The Financial Services Council’s new churning policy has been greeted with a highly critical reaction from the financial adviser community.
Announced at the conclusion of the FSC’s 2012 Annual Conference last week, the Council’s revised solution on churning (termed the New Life Insurance Framework) revolves around an industry wide three-year responsibility period on life insurance policies, where commissions will be clawed back on contracts that lapse inside the first three years (see: FSC Backs Down on Churning Policy).
While the New Life Insurance Framework is intended to enhance the long term affordability of life insurance, reduce underinsurance and deliver better outcomes for consumers, adviser feedback suggests the opposite will occur.
The major issue with the FSC’s new policy, according to many advisers, is that it will unfairly punish the majority of advisers for simply doing their job:
it is grossly unfair to hold advisers financially responsible for clients changing circumstances
“Obviously it is grossly unfair to hold advisers financially responsible for clients changing circumstances.”
“The serial churners will now wait 3 years and 1 month and proceed as usual. The rest of us risk advisers will now be penalised for the marriage breakups and unemployment issues even if the advice was exceptional if the policy lapses within 3 years.”
“This is not good policy and like most of the other advisers comments – agree it penalises advisers trying to do the right thing by clients…”
A number of advisers have said they would have preferred the FSC’s original proposal which included the removal of takeover terms, access to only level commission on replacement business and a two-year responsibility period:
“I fail to understand how the FSC has “backed down on churning”. This new policy is is far harsher than the original suggestion of only allowing level commissions.”
“Personally I would have preferred the original 24 months claw back period with a level commission on replaced business only or move to a hybrid or level commission on all new business where all good insurance businesses would be better off in the long term anyway.”
“This new policy is worse than the original. I’d prefer the removal of upfront commission structures and hybrid or stepped structures becoming the standard. This would reduce the level of churning (if it’s even that significant) and force advisers to build long term sustainable businesses rather than cash flow focused businesses.”
Not all responses have been negative. Those who support the FSC’s New Life Insurance Framework suggest it would create a more robust process:
“A great plan. If a policy is set up correctly to cover needs that the client recognises, unless the need disappears, it won’t lapse inside three years. I won’t argue that there wont be exceptions, such as job loss, but hey, if you are going to worry about this, you would bullet-proof your business by never writing on upfronts anyway.”
“Insurance policies will improve further to support retention of the policy in terms of financial crisis and unemployment. In the meantime write sustainable business…”
As an alternative solution, adviser support has again been voiced for the banning of serial churners:
“Common sense would suggest that the churning problem is the result of a finite number of advisers doing the wrong thing. How difficult would it be to identify such advisers and then to stop them in their tracks?”
… self regulate the churners by shopping them in at every opportunity
“… self regulate the churners by shopping them in at every opportunity, insurers also have a part to play in this.”
“Under the cover of a few churners who can be identified and removed from the industry – we ruin the businesses of all those who do the right thing!”
From the licensee perspective, Synchron Director, Don Trapnell, has released a stinging attack against the proposed new framework. In a statement released this week, Mr Trapnell said: “It is disgraceful that life insurance companies, via their association with the FSC, are working together to their mutual advantage, proposing a process that will financially disadvantage honest advisers for policy lapses in circumstances that are, more often than not, beyond the adviser’s control.”
“Life companies will only gain the respect of Synchron when they adopt processes which are designed to prevent churned cases coming towards them as opposed to penalising advisers for lapsed cases going away from them,” said Mr Trapnell, who also suggested that if the new framework is adopted, Synchron would consider making a formal complaint to the Australian Competition and Consumer Commission on the grounds of anti-competitive behaviour.
FPA CEO, Mark Rantall, told riskinfo the level of adviser comment on the new Framework was not unexpected.
“Whilst there was a discussion paper out there I’m not sure how many advisers actually reviewed that. But now that there’s a policy which specifically addresses clawbacks I think it’s to be expected that advisers are looking at it closely and asking questions about it,” he said.
He said that while the FSC’s position was that there was no longer a need to define ‘churn’, it was the view of the FPA that a definition would be a good starting point.
“Trying to define churn, and the extent to which it’s occurring, and the cost impact that has on the industry, and then if it was fixed, what benefit would be afforded to consumers – these are all good places to start.”
It would be a shame if we had clients disadvantaged by any policy designed to stamp out unsavoury practice
Mr Rantall said he remained cautious about the solution proposed by the FSC, warning the industry not to “crack a walnut with a sledgehammer”.
“It would be a shame if we had clients disadvantaged by any policy designed to stamp out unsavoury practice,” Mr Rantall said.
