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Let's deal with rogue advisers

Only very small number of insurance brokers are doing anything dodgy, writes David Whyte.

Monday, July 4th 2016, 6:39PM 4 Comments

With the release of the FMA’s report on policy replacement, reactions have been many and varied. There have been calls for government intervention, investigations into non-adviser channel practices, and focus given to the methods of gathering new business for other non-life risk products in the market.

So let’s drill down and put some perspective on the issue.

The FMA made it clear that they were of the view that inappropriate replacement – so-called churn – had potentially negative consequences for consumers and that the activity levels in life risk insurance distribution, being dominated by advisers who, with 40% share are the largest single channel, would be the focus of their investigation.

Now, it’s true that there are other channels that would merit investigation, but the opportunity to examine the FMA findings more closely should not be passed up by those intent upon establishing the actual extent of the issue. 

Paying attention to the vagaries of those other channels should be deferred.

They will keep.

In the meantime there are aspects of the report that, in my view, exonerate the vast majority of financial advisers, and provide a huge opportunity to eliminate suspect practices by a simple but comprehensive solution.

So first, some facts and figures from the FMA report might help in providing a platform for further discussions

The 45 advisers identified as having high replacement activity – potentially churning – represent 4% of the adviser population surveyed. These are advisers who replaced more that 20% of the clients’ policies in one year. There might be good and valid reasons for this, but explanation for this is a reasonable request to make.

But one point to make here, the FMA’s definition of a “high rate of replacement” needs comment. 

“At least 12% of an adviser’s policies lapsed, and the adviser writes at least 12% of policies as new business within one year” is cited as the criteria for being considered a ‘high rate’.

This is contentious, as without knowing the reason for lapses, it is presumptive to assume that the rate of new business is directly linked to the rate of lapse, and that all lapses are replaced. Clients die, move away, change adviser, or encounter changed circumstances that initiates lapse, with no adviser input whatsoever – i.e. not all lapses result in replacement.

What is not in any doubt is that the 45 advisers mentioned on p12 of the report have some explaining to do, and in that regard, the other 96% are entitled to a ‘please explain’ request.

Put simply, there is a very small number of advisers out of the total population who are indulging in anything remotely like significant churn.

In this regard, NZ has fared infinitely better than the suspect documents produced by ASIC and Trowbridge that formed the basis for the silly situation that prevails across the ditch.

We should be aiming to style our regulatory environment to encourage the 96% to extend their services and their reach to those parts of the community that find it difficult to access advice, or to understand what the insurance deal means.

Nevertheless, as we now have some evidence of the scale of the issue, we can deal with this by insisting that life offices are not permitted to accept new business papers to replace an existing policy without the signed authority of the client, the adviser, and the company ‘losing’ the business.

In this context, I agree with Naomi Ballantyne – if the life offices cannot agree among themselves to introduce this regulation voluntarily, then the Government should intervene, via whatever means at its disposal.

But, differing from Naomi’s view, I believe the intervention should be at product provider level, not adviser level. As Norm Stacey so eloquently stated – “ Address the drug dealer, not the drug user”.

Some will be aware of an adviser-driven initiative to design and develop an industry-wide form that must be completed before replacement can be processed. This is a very worthwhile proposal that doesn’t require statutory impost – providing all life companies agree to it.

Writing a ‘report’ – as is required in South Africa, I understand, seems cumbersome and unnecessary, but a simple submission with the rationale included and signatures from all parties attached appears to be more reasonable.

Yes, I know FSC suggested a common business replacement form a few years ago, and this didn’t fly. But this is now, times have changed, and as it emanates from the adviser sector itself, I believe there is a much better chance of this being universally acceptable.

If government intervention to enforce this procedure within the product provider community is unavailable, then I suggest those life companies declining to participate and comply are asked to explain their reluctance.

So overall, I am more supportive of the general thrust of this report and definitely supportive of the clean bill of health accorded to the vast majority of financial advisers who behave appropriately and provide proper service for clients.

I suggest we embark on a debate on how we can deal to the tiny percentage of advisers who are denigrating the industry by their inappropriate practices once and for all, and leave honest advisers free and clear to get on with business.

* David Whyte is chairman of Camelot and a former general manager of AIA in New Zealand.

Tags: Churn financial advisers FMA

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Comments from our readers

On 8 July 2016 at 4:50 pm Tash said:
I am sorry David, I usually agree with your comments, but I cannot see how Insurance Companies are in any position to pass judgement on any but the most blatantly obvious cases of churn (moving from a policy trauma policy with excellent benefits to a trauma policy providing patently inferior benefits for example). Insurance companies are not the adviser and do not know the client or their circumstances, goals or preferences.

