The New Zealand financial services regulator has found the likelihood of churn taking place in relation to life insurance policies was a real possibility but was likely to be occurring at the low end of the scale with a handful of advisers.
The Financial Markets Authority (FMA) said it had come to this conclusion after conducting a survey of advisers who had high volumes of life insurance policies on their books as well as those who had high replacement rates of those policies.
The FMA stated its research drew on four years of data provided by the 12 main insurance providers in New Zealand, which covered the period from April 2011 to March 2015 and covered life, trauma, income protection, and total and permanent disability (TPD) cover.
The regulator used this data to ascertain that while the overall number of life insurance policies held by New Zealanders grew at under 2% each year for the period of the FMA review, life insurers classified up to 13% of policies held by them as ‘new’, indicating these were likely to be replacement business.
The FMA also conducted a survey of the 8,200 financial advisers in New Zealand, separating out 4,500 advisers who did not write risk business. It then separated out a further 1,100 advisers from the remaining 3,700 for particular focus since they had more than 100 active life insurance policies on their books as well as a further 200 advisers who had a high rate of replacement business.
“…the FMA defined a high rate of replacement as when at least 12% of an adviser’s policies lapsed and the adviser wrote the same amount in new business in one year…”
In doing so, the FMA defined a high rate of replacement as when at least 12% of an adviser’s policies lapsed and the adviser wrote the same amount in new business in one year, or when at least 40 policies lapsed in a single month and the adviser wrote the same amount of new policies in that same month.
Using these measures, the FMA said it targeted the 200 advisers with high replacement rates, as they were likely to have dealt with more consumers than other advisers, given they had 65,000 active life policies between them.
As a result, the FMA found there was a strong link between the types of commissions on offer, the end of the clawback period and the likelihood of churn with policies offering high upfront commissions more likely to be replaced at the conclusion of the clawback period.
In its report, the FMA stated that overseas trips appeared to be a strong incentive and policies that had passed the clawback period were 2.2 times more likely to be replaced where overseas trips were offered as an incentive.
The FMA expressed concern that the quality of a policy was not a guiding factor in many of the replacement with this behaviour suggesting some advisers were not acting in the best interests of their clients.
“We saw that the majority of advisers do not have high levels of replacement business, regardless of the way they are paid for their services.”
Despite these findings, FMA, Director of Regulation, Liam Mason said “We saw that the majority of advisers do not have high levels of replacement business, regardless of the way they are paid for their services.”
“However, there is a clear link between high rates of replacement business in certain areas and high up-front commissions, or incentives for high sales volumes, such as overseas trips laid on by providers.”
“Following our report, FMA staff will be taking a closer look at the conduct of those advisers with the highest volumes of replacement business as the next stage of this work,” Mason said.
The FMA would also examine the basis on which the policies had been replaced while focusing on the incentives provided by insurers related to the policy and would conduct site visits with advisers who had high rates of replacement business to review their practices and examine whether churn is occurring.
“As a conduct regulator, our focus across the entire financial services industry is to ensure that customers’ interests are always at the centre of a business operation. So we will be paying particularly close attention to the behaviour of insurance advisers where it is unclear that the appropriate care, diligence and skill are being provided to their customers,” Mason said.
