The FPA and AFA have both acknowledged the insurance industry’s sustainability issue needs to be resolved, but they have cautioned against rushing to a solution.
Last week, the Financial Services Council (FSC) launched research which highlighted that the sustainability of the life insurance industry was one of the most pressing concerns among CEOs (see: Renewed Pressure on Risk Commissions). According to the study, the most popular proposal to address the issue was to change the way advisers, and employees, are remunerated.
Speaking to riskinfo in response to the findings, FPA CEO, Mark Rantall, said any debate about remuneration – whether in relation to churn or sustainability – would clearly be very emotional.
“That’s why we think creating a broader blue-print for the industry is a better solution for this, so we can move away from the emotional debate of churn. There are a lot of component parts that we can collectively work on to improve the insurance offering for advisers, and also make it better for consumers,” he said.
Mr Rantall also warned against taking action before the issue had been fully quantified.
“As of today we haven’t got further data that specifically points to the churn issue, although we have requested it as part of our fact-finding work towards building an industry blue-print. We certainly know the numbers around lapse rates, and those numbers have gone up over recent times – I don’t think anyone is denying that – but the question is, of those lapses, what relates to churn and what relates to replacement policies?
“We should be trying to identify the problem first, and how big it is, and then go about applying the appropriate solution, rather than everyone having to pay the price for the poor practices of a few.”
We need to step back and be clear about the issue we’re trying to solve
The AFA was also keen to put the brakes on any fast-tracked solution. AFA CEO, Brad Fox, said that changing the remuneration model may be the easiest and fastest way to address the issue, but it shouldn’t be the only solution.
“We need to step back and be clear about the issue we’re trying to solve – is it churn or is it sustainability? Jumping to conclusions will not help anyone.
“Everyone hates uncertainty, but let’s not fall into the trap of racing to a decision, and ending up with the wrong solution.”
Mr Fox will feature in a panel discussion about this issue, and the evolution of the insurance customer, at the upcoming FSC National Conference. He will be joined by FSC CEO, John Brogden, and ASIC Deputy Chairman, Peter Kell. Riskinfo will be tweeting live from this event – click here to follow us on Twitter.
We all agree that a sustainable retail Life Industry is crucial to the welfare of all Australians and that any decisions around making changes, must be based on factual information, with data collated correctly and comprehensively by all Life Companies.
Inclusive of this, should be a similar study of direct offerings to look at the sustainability issues, as the 40% lapse rates in the first year of these products, shows a lack of loyalty from those customers.
Retail Life Insurance has been the back bone of the Industry and we should never forget that clients want and prefer certainty which is why they will pay more to have this.
I agree Jeremy, the Insurers should have a hard look at the 40% lapse rates, writing insurance in this manner was always just going to be a short-term fix to revenue.
Where was the business plan for these that identified sustainability and adhering to best interest duties instead of marketshare for the sake of marketshare.
would love to be at the panel discussion.
In addition to waiting for solid, empirical data it is also important to give consideration to the potential negative consequences of changes particularly to changes in remuneration.
In the interests of disclosure, I prefer a level remuneration structure commercially. I don’t, however believe that this should be mandated.
In particular, whereas the current remuneration model does provide obvious incentive for unscrupulous advisers to churn policies a mandatory level remuneration model provides incentive for unscrupulous advisers to neglect clients and to not do the work where it is in the client’s interest. This not only leaves clients worse off but also removes incentive for product provides to maintain premium competitiveness and product innovations.
All professions have the potential for unscrupulous members to act in their own financial interests rather than in their client or patient’s interests. We should look to the other professions to see how the manage it (hint, they don’t do it by legislating remuneration): for instance, how does the AMA limit over-servicing by doctors?
Obviously, in my opinion, remuneration is not the answer and will lead to negative outcomes for consumers.
Part of the solution is for insurers to do more to defend their business. It is simply not good enough that they look to limit advisers options rather than take action themselves.
Firstly, they need to make it easier to increase benefit levels or improve policy terms. At the moment it is often harder to increase an existing policy or improve the terms than it is to apply for new cover.
Secondly, they need to change the way they engage with advisers by recognising and supporting the advisers that recommend policies for the long-term rather than court those for the heroin shot of new business.
I am aware of at least two insurers that are making practical changes in both of these areas. They are simply making it very hard to justify switching from their policies to a new one.
Much criticism has been aimed at churners. It must be remembered though that ours is a very tough industry and in a tougher-than-usual economic climate especially new advisers won’t survive unless they occasionally “churn”. How else can they write business and more significantly, how can they live?
Rarely do we come across prospects who don’t have any life-risk insurance. So it’s not as though these new adviser are recommending new policies to virgin potential clients. If they decide not to change the existing policy/ies, some of which may be years old, the client will pay more overall in the face of economies of scale and/or more policy fees. This scenario will not be easily settled.
Longer-serving advisers shouldn’t do this as a matter of course, but life companies have a role to play here. They need to do more to make it attractive to retain existing policies and find new methods to remunerate advisers who seek to upgrade rather than switch.
Get rid of up front commissions, implement a 2 year straight line clawback on hybrid and churning, if it is endemic (and I have yet to see proof of this) will plummet.
In what other business can one get a $100 monthly premium from a client and the next month receive arount $1,400 commission? Hello!! This very model invites bad behaviour. Terminate it before legislation is enacted which will do it for us. Or, worse still, commissions will be banned (only a matter of time in my view).
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