“Ultimately the questions that still remain are: what is the prevalence of churn, and what’s the right way to deal with it?”
The AFA also issued a follow-up statement regarding the FSC’s Framework, saying it was a solid first step in the right direction.
“We thank the FSC for its consultative approach and willingness to engage key stakeholders,” said AFA CEO, Richard Klipin. “As an industry, we own our response to the proposed framework. However, decisions which change the way advisers currently operate need to be founded on solid, robust data.”
He said the AFA was particularly concerned about the three-year responsibility period, proposing a one-year responsibility period where hybrid commission is chosen as an alternative.
“We need to be assured that any change to the life insurance industry results in consumers having continued access to high quality advice about their life insurance needs at an affordable price and for advisers to be able to continue to act in the best interests of their clients,” Mr Klipin said. “We look forward to working with the FSC in the next phase of this process.”
The FSC has indicated that its member life insurance companies have agreed to commence this new self-regulatory standard with effect from 1 July 2013. riskinfo will continue to monitor and report any further developments on this issue, including any public responses from individual life insurance companies.
So, in deciding not defining Churn, the Insurance companies have basically set their own agenda and gone ahead with measures that transfer the financial risk from themselves to individual Advisers (and Dealer Groups) that have done the hard work, but can’t spend the income for 3 years, in case of a genuine lapse. Just lovely….
Insurers need to look at their own hand in this, with Takeover Terms and BDM’s being rewarded for new business growth over all else. Man up, and ban the offenders instead of ruining good businesses for the majority.
They could at least be fair about it and consider partial clawbacks for time on risk. 100% clawback on a policy that has sat with them for 2.5 years for example is a bit rich.
Just like many things these days. We legislate against the minority and end up penalising the majority. As a result, unfortunately writing insurance will end up placing too much risk on my business.
How can the FSC comfortably say that an adviser is responsible for 3 years? So much can happen in 3 years. 3 Years ago Rudd was still Prime Minister, there was no European debt crisis, Gaddafi was still in power and we hadn’t even heard of FoFA!
So, if a client changes their circumstances beyond their control, our business get’s clawed back and we end up having worked for free. Could the governing bodies please get somebody with some decent commercial experience and who has run their own business to please make up the rules.
It’s not about churn it’s about profit! Brogden admitted it wasn’t about churn anymore ‘we don’t even need to define it’. The banks are the biggest churners, they do it with mortgages and insurance. Insurance companies will churn their internally written ‘old policies’. Let’s ask (do a survey) of the insurance companies and ask them their ‘lapse stats’ from 0 – 36 months, and what if any (sic) the new clawback rules would have on their profit line? Seems only fair they are always asking us to complete surveys (free) to assist them! So let’s get AFA or FPA or Risk Info to run the survey! My guess is that it wouldn’t get too far, they all would hide away from giving such damming information…… because this is all about profit!
Yes it is back to the old days when advisers were responsible for 2 years of commissions. Clients change their minds and poof you lose your commission. This policy will in no way stop the prolific churners it is the responsibility of the insurance industry to monitor and cut off those serial churners. They would have a much better idea of who they are. We all know who they are really. i meet clients on a regular basis that have had thier income protection changed every year on the pretense of better pice or benefit and in some cases they have been wqorse off once the new policy has been placed. These are the real crooks in this industry as they not only blacken the name of good advisers but walk away when the proverbial hits the fan. I worked with an adviser back in the 90s when we were responsible for 3 years he had a book that he would rewrite evry year with a retention rate of 28% yet he was earning in excess of $600K+ annually in a town of 15,000 population!! The company was aware of the churning but he was producing over a $million in premiums so they just wore the issue until he left then as the complaints followed it cost them an estimated 5 million to silence the problem!! This is churning at its full throttle!!
Why don’t all insurers(through the FSC) get together and agree not to accept replacement business if less than three years since date of assurance.Problem solved!
This is a joke. A representative of a life insurance company , when asked about the level of churning… replied that ” we dont really know, probaly very little” … its a game being played by the companies to retain business, got nothing to do with protecting the consumer! I would have thought , if I was a consumer I would have the freedom to choose and NOT at the expense of work someone has done. I would expect my adviser to tell me of better products on the market. This development is quite frankly disgraceful !
I will say it again, it is insurance companies protecting themselves at the expense of the consumer and 99% of advisers!
This move by the FSC and FOFA benefit the Product Manufaturer with their own distribution channel more than it will ever aid consumers.
