October 17, 2017
Industry stakeholders are seeking clarity from ASIC over the criteria it is using to determine the incidence of life insurance policy lapses.
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:
- 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
- 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.