non Aligned broker channel absorb 100% of the cost to distribute the product including when there is NO SALE.

It is my opinion that what the insurers are paying commissions for is the cost of distributing of their products. They have no risk or costs (for all the non-sales)until the policy goes in force. It is over to the insurer to pay a commission at a level they believe fairly represents their cost of distribution. Whether that is a spread model or upfront.

The other model of distributing insurance products is direct like Cigna, The Warehouse, Countdown, Pinnacle Life or bank Assurance. They still have huge distribution costs like advertising, google adwords, call centres, mail outs, branch networks etc that don't translate into cheaper premiums for the consumer or better products as they still have costs to get their product out to consumers.

So I believe commission is here to stay as it is the only viable way to pay a non - aligned adviser to provide personalised advice to the general population and at the same time solving the underinsurance problem.

Reducing commission to unsustainable levels will drive the non-aligned channel to become tied agents as it is not viable to do business at those rates.
On 25 November 2015 at 2:01 pm AdviserMan said:
Justalifeinsurancesalesman this is the type of detail the Minister would like to see. If you add some further details to this, I suggest send in as a submission and it will be welcomed as a factual estimate of a real life Adviser business practicing their craft. Well said.

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