Trying to pass the responsibility for churn on to insurers which do not deal directly with the public (there are some which deal direct who can be accused of churn by their misleading marketing) is a cop out by advisers, who are solely responsible for churn.

As advisers the client is ours, the advice we give is ours and the actions taken by clients arises usually by our interventions. To blame the insurers or try to have them regulate the behaviour of, or adjudicate on the acceptability of advice given by, independent advisers who are not their employees and who are free to give whatever advice they choose, is patently ridiculous.

Replacement of existing business (either by the original adviser or a new one) should only be done after compilation of a detailed study of benefits lost and gained, pros and cons, advantages and disadvantages. Anything less is non compliance with the 6 step principles of best practice and is probably contrary to the fair trading act or consumer guarantees act or whatever because it does not give the client enough information to make an informed decision.

Insurance will never be a profession until we stop making excuses, stop trying to blame insurance product providers for every ill and start providing comprehensive, accurate and acceptable advice (which incidentally means actually reading, analysing and understanding the policies we sell and replace!).
On 8 July 2016 at 11:45 pm dcwhyte said:
Fair comment, Tash - you make a valid point re providers adjudicating on the merits of a replacement, but they need to be involved in the process to some extent, as yet undefined.

And tackling the most blatant cases of churn is a good place to start!

What about "block" transfer terms?

Also, surely it is reasonable seek co-operation from the companies to address the issue? They are parties to the contract and have a responsibility to contribute to a beneficial outcome for the consumer, the adviser, as well as their internal stakeholders.

The regulator has been able to identify 45 advisers with a 20% or more replacement rate - why wouldn't providers be concerned to take a closer look at those agencies? If appropriate advice has not been provided, I'd want to protect the profitability of the portfolio and prevent further bad practice from occurring.

With respect, far "from blaming product providers for every ill", I'm calling for a reasoned debate with advisers, providers, and anyone else interested in eliminating poor practices which are likely to adversely impact consumers.

I'm sure your input in the debate would be welcome, although I'd challenge the statement that "advisers are solely responsible for churn" - in the absence of the receiving company accepting a Replacement Form of some description, the whole transaction would not complete. The providers are therefore involved and have a role to play in eliminating churn. The discussion on how to address the issue should rightly involve providers.

Also, "advisers are free to give whatever advice they choose" - I think not, or are you advocating that advisers are free give misleading and deceptive advice?
On 11 July 2016 at 9:26 am Tash said:
Hi David
Thank you for responding. I am most definitely not advocating misleading or deceptive advice, what I was referring to was the ability to give advice unfettered by any one provider.

Unless the provider deals direct, even "block" transfer terms require an adviser to convince the client to move. The incentive (ease of process of new business for the adviser) is really no different to trips or commission levels offered. Whatever the incentive, any replacement must still be in the client's best interests and should only done after proper product analysis of benefits lost and gained.

As far as the Replacement of Business form goes, it is no bar to churn. I have yet to find an insurer that will refuse replaced business, regardless of any replacement business form, and rightly so. I don't know whose idea this form was but it is totally meaningless and its purpose seems confused. What purpose does it serve? Unless the new provider actually makes a judgement call on whether the replacement is in the best interests of clients (which insurers dealing with independent advisers cannot and should not - they are not the adviser!) what does this form mean? I believe it is obsolete and effectively replaced by the necessary statement of advice to the client justifying the adviser's recommendation (which just to be clear, the insurance company dealing with the independent adviser has no justification for or capability to adjudicate on or approve or disapprove).

Insurers will undoubtedly have to be involved in the issue but to my mind the distinction between "advice giver" and "product provider", their roles, duties and capabilities, needs to be fully understood taken into account. Unfortunately it seems to me that too many still seem to think the insurance industry consists solely of big insurance companies employing advisers who are bound to comply with the insurance company's instruction. This is not always the case. The solution to churn will differ depending on whether we are talking about independent advisers (able to offer a number of different providers products)or sales staff (tied agents/employed sellers of their master's products)who are just as capable of churn but who do not seem to have been exposed in the FMA investigation.
On 12 July 2016 at 12:04 pm Referee said:
David's suggestion for an industry's collective approach is correct on this subject.

Tash, take a look at the latest from the Life Insurance Consumer Group in Australia and what Mr Trowbridge has to say:

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