Mandating hybrid or level commissions for insurance advice will not remove the practice of churn, according to an industry legal professional.
Claire Wivell Plater, Managing Director of The Fold Legal, said just because an adviser uses hybrid or level commissions, instead of upfront commissions, does not mean the churning issue ceases to exist.
“If an adviser takes over a client from another adviser, the best they could get if they continue an existing policy would be a small trail commission,” she said. “So hybrid and even level commissions can still incentivise advisers to churn, although obviously, to a lesser extent than full upfront commissions.”
Ms Wivell Plater said she believed the current insurance review being undertaken by the Australian Securities and Investments Commission (ASIC) was the regulator’s way of sending a message to the advice industry that commissions were driving inappropriate insurance switching.
“It is pretty clear that ASIC would have liked to see life insurance commissions banned as part of the Future of Financial Advice reforms,” Ms Wivell Plater said. “Because they weren’t, ASIC has to find other ways of rectifying the high levels of churning its shadow shopping uncovered.”
It is pretty clear that ASIC would have liked to see life insurance commissions banned
She warned ‘churners’ there would be nowhere to hide, as ASIC would be conducting specific investigations into advisers whose clients were regularly upgraded, using data it is currently obtaining from life companies.
“ASIC will be looking at the typical longevity of policies and how often they are ‘upgraded’. This will provide a pretty targeted indicator of which advisers are engaging in inappropriate switching.
“Some of these advisers may believe they are honestly doing the right thing for their clients and in some cases, they may be. But that’s a judgment call that ASIC will now make.”
In order to demonstrate the appropriateness of their advice, Ms Wivell Plater said advisers should develop a ‘Product Replacement Policy’ which clearly explains the circumstances in which they can recommend how existing insurance products can be replaced.
She also warned against relying on system-produced product comparisons, citing ASIC’s March 2012 shadow shopping study as a guide to the way ASIC will view switching recommendations: “The study found that nearly half of the switching recommendations inadequately provided the required information about the recommendation to change.
“The common industry practice of incorporating system-produced product comparisons, with little else, is not adequate,” she said.
The regulator recently confirmed it had served notice to Australia’s life insurers, requiring them to provide data for a project relating to inappropriate insurance switching (see: ASIC Commences Churn Inquiry).
Having just returned from overseas I remain amazed at the bubble we live in here in Australia… Why the drive to get rid of commission on insurance? A structure which has been an appropriate way if remuneration for centuries all over the globe, while at the same time here in Australia life offices themselves directly market and by the nature of direct marketing openly encourage the public to jump on board with no underlying message about appropriateness of the product or the consequences of replacement… It’s really messed up, it makes it difficult to fathom whether ASIC is really serious about ensuring Aussies have adequate advice around the cover they obtain or are just seeking regular headlines to justify their involvement in discussions re risk protection.
There are other ways serial churners or inappropriate advice could be weeded out starting with the adviser declarations on the application, if a case is submitted which replaces one in existence – the life office the business is going to should take much more interest if they are truly concerned about this issue… My plea is for 2 things, one; an even playing field in which advisers and those who offer cover direct abide by the same rules and two; that the industry addresses the issues around sustainability in ways which stop putting the burden on risk advisers – who in the vast majority of cases are simply trying to look after their clients, while trying to keep their small businesses competitive in a world where every bank, credit company and even health insurer is constantly trying to lure clients away from the advice process.
Perhaps Peter Kell from the ASIC could not take any income for 12 months and see what it is like to struggle to get your business up and running.
Churners why the interest? 1% of 1% of advisers do it, the ASIC has no legal standings to investigate such matters it is illegal for them to do so, the ASIC does not have the powers to seek confidential information about advisers practices through the Insurance companies, it is a breach of privacy.
And let me make this very CLEAR if a company takes over another Insures policy it also takes on the policy wording, Should at claim time the previous policy have better definitions then the take over company must honor that. SO WHAT IS THE PROBLEM PEOPLE? oh Its FOS who for some reason don’t honor its obligation to uphold policy wording with Insurance Companies. Such as Zurich.
Joe Hockey what are you doing about the ASIC and its destruction of the insurance industry (its the egg board again or the Wheat Board).
All to many people who have never had to work for free nor would they ever consider it have to much to say about nothing they understand.
Advisers don’t be fooled into thinking its the ASIC 100% behind this issue some Insurance companies are fueling the issue.
Most banks today are not FOFA compliant they cant be, How can they be if they only offer one product of insurance? how is that in the best interest of the CLIENT look into that Mr Kell.
Insurance companies dealing direct now a breach of FOFA so how is that compliant such as Zurich’s online insurance. Perhaps you should cancel an AFSL or 2.
Planners only 2% of the population uses a planner, really so how many people are we talking about?
This commissions thing well its a very minority view an attack led by a major Insure and Bank cause they don’t want to share it.
Its not about they way we go about earning an income its simply about Money and taking from your pocket to increase the Insurance companies bottom line.
Insurance companies will not deal with serial churners they simply refuse to take applications from them its not an issue at all.
I can name 20 people that insurance companies such as ING,AIA, ZURICH and AMP have stopped doing business with simply because of churning it is regulated, full stop
MATT – You couldnt be more wrong!
“And let me make this very CLEAR if a company takes over another Insurers policy it also takes on the policy wording, Should at claim time the previous policy have better definitions then the take over company must honor that.”
When you swap to another insurer you take on THEIR wording, you dont get the benefits of the old policy AND/OR the new one
it is up to the adviser to ensure they are not doing the client a disservice in changing them to another insurer
god help your clients..
Dear Daniel, I take on board what you say and suggest you speak to an underwriter with some knowledge perhaps Phil Anderson at Zurich or Jane Edwards at One Path.
