What’s a Lapse?

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Should partial reductions in cover, when acting in the client’s best interests, be taken into consideration by ASIC when defining policy lapses?
  • No (87%)
  • Yes (13%)
  • Not sure (0%)

Our latest poll asks for your verdict on whether insured benefit reductions should be used by ASIC as a factor when determining lapses.

This question stems from an emerging debate around whether the regulator has fixed on the right formula  for what constitutes a lapsed policy.

At present, we understand the following criteria form part of ASIC’s definition of a policy lapse:

  • 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)

The contentious issues revolve around the third bullet point relating to partial or total sum insured reductions (see: Calls to Review ASIC Lapse Definition). ASIC’s contention – backed, we understand, by data provided to it by product manufacturers, is that some advisers may significantly reduce their clients’ insured benefit within the first one or two years of the policy, but not cancel it, in order to avoid a commission clawback.

On the other hand, there appears to exist a compelling argument that if a benefit reduction is in the best interests of the client, irrespective of whether this transpires within the first two years of the contract, then the adviser is compelled to act in their client’s best interests, and would be poorly served to have a lapse recorded against this activity.

ASIC’s list of circumstances that do not constitute a lapse include:

  • The cover/policy expires
  • The policy is subject of a current claim
  • The policy terminates or reduces as a result of a claim
  • The policy is cancelled from inception or during the cooling off period
  • The policy ceases due to the death of the insured person
  • A reduction in premium is built into the contract (e.g. healthy living-related discounts) where there is no explicit action by the insured or the insured’s adviser to reduce the cover
  • The policy/cover lapses but has been reinstated during the period
  • The policy has been cancelled and internally replaced

What is your verdict?

As can sometimes be the case, these issues can be nuanced, meaning there isn’t a straight-forward solution. For example, should there be more definition around what constitutues a ‘partial’ reduction in cover? Should there be consideration given to restricting this lapse criterion only to those policies that have been in-force for less than 24 months?

There are more issues we could cover on this topic, including the ongoing call for all stakeholders to standardise and agree on what constitutes a lapse and what constitutes a churned policy.

For the time being, however, it’s over to you to have your say and we’ll report back next week…



3 COMMENTS

  1. The yes voters will largely be manufacturers who are determined to push a direct agenda. The life companies also include removal of CPI as a lapse as it is a loss of benefit. The bigger issue is the inclusion of clients aged over 60. In many cases, they have logically come to end of their need for large sums insured and no matter how long they have been in force – they are being included in lapse data. As they also, logically, have larger premiums this is warping the data and providing a false bias on the data ASIC is using in its crusade to find churn.

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