by Jon-Paul Hale
We’re going to hear more on this I think, and it’s been a significant elephant in the room with the insurance adviser community with a close second, how are we going to disclose commissions?
We’ve had the second reading of FSLAB, and that’s whistled through without anything significant popping up, though the subject of comparing products when changing products and managing replacement business is pretty silent in the legislation.
Which for the consumer is going to miss a significant point for them on the operation of the insurance industry.
Let’s dwell for a second on what churn actually means from what we have been told.
As we have seen and heard from the regulator; this has been focused on as movement of policies from one provider to another with clients in your own book of clients.
From provider comments; it is often seen as a significant movement of business away from that provider, as they’re happy to see it come in the door from another.
From an adviser perspective; it’s the movement of perfectly good policies from one adviser by another only to clip the ticket with the commission along the way, usually expressed by the losing adviser.
At some level, they are all right, but there’s more to the story than just moving business around.
The FMA, before all the replacement research they did, came out saying, the idea is for a consumer to move and access products for an advantage until they can’t. Being the idea that they would stop moving once they developed medical conditions, or other situations, that prevented them from moving without losing benefits. (paraphrased by me)
Which with the research has shown this approach is a little naive with the significant disadvantage for the client in the transaction with disclosure and the incentive to move a willing client by an adviser for a payday.
I haven’t mentioned the consumer in this, as the majority have no idea what all of this means, and it’s only in the last little while that consumers have started to be aware enough to ask better questions on this. Outside the usual we don’t have to fill in lots of paperwork, do we?
I had a conversation a few years ago with a few bods at the FMA, and one of the questions I was asked was; From the outside what does an adviser business look like that’s not doing the right thing?
Which my answer to them was, highly active business, movement of clients from one provider to another, significant levels of replacement business. Potentially under disclosure claim declines, and maybe client complaints that things haven’t gone to plan.
Then I got them to ask the opposite question, What does a successful adviser business look like from the outside?
Which my answer to them was, highly active business, movement of clients from one provider to another, potentially significant levels of replacement business. Potentially under disclosure claim declines, and maybe client complaints that things haven’t gone to plan.
Yup, from the outside of an adviser business it is difficult to determine if behaviours and replacement is active management and servicing of clients or outright self-interest. It's not until you look at the quality of the file documentation and review the whole client situation, that you can gain a clear picture.
So what is churn?
Well, that’s a hard one to pin down.
If you look purely at the sticker on the policy and compare before and after, many replacement situations will look like churn. Yes, the level of covers may have been tweaked, and the premium might be a little different, but at this level, it’s hard to say where’s the client advantage, against the potential harm of non-disclosure for the client.
If we scratch the surface a bit, we might see that there are TPD benefits built into the cover, or there is a heart definition that's rated 5 points better. However, still feeling superficial as reasons to move the cover and not just change the servicing.
If we dig a little deeper, we might find that the client has had some changes to their situation since they last reviewed everything. About 20% of clients in any one year will have a change that needs a chat to establish if there’s a shift in risk management required, and about half of them need something tweaked.
Which for me is something we typically do with the existing provider under a special event most of the time, or if the last underwriting was less than 12 months ago, a dec of continued good health.
However, this is just servicing, what about the ones that need to be moved? And this is the bit that often looks like churn but isn’t necessarily churn.
Say a client comes to you and says, look we have this policy we took out some time ago, and it’s getting expensive, and we’ve upgraded the house, and we’re thinking about having a baby.
If you take that policy at face value, yup it’s probably an older style approach, and they probably have lots of life and trauma and little income protection or disability coverage.
Looking through things and getting a guide on what the client is concerned about, it becomes glaringly apparent that the current approach isn’t going to deliver to what they need. So you step back and have a look at the options.
Moreover, more often than not, that option is with another provider as the mix of benefits, the coverage for that client and their pressured budget, mean you have to juggle and utilise the interactions of the policies to shoehorn everything in.
Also, depending on where you sit in the industry at that moment in time, this transaction is either churn, because you’re losing it, or it’s beneficial rearrangement because the client is getting a better cover for the premium they are spending and you’re on the receiving end of it.
Now where the rubber meets the road on this, is the quality of the execution.
And this my colleagues is the real test and question on replacement business. Was the execution of that replacement:
I'm not fond of business replacement forms much; they’re a tick box exercise for the insurers, that doesn’t cover enough of the situation to be meaningful when it really comes down to it. Asteron Life and OnePath Life have done away with them, though there is noise they should reinstate them.
However, I also can't entirely agree with the FMA guidance that an adviser can state they haven’t compared the existing policy and also say they recommend a move and change of cover. Frankly, it’s an oxymoron.
This guidance puts clients in harm's way, as they don’t back away and go; oh, maybe I should consult an adviser that will compare things. No, they go, this guy (or girl) is nice, and they’re looking after me, we’ll do as they say.
Which often results in harm to the consumer when they give up a good cover. Which the FMA is finding in the QFE replacement report they’ve reported back to the market on.
Sure we have a few rat-bags, but on the whole, for the numbers and volume of advice and policies insurance advisers transact on, the level of harm is relatively low. Also, when compared to the behaviour of the VIO’s under QFE it’s non-existent.
Going forward, if you've had a chance to read the proposed Code, we'll be expected to manage both commission conflicts and benefit and policy replacement at a higher standard than we presently do.
The code commentary for Standard 5, is going to trigger many challenges with those that don't compare on a replacement.
From the draft code: If the nature and scope of the financial advice includes an actual or implied comparison between two or more financial advice products, the financial advice should be based on an assessment and comparison of each product. This includes, for example, where an existing product held by the client is being replaced by a new product which provides similar features or benefits.
Which is going to have significant ramifications on how advisers and providers interact with clients. I would hope that the FMA see's scope of service contracting out of comparison as a foul.
Add to this, an organisation that has a standard operating procedure of not making a comparison, be pulled up or required to actively put the client on notice that advice on the current cover suitability against the newly recommended cover needs to be actively considered.
This isn't about making it hard for VIO's, they have a place in the market too, capturing clients on simple products that are better than no product, until a real adviser gets to them.
However, it should put the VIO's on notice that moving clients from comprehensive, robust coverage and products to slimmer cut down products have an active disclosure requirement. Because for some clients, these products will suit their specific situation or budget constraints that drive the need to take that approach.
At the end of the day it is about disclosure, and being able to prove that you have done the right thing for the client and by the client.
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