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Jennings working on churn solution

The former chief executive of Fidelity Life says insurance advisers should come up with their own solution to the problem of churn.

Wednesday, May 3rd 2017, 6:00AM 12 Comments

by Susan Edmunds

The Financial Markets Authority is still working through its investigation into replacement business.

It initially requested information from insurance companies, and identified 200 advisers who had higher numbers of clients replacing policies.

It then asked them for a list of all their clients, and all those who had moved their policies since 2012. It also wanted a list of all insurers clients had policies with, and details of the commissions and incentives advisers received.

That was then followed with another request, which asked them to present full client files for specified clients by December 15.

“The initial information-gathering as part of the review of insurance replacement business has raised concerns about the conduct of some advisers that has required further inquiries. This is progressing and we are following up with the individuals concerned,” a spokesman said. “These matters remain ongoing so we cannot provide any further detail.”

But Milton Jennings, who stepped down as chief executive of Fidelity Life in 2015, said advisers would be best served if they could work on their own response to the issue, not wait for the FMA to act.

He has been working with adviser groups to try to find an answer.

“I’m trying to set the foundation for a solution. The FMA is doing a lot of work around replacement business but if advisers can come up with a solution that’s better than if the regulator comes up with one that may not suit their needs.”

He said there were conflicts of interest to address around commission and soft-dollar incentives for replacement business. The solution would have to involve that and writeback periods, he said.

“We’re looking at all the options rather than jumping to one answer.  We will try to find something that is sustainable for the industry going forward. We are sort of looking at a wider view rather than a narrow view to find a solution.”

The FMA had been responsive to an industry-based solution, too, he said.  “When I was CEO of a life company there was not a lot I could do in therms of trying to find the answer but now I’m in an independent role there's an opportunity.”

Jennings had previously said the answer could be to remove commission from replacement business.

READ MORE: FMA starts major investigation into churn

Tags: Churn

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Comments from our readers

On 3 May 2017 at 10:51 am dcwhyte said:
I think the last sentence is meant to read - "......remove upfront commission from replacement business".

This idea has merit, provided there is provision for genuine replacement being rewarded. Where an adviser goes through fact-find, needs analysis, etc., and discovers a legitimate reason for suggesting a more appropriate solution, the adviser should not be deprived of earnings. For example, if a client presented a request for a review and update, and an old whole of life policy totally unsuited to the clients current circumstances came to light, why would a more appropriate recommendation be penalised? Or where old style term life policies with no terminal illness benefit are discovered, why wouldn't the recommended replacement attract normal remuneration?
As I say, the idea has merit, but there needs to be provision for a legitimate process revealing a deficiency in the existing cover to be recognised. The proper provision of efficient and effective service should not be penalised.
On 3 May 2017 at 4:00 pm Dirty Harry said:
Does the insurer proposing not to pay the adviser also provide the usual circa 20% lifetime discount associated with no upfront commission?
Or they expect to be fully paid, in fact substantially more profitably so by providing a replacement policy that took the poor adviser no less time, care, knowledge, skill, and liability to write?
Enforcing the present rules would be a better place to start, before writing a whole new set.
On 4 May 2017 at 1:49 pm Glyn L-J said:
If policyholders were allowed to transfer servicing commission to the active adviser it would immediately reduce churn. But there's so much vested interest from within the industry that I can't see it ever happening.
On 4 May 2017 at 3:12 pm I was wondering said:
I agree with DC, but how would this be measured?

Sometimes it is not necessary to go through the whole written advice process for an existing client. The insurers must expect policies to be replaced if they insist on changing and improving policy wordings to attract more business.Some like AIA offer a discount for bundling of policies. The insurers know that most of their new business comes from clients that already have cover elsewhere. At least one newish national business was built on the back of massive change/churn. Funny idea this, but when a company benefits from change/churn it is considered 'new business' and when the business is lost it is 'churn'. As an adviser and AFA I must ensure that my client's interest come first. If I move them is it churn?

It looks as if the FMA has a reasonable handle on this by calling out the most prolific 'changers', how about them calling out the company or companies that benefit the most from these changes or churn? This is not just an adviser issue.
On 4 May 2017 at 5:08 pm Tash said:
I'm sorry but it would be useful to understand what is the harm we are concerned with?

Is it the cost to the insurer (ultimately passed on to policyholders) of having to pay another large up-front commission or is it harm to the consumer in the form of unjustified reduction in cover/benefits?

If the former, Government needs to regulate commissions payable because competition (and maybe some laws) will not allow the insurers themselves to do this.

