Recent industry speculation suggests the practice of churning life insurance policies is set to become a thing of the past. But what is the opinion of advisers on this issue?
Our latest riskinfo poll asks:
Will the introduction of ‘Client Best Interest’ legislation have a significant impact on reducing churning?
‘Client Best Interest’ legislation will be part of the soon-to-be announced FoFA reforms, which will enshrine into law the requirement that the financial adviser act in the best interests of their client. (This part of FoFA was previously described as the ‘Fiduciary Duty’ reform proposal.)
The argument is that if the adviser will be required by statute to act in the best interests of their client, they will be breaking the law, post FoFA, if they ever churn a life contract (churning being the practice of moving life policies between insurers for the purpose of obtaining higher levels of remuneration without a sufficient reason to cancel the existing policy).
While the logic of this argument is sound, there already exists a contention that current Financial Services Reform provisions make churning extremely difficult to achieve due to the requirement that all product recommendations and reasons be included within Statements of Advice.
Yet it is widely acknowledged that churning still takes place in significant numbers, meaning current regulations have not had the desired effect on stamping out this practice.
If this is the case, will the introduction of ‘Client Best Interest’ rules under FoFA make that much of an impact on the minority of advisers who are tempted to practice churning?
We acknowledge that it is difficult to determine the exact level of churning that currently takes place, as there are differing views as to what actually constitutes churning, combined with the fact that there are usually very sound reasons why advisers update their clients’ life policies, such as product enhancements and innovations or changed client circumstances that make different policies more appropriate.
What is your view? In a post FoFA advice environment, will the practice of churning continue? Who is responsible – the adviser, the dealer, the insurer or the regulator? Let us know what you think…
If churning means changing a policy from one company to another there are are often good reasons for doing so.
It could be that a company will offer particularly good terms thrugh having reviewed their policies or reduced premiums because of claims experience etc. Certainly valid reasons exist for doing this.
As well, how often do general insurance brokers ‘churn’? Do these brokers have watchdogs saying that they frown on the practice? Indeed, the very term “brokers” is intrinsic to looking always for the best “deal” for the client.
Churning as described in the article should never happen (churning being the practice of moving life policies between insurers for the purpose of obtaining higher levels of remuneration without a sufficient reason to cancel the existing policy) & I don’t think anyone could disagree with that. The article also highlights that another style of ‘churning’ can in fact be the best result for a client. If a client receives a better product thanks to enhancements or changed circumstances, then that is exactly why they chose to seek advice. The issue here is if the insurers can get enough momentum going to ‘stop churning’ or have it seen as a anti-client element, which it isn’t in the bulk of the situations, then they have a base on which to push reforms. Result – a reduction in the commission they pay out to advisers.
There was a time that LIMRA used to acknowledge
in force premium .I was awarded the international quality award for 15 consecutive years for maintaining premiums in force,something that i was proud of.it would not be that hard to introduce this back into australia,it quickly identifies the churners and burners.
There are two sides to this coin.
Can there ever be an advantage to the client from better features or premiums introduced by the insurance companies. I think so.
The flip side is when clients could be worse off due to loss of benefits or else exclusions due to “new” health issues.
From my underwriting experience there is no grey area of “Chirning”. It is quite from where we sit who Chirns, adding no value to the client, and who reviews their portfolios periodically to re-align their clients’ needs.
The practice of blatant, short term Churning has been a long standing blight on the Australian Life Insurance Industry which thankfully, is isolated to only a few these days. Apart from not acting in the best interest of clients, it drives up insurer costs and erodes credibility in the Advice sector at a time when we are under more pressure than ever to prove our relevance against the No Advice model.
In my view, any move to eliminate such practices whether real or perceived, is a move in the right direction.
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