For years Insurers have been setting their BDM quotas to such levels they exceed market capacity. Takeover terms straight out promote replacement and churn is viewed as happening with policies going “away” yet ignored on policies “coming in”. Besides doesn’t the banding together of competition to dictate business terms indicate cartels & collusion???
I recently reviewed a trauma policy for a client that was put in place just over 2 years ago. His request was for me to evaluate how robust the policy was as one of his friends had made a claim on his trauma policy for Prostate cancer and had only received a pay out of 20% of the sum assured. “What would the situation be for me ?” was his question. After a detailed analysis it became clear that his current provider would also only pay out a partial benefit up to a pathology grading of 5 on the Gleason scale which the insurance companies use at claim time to determine what benefit is paid to the client.
I put some options to the client that he should at least be aware of. One option was to change providers to one that paid out a full benefit on all prostate cancers as confirmed by a qualified treating physician irrespective of the degree of progression on the “Gleason Scale”. The premium also turned out to be approx $1500 a year cheaper.
What should I be expected to do for this client? I did not write the origional policy but supposing I did? Financially once the new “churning” policy is initiated the motive from a personal perspective is to not provide advice which is in the best interests of the client! Can that be the right outcome for the Client, that the financial planner is financially penalised for giving advice that improves what he has? At the end of the day it is not Financial planners that are responsible for the sometimes significant product differences between companies especially around insurances like trauma cover?
I think that every case that involves the replacement of a policy should be independently audited to ensure that the recommendation is meeting the planners fudiciary responsibility to the client. If planners have to pay for this independent audit -then so be it but at least it does not impact on his advice to the client.
I’m not sure the extent to which churning is a problem for the industry. I have been in practice for over 25 years, including time as a life company BDM, and never directly witnessed risk business being churned. I’m sure it happens but I’m less certain is a widespread industry practice requiring almost punitive measures against all advisers
I’m in complete agreement with many of the criticisms levelled at the FSC as the stalking horse for the insurance companies. I’d also raise issue with those advisers promoting level and hybrid commission structures. As we reengineer Practice for FOFA we time costed new risk business and determined a clean skin cost us around $2600 rising to $4000 on average where medical history existed. With an average risk premium of around $3000 per annum I believe an upfront commission equates closely to the average cost of bringing on new business. My question to those promoting level commissions is “is it appropriate as we move to fee-for-service to continue to run losses on acquiring new business”, losses which in future years which may not be able to be recouped?
One of my friends and ex-boss when we were both Industrial Engineers once said “For every problem there is a solution that is quick, simple and wrong.” This is such a case. I recently “churned” a policy where the adviser had maximised commission and cost to the client. I brought his business to the company I had his wife with, gave him an equivalent policy, a multi-life multi-policy discount and saved him around 50% of premium. The FSC wants to treat me as a “baddie”. Other comments are right. The companies do have the information to know the professional churners and weed them out but they live in the fool’s paradise of believing that they will end up better then their competition. Make them accountable for churning and it will soon stop and those crooks who live off churning will leave the industry.
So I take on a new client, who has had a policy for 2 years. I can’t take over the policy as if it lapses for any reason I will have a clawback for commission I never received in the first place. I therefore do not receive advice from the Insurance company when he changes his bank account and the premiums bounce. His policy lapses, he has no cover and it will be my fault somehow. Sure… much better for the adviser and the client !
Alternatively I take it over, and find it is completely inappropriate. Now what do I do? Replace it and wear the clawback for commission I didn’t get? Leave it there and hope the client doesn’t get sick till after 3 years is up so I can then replace it? Charge the client a fee to cover the clawback for premiums he has already paid? Seriously!
I recently had a clawback because the client sold their business and no longer needed the corporate key person buy sell insurance – $10K ouch.
Then a certain insurer tries to claim clawback for their decision to refund premiums from outset on a client who APPARENTLY non disclosed some 3 years ago. They still haven’t been able to show me the clause in the distribution agreement (that I signed) allowing for this to occur.
The other side is that I have clients come to me that have been underinsured and where they tried to DIY the first time and didn’t get it right in choosing a quality policy with quality definitions. Now I don’t think asking them to consider a better policy is bad advice or churning.
As an ex-BDM and now adviser I have known of many serial churners over the years. When approaching other life offices in the past to do something about it, the response was always one of disinterest as the churned business boosted their sales figures and bonuses in the short term. If the Life Offices would take a stance against those they know who are offending, the problem would be solved. Instead, they want to penalise all advisers to boost their own bottom line further. One has to wonder the fate of the industry with these sorts of attitudes from Life companies.
