Calls to Review ASIC Lapse Definition

Industry stakeholders are seeking clarity from ASIC over the criteria it is using to determine the incidence of life insurance policy lapses.

AFA's GM Policy & Professionalism, Phil Anderson... AFA is arguing for a more sensible outcome on lapse definition

AFA’s GM Policy & Professionalism, Phil Anderson… the AFA is arguing for a more sensible outcome on the definition of a lapse…

Riskinfo understands the Association of Financial Advisers has sought discussions with ASIC on the definition of a lapse, which it appears is presently based on criteria including:

  • Policies lapsing due to non-payment of premiums
  • Policies/cover cancelled at the client’s request
  • Partial or total reductions in cover (e.g. reducing sum insured or reducing a monthly benefit)

Two key areas of concern for the AFA, advisers and advice businesses, centre around:

  1. The extent to which partial reductions in cover to reflect a change in the client’s circumstances should be included in the definition of a lapse
  2. The argument to exclude policy discontinuances where a mature age client cancels due to affordability issues or a change in personal circumstances

AFA GM Policy & Professionalism, Phil Anderson, confirmed to Riskinfo that in a supplementary submission to the PJC Inquiry into Life Insurance last month the Association called for ‘…a standardised definition of lapses that excludes reductions in cover and people who have reached an age where continuation often ceases as a result of affordability issues or a change in personal circumstances (i.e. 60 years of age).’

…the AFA has been arguing for ‘…a more sensible outcome’ on the definition of a lapse’

While the AFA has been arguing for what it refers to as ‘…a more sensible outcome’ on the definition of a lapse’, this topic also emerged at last week’s AFA National Adviser Conference. Speaking with Riskinfo, Robina Financial Solutions GM, Paul Forbes, strongly disagreed with the contention that partial or total reductions in cover should be included in ASIC’s lapse criteria:

“The first two [criteria] make sense,” said Forbes, “…but reductions in sum insured does not – especially with an aging demographic.” He continued, “Somehow ASIC has decided that an adviser who actively reviews their clients, retains their policy with a life company but reduces their cover, either because they can’t afford premium increases or because they have less need for insurance as their estate has grown and kids etc are off their hands, is a lapse.”

Forbes also noted he believes the removal of CPI cover linking on an insurance contract or moving the policy owner from stepped to level premiums could also be included in ASIC’s lapse data.

Riskinfo understands ASIC has recently obtained a comprehensive set of data from the life insurers for each adviser with a lapse rate of greater than 20% for the 2016/17 financial year using this lapse criteria.

We will report further developments in this emerging debate over the definition of a lapse and whether ASIC will consider any changes or offer greater clarity and transparency around this critical issue, which will become increasingly important as the industry approaches the 2021 ASIC review of life insurance advice.

  • Ken

    This could be a marathon of things that should not be considered a lapse ! Why on earth wasn’t this addressed 2 years ago instead of 3 months before ” kick off ”
    The reasons behind the lapses could be just as varied from no longer required ,business sold ? Divorce debts now reduced a better cover available for the same cost or cheaper cost elsewhere etc etc etc on top of a 20% reduction in commission introduction of a 2 year clawback and premium increases of 20% plus oh and of corse who keeps the premiums paid during the responsibility period ? who wins at this ?? Go on hazard a guess ????
    It would be interesting to compile a list of what should not be included in the definition of a lapse from the advisers and address each one as viable or not and add them to a list for all to see I think everyone would be surprised at some of the reasons lapses occur that are out of control of the adviser

    • BKY

      All lapses are out of control of the Adviser. This best interest duty changed the legal landscape forever. Is it in the best interest to maintain loyalty based on the more efficient and certain claims experience one has had with older policies…or does one research and compare against the market to find what could be concluded as a more appropriate policy and recommend a switch? Either way, if the objective is to reduce premiums due to affordability and ASIC maintains what is currently classified as a lapse, then this process described will end up in the lapse figures. As a Risk Adviser it seems like you are damned either way.