If the concern is poor advice outcomes of reduced benefits, don't we already have many laws that could punish advisers (including bank tellers)who replace an existing solution with a solution with risk and downside not completely and accurately disclosed to and accepted by the consumer?

To my mind 'unacceptable' churn, which I do think happens more than we'd like to believe, happens when a policy is replaced with no objective, accurate and fair explanation of the pros and cons and which benefits the adviser mainly. A colleague recently showed me an adviser recommendation given to one of her clients so full of lies, half-truths and misleading irrelevant statements coupled with a purported comparison of 'like-for-like benefits to show premium difference which was so misleading and incorrect I was appalled. This is not simply incompetence - this is deliberate and completely misleading, surely a breach of some law. Perhaps when some of these dishonest people (I don't call them advisers)are held to account and punished significantly 'churn' (indefensible replacement) will disappear naturally.

On 5 May 2017 at 8:53 am LNF said:
Commission should only be paid on the new premium introduced to the industry
The premium on the churned business should be commission free.
Insurers gaining from the churn are happy as Iww stated. Insurers are happy with the business go round as it cleanses their book of past conditions
On 5 May 2017 at 9:15 am Another AFA said:
Agree with Glyn, if servicing commission could be transferred, then policy switching from one company to another would reduce immediately.

Commissions and incentives, no matter how big or small, create an immediate conflict and alters the outcome of the advice. That's why the insurers offer trips, events, dinners etc... because it increases business through the door.
On 5 May 2017 at 10:17 am Dirty Harry said:
@ Glyn
Some advisers, with little more than a letter of authority to act, may or may not actually provide an advice service that may or may not be any better than the original adviser.
Some would act like the banks do with KiwiSaver - hoovering up policies into large scale books that they cannot possibly do proper service to, accumulating trails they cannot, will not do enough to deserve.

With the rising popularity of lower upfront, higher trail structures the current ownership model will rightly stay in place. If you want to service my client, fine. Have them sign the letter, and fill your boots. Or, you could act like a professional and refer the client back to their original adviser for service, or you could charge them a fee to assist with their policy.
If you want to own the trail, buy it.
And if the "only way" you can be "fairly" compensated for your time is to replace the policy, then perhaps you're not adding much value at all - the definition of churn lives here - replacing a policy more for your own benefit than the client's.
On 5 May 2017 at 10:23 am Observer said:
DC - Oh no! Don't recommend replacing a quality WoL policy! (I;m a great fan of whole of life and would always recommend keeping it in place.)

Surely though the answer to churning is this: The provider that loses the business should be able to debit the adviser (perhaps via the provider that gets the new business) with any clawback that applies to the policy lost.
On 6 May 2017 at 9:50 pm Ron Flood said:
Tash. Please keep us informed as to the action of the FMA, once they have investigated the actions of the adviser, whose recommendations appalled you.

I assume this has been brought to their attention, if not, why not.
On 7 May 2017 at 12:29 pm donbrown said:
Australia has just had our commissioned dropped to 60% from 100% which will come into play on the 1st January 2018, this is been driven by our banks who are all members of Au FSC and they have used the FSC as a Trojan horse for lobbying parliament to change the commission structures with 100% clawback if policy lapses in year 1 and a 60% clawback if policy lapses in year 2, so the responsibility period has been doubled and then if a clients needs change or they reduce or cancel there policy for Whatever Reason the Clawback applies in first 2 years. The banks in AU have control of distribution of Insurances and are trying to shut down the 15000 independent non aligned Advisers so they can control our Insurance market, beware NZ advisers you have got very little compliance compared to AU so enjoy the moment and form an association that cant be corrupted by the Banking industry and stand up for your rights, is my email.

On 9 May 2017 at 1:25 pm Referee said:
In response to some of the above comments:

1) Tash, Ron is absolutely right. You have a (legal) obligation to report this person.

2) LNF, who are you suggesting would control the commission on churned business - the Adviser or the Insurer?

3) Dirty Harry, today too many Advisers have never been properly taught how to prospect for New Business. Often they've been shown how to get new business by incompetent BDM's. It's a skill lost over the past 20 years - it's become easier to replace business rather than look for profitable new prospects. However, you have made a very good point about charging a fee when advice is required around their existing policies when they have not been serviced adequately - discount all or some of the Fee if adequate REAL new premium is placed.

4) Finally, Don you're right but have you noticed that banks are starting to sell off their insurance arms - they don't like current Treasury demands and their low profits in comparison to their core business. I suggest the tide is changing?

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