With 90% of advisers now owned and run by large banks and insurance companies of course they can control the industry to suite themselves. Tied advisers wake up clients need your advice and independants, not the large institutions just looking after themselves.
Then they will have far less chance to pull this type of self serving rubbish.
Can anyone, mr brodgen actually quantify the level of churning that exists?
I hear not all insurance members of FSC endorse this policy. I also note there are some (currently prominent ) risk insurers who ARE not members of FSC, and who have not endorsed the policy.
Lets have an answer to this question-is it true to say this agenda is being driven by those life offices ( and their dealers) who are owned by banks and where the banks are exercising all sorts of ploys to increase profits from their insurance arm.
Do the banks think offering this sort of sop to the fundamentalists at the ISN will take the pressure off.
Do the banks think a return to tied agency arrangements, and the adviser control that ensures is a good thing, or have they had a wink & a nod from Tiger Bill Shorten that the fiduciary duty test will not apply to tied agency advisers
Right now, every adviser should now write to ALL the insurers they use asking them if they will be enforcing ( or modifying ) the FSC regime.
Vote with your feet, or get stomped by other feet !
I checked the FSC website, all Australian Insurers and Re-insurers are members of the FSC. Brogden and the Insurance Companies have done a trade off with Bill Shorten to keep him from completely screwing the indusrty. No business in Australia has to make provision on their Balance Sheet for 3 years just in case a customer wants to hand back the product after 2 years and 11 months and get all or part of their money back.
I agree with Jason. Get some people in policy making who have some good commercial business experience who know what they are talking about.
The Life Industry is going through upheaval and is being hit from many fronts.
The only way you can protect your Business, is to first understand how your Business runs,then look at the most effective way to run it,including managing policy cancellations.
Insurance Companies collect data,so you would assume there are people employed in these Companies who are experianced enough to collate data in conjunction with asking direct questions to every policy holder who cancels a policy,why are you cancelling?
I think the Insurers would be surprised if they dig deeper and ask more relevent questions to the policy holders and advisers as to why they believe this is happening.
It seems to make more sense than asking for input from people who are removed from the day to day workings of our Industry.
I question who this new FSC proposal is intended to protect, the client or the insurer. In the worst case scenario of actual churning, is it the client or the insurer that is being affected. If the churner is not acting in the best interest of the client then all efforts should be made to rid the industry of the churner. The insurers know who the churners are and they could do something to stop them by not accepting their business for example. If it is the insurer that is being hurt then their business model perhaps needs to be looked at.
Let’s not penalize the good honest advisers for something that is out of their control such as clients being unable to afford the cover due to things like divorce, loss of job or business going broke.
I think that there needs to be a clear distinction between commission rates and styles and genuine client cancellations/lapses and churning to obtain new business commission. I fear that the insurers are not separating these 3 issues.
The lack of any show of support from any of the insurance companies so far is extremely disappointing.
If any insurer does not agree with the proposals put forward, now would be a great time to speak up, let advisers know where you stand on these issues and get some advisers onside. The silence from insurance companies so far has been insulting to all advisers, who over many years have helped these companies grow to their current size.
I have heard a lot of talk recently from various insurance companies about partnership and mutual long term benefits by working together and now it would seem that it has all been talk.
It is very obvious that they appear to have no respect for the work that we do by the way they have announced the new proposal which is far more severe than the original, without any consultation on the impact this will have on advisers and their clients.
They must have big plans for direct insurance as the way they are going there will be significantly less risk advisers operating in a few years time.
Maybe the insurance companies could adopt the same claw back percentages to their management & staff salaries? If business does not grow as forecast they will claw back the salaries paid on the same percentages from the last 3 years.
What an absurd idea I hear them say, but is that not what they are trying to impose on us?
Thanks for nothing FSC!
Greed, that’s all it is. The producers trying to make consumers pay more profits through twisting the advisers hand. If the producers don’t want to sell their product, shut it down.
This is just the Producers scheming to leverage more value from the client without doing the hard work of “find, educate, support” process the adviser does.
Ha! The producers want to ban switching to more cost effective cover or stop clients getting a better product for the same money. A definition for churning. I’d like to see that get past the ACCC.
The producers are quickly alienating advisers as they shoot holes in book value with their continual meddling in the industry financial balance. What’s the next way they’ll steal the hard work advisers have done.
Producers, own afsl’s, are going direct on clients, cutting back coms, increasing claw-back, they are the industries worst problem.
Keep your friends close and your producers closer!
