Adviser related churn is likely to be as low as one to two percent of the total lapse rates of life insurance policies with the remainder of lapses included under areas such as policy expirations, cancellations, claims and internal replacement business.
Even in those cases where churn has been initiated by an adviser, there is a lack of information about whether this is in the best interest of clients, according to Damon Rasheed, Chief Executive of life insurance comparison site Rate Detective, who believes churn numbers have been artificially inflated in the consideration by regulators and government.
Rasheed, who was formerly an economist with the Australian Competition and Consumer Commission (ACCC), analysed lapse rates based on requests for information from retail life insurance companies. Across the 10 that responded there were significant differences in what is considered as a lapse. He also found no information about the percentage of lapses triggered by advisers churning clients.
He said it as was a myth that all lapses are counted equally and “…these differences are creating distortions on reported lapse rates which are having the effect of artificially inflating them”.
Rasheed stated that while the responding life insurance companies all counted cancellations and premium dishonors leading to a cancellation as a lapse, two life insurance companies also included expired policies and two counted claims in their lapse figures.
Policies cancelled from inception were also counted as a lapse by around half of the insurers who responded, according to Rasheed, who stated it was difficult to get precise data in this area due to the differing way in which lapse rates formulas are constructed.
“…it’s difficult to conclude that adviser driven churn makes up a substantial percentage of the annual lapse rate…”
“There is no data set that exists that we are aware of that determines what percentage of this is retail replacement cover from advisers churning their own clients. It’s even difficult to take educated guesses,” Rasheed said, claiming that large scale adviser churn was also a myth.
“We know that cancellations without replacement, clients going to another adviser, expired policies, sum insured decreases, cancellations from inception, internal replacement business, book transfers, clients asking their advisers for new policies and reinstatements all must fit into this 15% lapse rate along with adviser driven churn,” he added.
“Given the above, it’s difficult to conclude that adviser driven churn makes up a substantial percentage of the annual lapse rate and is unlikely to be the issue regulators perceive it to be. It’s difficult seeing adviser driven churn making up more than one or two per cent of the overall lapse rate.” Rasheed said.
Rasheed also labelled the idea that any form of adviser related churn as negative was another myth that had arisen in recent years, and regulators should measure churn that is within the best interest of clients as a benchmark in addition to whether the related advice complied with financial service law.
“Adviser driven churn should be encouraged if the result is the customer is better off afterwards.”
“Adviser driven churn should be encouraged if the result is the customer is better off afterwards. This is the normal competitive process working. In fact, advisers have a fiduciary duty to act in the client’s best interest. As far as I am aware, there has been no industry report to determine whether churn has failed the best interest tests.” Rasheed said.
He stated that churn could be an indication of healthy competition in the market. In fact, in other industries, such as telecommunications, the ACCC has gone as far as taking action against companies that are seen to frustrate customer churn.
“Any regulation should keep the long term competitive dynamics of the industry in mind. The ASIC and Trowbridge reports are totally silent on this issue and it’s definitely a topic that needs some consideration with the experts being the ACCC,” Rasheed said.
“Clearly a reduction in the adviser distribution network would have a negative impact on those product providers without bricks and mortar distribution, effectively reducing competition in the industry.”
Brilliant! Thanks so much Damon Rasheed and RiskInfo for publishing this.
It’s about time clarity around what the real ‘churn figures’ are in comparison to what’s been spruiked by ASIC and various life insurance companies had the spotlight put on them.
I have always suspected from understanding my own professional ethic and that of the peers I’ve known since joining the industry that the churn figures being spruiked were grossly inaccurate. This just confirms that suspicion.
All I wonder now is how many other advisers are going to jump on this article and raise their arms in protest at the unfair treatment being handed down by the people biting the hand that feeds them?
Finally some sense in the BS Churn debate for the reason for the LIF.
O’Dwyer, please stop peddling the institutional lies about churn, it’s simply a made up stat to try to enrich the large financial institutions more.
Thanks for publishing this and for Damon’s excellent research that only validates what we have all already known. The insurance companies basically don’t have the systems in place to substantiate their position. Everything is classed as a lapse whether it be an expiry, claim, benefit reduction or cost cancellation.
And we the independent risk advisers should be the ones to suffer financially and be wiped out so that the FSC can make more profit from Direct higher priced, poorer products or aligned advisers only!!
It is little wonder the FSC have bypassed the ACCC and are trying to legislate because they know the ACCC would cry fowl on anti-competitive behaviour.
The ACCC should start being involved in the LIF debate now before the FSC have the ability to make life worse for the end customer.
Well that’s just great…. I really don’t know what is going. what is the end game the hidden agendas, the under the table dealings. Can someone please tell me? are they really wanting to eradicate us? that’s it I am going to be a greyhound trainer……
Its absolutely laughable too when you consider just how much of Australia is still massively under-insured! There’s still around 65% left isn’t there??
The tactics that have been adopted by ASIC, the FSC (& maybe the FPA?), the banks, life insurance companies, and I guess industry super funds to some extent seem to resemble a desperate grab for market share in a totally saturated market which in my opinion, is absolutely crazy because we all know Australia is far from saturated when it comes to personal insurance cover.
Damon, thank you for pointing out that the issues around churn, has been based on lies, mis-truths, inaccurate data and non existent data.
It makes a mockery of the Australian regulatory system and the perpetrators of this scam should be brought to trial, as they have breached their fiduciary duties and failed any best Interest duty that they purport to represent.
What I don’t understand with this article Jeremy is why there haven’t been hundreds, if not thousands of advisers up in arms over this article.
Wasn’t the concept of systematic adviser churning the basis for the whole LIF Reform package in the first place??
This article proves how false and unreliable the data was that lead to it so how can advisers not be totally enraged by this???? I’m at a loss to understand this.
Why would you believe an article written by someone that has an interest in clients moving insurance and no current connection to any insurer or insurance body ? Rate Detective will make money on you looking for better deals for your clients. Jeez your right, there’s no such thing as churn in our industry so it will be ok to use Rate detective’s service to find a better deal. Wake up.
He says the churn rate is lower than what is reported.The lapse rate does include such things as policy expirations, cancellations, claims and internal replacement doesn’t it?
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