The Financial Services Council (FSC) has proposed new reform measures designed to manage the issue of churning insurance policies.
The ‘Standard for Replacement Business’ initiative was announced by CEO John Brogden on the second day of the FSC National Conference.
Under the proposed reform, riskinfo understands the FSC is recommending:
- The removal of takeover terms for policies transferred by an adviser between insurers
- The establishment of a two year adviser responsibility period where 100% of commission would be clawed-back if the policy lapses or is cancelled within one year, and 50% clawed-back in the second year
Mr Brogden said the time had come to address the practice of churn in order to support financial advisers and a sustainable life insurance industry in Australia.
“This practice is not in the interests of consumers and the FSC has taken the clear view that it is inconsistent with the statutory requirement for financial advisers to act in their clients’ best interests.
“While this practice is not widespread, it is significant enough an issue to warrant industry action,” he said.
The insurance industry has been quick to offer its qualified support for this initiative. Asteron’s Executive General Manager, Jordan Hawke, commended the FSC for taking a proactive approach to the issue of churning, in particular the removal of takeover terms:
“We believe appropriate risk management is required at underwriting to ensure we protect the integrity of advisers’ books of business and their clients’ cover, so that premiums remain affordable, and that we can deliver on our commitment to pay claims,” he said.
But Mr Hawke noted that not all replacement business is churn: “With products and client situations constantly changing, it is appropriate for advisers to review their clients’ insurance portfolio to ensure that it is both appropriate and competitive. It is all about quality advice,” said Mr Hawke, adding:
riskinfo understands the proposed two-year responsibility period would address the larger than average number of policies that are cancelled and re-issued at thirteen months (most policy responsibility, or ‘clawback’ periods cease after twelve months). Mr Hawke noted that insurance policies usually don’t change sufficiently in a twelve-month period to justify their cancellation and re-issue.
But while welcoming the two-year responsibility period proposal as an important first step, Mr Hawke added Asteron’s own experience “… shows that policy cancellations due to adviser recommendation combined with rising cost pressures and lack of affordability for clients, occurs mostly between 3 and 7 years.”
This new, ‘self-regulated’ Standard on churning is currently being developed by the FSC in consultation with industry stakeholders, government and regulators. The FSC says it aims to have the Standard finalised in 2012 with an implementation date consistent with the commencement of FoFA reforms.
There is a huge issue here for all financial planners, is this 2 year responsibility period anything other than the insurance compamies putting more pressure on the advisers, and if this is going to be the structure maybe we need to do what England does and have 200% commission for a 2 year responsibility period, then i would suggest that this was fair.
There are many, many situations where a client cancels a policy and no churn is involved- e.g. a client cancels a policy under 2 year’s in force as he goes from self employment to employee- and is convinced to join the employer super fund including insurances. The adviser is not benefitting from the change, but will experience a substantial writeback! Churn has not been a factor here, but the penalty is still applied to the risk adviser. This is totally unfair and un-commercial- any one else provide some examples of “unfair”??
To reduce churn,the Life Companies need to reduce the paperwork and the best way to do that is to lobby Government, to allow advisers to increase existing policies, without having to spend up to 8 hours complying and being snowed under with onerous processes,just to put through small premium increases which do not even cover the advisers expenses.
Allow advisers to advise and not be buried in red tape for increases, then watch churning and all lapses reduce considerably, which will dramatically increase profits for Life Companies and guarantee their viability for the future.
Comments are closed.