It’s all very easy really. Legislate for hybrid or level commission only and have a 2 year straight line responsibility period – ie if it lapses after one month claw back 23/24; if after 13 months 11/24 etc. For advisers charge a small fee (say $550) for plan preparation. So easy!
The insurance companies BDM’s know who the serial churners are. The answer is to NOT accept any new business from these people, put them and their company on a black list. I have been a risk advisor for 25 years and all these so called advisers who continually churn (and they have been around for many years) will always find a way to churn. This new legislation will not stop them. It is not fair to hold the responsible advisor financially responsible to the policy for 3 years. Clients circumstances change all the time. They lose or change their job, they get a divorce, some other advisor convinces them their policy is better (and doesn’t that happen a lot) any number of reasons that may cause them to want to change or cancel thier policy. Is this fair on the advisor that set the insurance up in good faith, absoluteley not. So take a look at where the problem is coming from, the serial churners and don’t accept their business. This will go a long way to relieveing some of the problems.
Why is Churning as you call it such an issue? if the Insurance Companies do not wish to deal with the adviser they can simply refuse to do so end of Churn.
And how are clients affected? they get the benefit of better definitions premiums and extras etc. Leave it alone it is not broke dont try and fix whats not broke. Hello Egg Board
As advisers we have had to deal with FOFA and the effect that would have on our businesses due to the Labor government and there relationship with the industry bodies that pay there way. Now we have a potential Churning issue that is supported by the Life Offices and will help the under insurance issue and promote our industry moving forward. Come on who are you kidding ??? If the FSC and Life Companies are transparent you would address the practices and advisers and make there names and business practices known to the industry. Come on boys use COMMON SENSE and support the loyal advisers that support you.
In the past I have been in contact with two major life offices re the loss of a case which to me semed to be suspicious, one of which was a health risk of a serious nature which would need a lack of disclosure to get through with out a loading, THEY WERE NOT INTERESTED!
I also had a lady with a brain tuma cancell, I bet that wasn’t disclosed (trauma)
My loss of business has increased since the GFC as planners began to turn to risk business as they did after ’87 and many mistakes were made, like cancelling existing before completion of the new business.
churning is the interest of the life companies, it should be sorted between them , it only needs a designated person in each company and an email like — DO YOU HAVE AN APPLICATION FROM WHO- EVER. Privacy comes into it but those desinated people could be excused and also charged with keeping enquiries secret.
The offending agent(the churner )can then be delt with ie one warning a second offence your dealer handles the sale of the client base but has to pass on the proceeds.The origial agent continues , may have been penalised by the loss of a client or the original life office involved may choose to re-instate, their option. The client can allways go after the offending agent.I doubt ASIC will bother.
Don’t be fooled – there is only goal of the proposed solution.
INCREASE PROFIT FOR PRODUCT MANUFACTURERS.
If the industry was serious about churning – the simple 100% effective solution is for the underwriters not to except any risk proposal underwritten within the last 3 years. (Like for like basis)
Every application requires disclosure regarding existing business – every underwriter is complicit in churning if indeed it exists – or is this another furphy designed to marginalise planners?
Obviously more profit in TV insurance – and why not grab a funeral plan while you’re at it!!
This is ridiculous. This industry has for the 37 years I have been in it, been real, realistic, and fair.This is neither fair nor realistic. Why should an adviser’s income be affected by divorce, going broke changing employment status, or going overseas, just to name few changes. The industry has always operated in good faith within the industry. This is an unfair outcome for advisers who do the right thing
Nobody has yet defined “churn” or how much is actually churned. Perhaps some large premiums may make the figures look ordinary, but by numbers of polices in force, I would suspect not many lapse. What, exactly, defines a lapse, as opposed to a policy which does not continue for a period of what time?
The insurance industry is making it’s own definitions, with no substantiation(who made up that last lot of statistics, anyway?)figures that aren’t there, and a time frame to revolt against, and it’s own agenda to satisfy itself.
Identify the churners, introduce a “yellow” card system, so they are warned, and then refuse to accept business for a period of time, so that they can be brought to heal. BDM’s need their targets reset so that realistic figures without churners are the order of the day.
Teach a few ethics and good old fashioned morals to the BDM’s CEO’S and advisers and watch the premium pool increase.
The insurance companies, in the main, caused this issue. Get rid of replacement terms, and get rid of the serial churners who take no notice of the warnings.
Surely we don’t need anymore government interference, including the FSC, in our industry.
It seems that if it isn’t one thing it’s another. The government should show some leadership and support the sector which employs more people than any other in our country – small business. They have the power to make it go away; they should exercise it.
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