  • Phil Smith

    30 years of client advising now sees me with a range of risk insurance clients including up to age 70. I have clients with the same policy in force for 25+ years. As their risk protection needs decline and their wealth builds, at each review a decision is made as to whether they should reject auto CPI or reduce their existing levels of cover. In what world can you call meeting the client’s best interests, by reducing their cover to match their present needs, a ‘lapse’? But don’t just blame ASIC – I’ve had 20+ year old policies cancelled from time to time in the past 10 years – due to there no longer being a genuine need to insure – with the life office still calling them ‘lapses’ and affecting my lapse rate with them.

  • Jeremy Wright

    Once again, here we go.

    Every theoretical expert and vested Interest group will put forward their convoluted,
    misconstrued ideology about their interpretation of a lapse and we will end up with the same ridiculous, complicated answer that makes no sense.

    The Regulator will collect irrelevant data that has NO bearing on the REAL REASONS
    why a policy lapses and the real culprits AKA the FSC, who continually bend the truth to benefit themselves, will continue to “guide” the Government, who will ask ASIC to follow the steps set out by the very organisations that are the main reasons for policies lapsing.

    How many times do we have to say it.

    The main reason clients cancel or reduce a policy, is because the Life Company increased their premiums by 10 to 30%.

    The next highest reason, is because a clients circumstances change, which has nothing to do with their adviser and yet both these scenarios are calculated as a lapse/churn against advisers.

    Maybe we could ask the New Zealand Regulator to look into this.

    Their extensive research and solution will commence and probably finish before lunch on the same day and they will have correct answer.

    I have said it before and this may seem revolutionary to all the theoretical guru’s,
    “Why don’t they ask the customers why they are lapsing their policies”.

    Shock horror. The answer will show why and it will probably reflect the FOS complaints, where 99.6% of the issues had nothing to do with advisers. It was the Big end of town causing the mayhem and deflecting the blame to advisers and everything else but themselves.

    The merry go round continues.

  • Walker

    Paul Forbes, any suggestion that a client opting out of annual indexation of benefit or converting a policy from stepped to level should fall within a ‘lapse’ definition, is the most ridiculous thing I have ever heard. If Riskinfo is putting Mr Forbes forward as some sort of expert in the field then it needs to take a long hard look at itself. Goodness me!

    • Troy

      There is a mis interpretation here. I had to re read as well. Paul is not suggesting this should be included. The article is saying it could be included in the current definition. It also can include the situation when there is a change of ownership as well even when the sun insured has not changed in the current definition. I believe this should not be included as this is not a reduction or material change to a policy this would be based on the clients individual needs and would be a minor change to a sum insured.

    • SME

      I lapse is defined as a partial or total reduction to sum insured. It does not include moving from level to stepped, or opting out of annual indexation. It is not included in the current definition. Neither are internal replacements – i.e. replacements within the same insurer.

  • Phil Anderson and the AFA are doing the neccesary here. There is going to be a “review” of whether the LIF has “worked” in a couple of years. However there are not yet any terms of reference as to what defines whether “it” has “worked”. However if it is determined that “it” hasn’t “worked”, commission is likely to be taken away as an option or reduced to 20/20. Phil has the skills and knowledge to assist with this. Thank goodness he is back!

  • RPM

    What about a policy that goes off the insurers book due to a death claim? Is that also a lapse?

    • SME

      No, that is not a lapse for ASIC reporting purposes. Reductions to in-force premium or cancellations due to expiries and claims are definitively excluded.

  • Reality Check

    The FSC don’t care whether a “lapse” is genuine or not and manipulating this falsely to get the LIF passed. But lets not forget that the AFA and FPA were complaisant in this happening. The LIF could have been fought by the AFA and FPA by arguing that only a policy moved by the existing servicing adviser from one company to another is subject to a clawback in the first 2 years. Simple??
    And yes to all of the comments below. The insurance companies treat everything from claims, cover reductions and policy expiry as a lapse.
    Like every other adviser I want the AFA and FPA to be getting answers as to why both ASIC and the FSC falsely represented the churn debate. Has Sally Loane be asked publicly to justify their actions after ASIC admitted churn may now only be an issue with a handful of advisers? She seems to have disappeared!