Take over terms are not clear to all in the industry and simply it is not made common knowledge.
Swapping is different to take over terms, Swapping is churning please be careful in your definitions those of us with 30 years experience do know what we are talking about.
Dear Daniel, I take on board what you say and may I suggest you speak to an underwriter with some knowledge, perhaps Phil Anderson at Zurich or Jane Edwards at One Path Michelle Gill at AMP or Brett Turner these are some of the most senior underwriters in Australia oh I forgot Karen Janes of TAL or perhaps Andrew McPherson of AIA. the question in the application are we taking over or replacing other insurance has more than one reason.
The reason they ask for a copy of the schedule is not just to confirm its existence.
Take over terms are not clear to all in the industry and simply it is not made common knowledge.
Swapping is different to take over terms, Swapping is churning please be careful in your definitions those of us with 30 years experience do know what we are talking about.
I hope this helps your practice
Nonsense Daniel, where did you get that information from? Are you suggesting the contract wording in the existing policy changes simply because another company takes over? Get a legal opinion because my friend, your suggestion is totally incorrect. The client could have a field in court if that was the case. By the way, God is spelt with a capital “G” whatever your religious affiliations.
Daniel it would appear you are confused. The reason why we need to assess a client’s existing policy and compare it to a potential new policy is because the existing definitions will cease and thus it’s our obligation under BID to advise the client of the pro’s and con’s of moving. Advisers need to be very careful of moving business without diligently assessing the variance between both policies to mitigate the risk of being sued.
As for commission, upfronts aid with cash flow in the short term but not in the long term. More planners need to think long term as hybrid and level (especially when recommending level premiums is more advantageous long term). I think that 100%+ commission is excessive when you look at how general insurers are paid.
If insurance companies don’t make a profit until year 6/7 then we advisers who don’t move/churn (whatever you call it) need to realise that our businesses and client’s will suffer as these companies will simply have an a cross the board premium increase. We can not expect insurers to not be profitable but that seems to be what some planners think is okay so long as they are profitable thus companies like TAL, OnePath, Zurich as AMP reviewing lapse rates. Personally I think we as planners should work with the insurance companies to find a more sustainable solution to ensure the few don’t spoil things for the many and that premiums don’t increase.
Agree with Tim – how could I not? Churn has only recently come into the picture but it’s been going on for as long as I can remember. Is this, as Tim said, their (the regulators) raison d’etre (reason for being) because they have nothing better to do?
There really isn’t any way that churn will be eliminated. I’ve said in this forum before: for newer advisers, if changing policies is considered bad form and was stopped entirely, they wouldn’t survive in our industry. For insurers, this is an occupational hazard – every other industry has its own occupational hazard (except the banks!).
As for commissions, this form of remuneration is the only one which will keep Australians at least with some life-risk insurance. If clients had to pay fees to an adviser for getting this done for them the underinsurance problem here would become untenable.
As I have set my default commission model as hybrid, I can’t be bothered ‘churning’. It’s immoral and only disturbs the client, who questions ‘well why didn’t you give me appropriate advice in the first place?’ Having said that, I’m sick to death of having to fix up out dated policies whenever an insurer starts a new series and I have to create another SoA just to tweak improvements, with no guarantee that I will not have to repeat the process a few years down the track. Claims is another issue. If ASIC wants to fix the insurance industry then they should set a standard that all insurers should be bound by when it comes to the processing of claims.
Mark, as we have an obligation to review your client annually. Insurance companies are always competing for market share by bettering their competitions definitions – enticing advisers to consider and switch to their better and potentially more cost effective product, how can this be viewed as churn??
Personally I am sick of the subject and sick of whining insurance companies and “advisers” to the industry jumping on this bandwagon.
Let’s just on with our job. I tend to agree with Matthew (although I am not sure what he is on about with his singling one Insurer??) ASIC need to be very careful about their legal position in this witch hunt.
Over the past 38 years I have witnessed the various steps taken to try and eradicate the questionable actions of a small group of less than ethical agents [now called “advisers” or “A.R.s”].
All along the life offices have failed miserably in their pretence. Making out that unnecessary policy replacement is a plague, yet continuing to push new business “incentives” and “offers”, rewarding the adviser who pumps in supposed “new business” whilst ignoring those who maintain a long term book of business with them. I have over $1 million of in force premiums with one life office, yet have never been “rewarded” or even “recognised” for not re-writing them with other life offices.
But why haven’t I? Because my client’s have not asked me to and in my regular reviews there has not been a compelling enough reason or reasons to do so.
The interesting question for me over “churning” lies with who is the actual instigator.
On occasions a client has come to me, or at review time has asked me to see if I can “reduce their premium” as it’s getting too expensive, particularly as they get older. Of course, had they taken the level premium I suggested 15 years ago, they would not be asking me this question now. But I digress. So what am I supposed to do? Do an industry comparison, select the “lowest costed policy” whilst ensuring the client policy benefits match up or are superior? Notwithstanding such things as a fresh 13 month suicide clause upon issuance of a new Term Life policy. Am I churning? No, apparently I’m acting in the best interests of my client.
Now let’s just change one thing. At review time, in keeping with my “best interests duty” I identify several lower costed premium contracts with same or better policy wordings. Am I “churning” if I suggest to the client that they look at “updating” their current policies? Even if it’s on level commission? The answer is a potential “yes”. Sure, I would carefully document every step of the way on my files and in my Statement of Advice. But as I am the one instigating the potential replacement of an existing policy, does this automatically change the landscape? It does if I accept what Ms Plater says and what ASIC is trying to have us believe is a chronic issue in our industry.
But what is ASIC really going to achieve in the long term? A worsening of underinsurance in Australia and a level of paranoia and mistrust in the eyes of the consumer, both unnecessary and mostly unfounded.
How about ASIC recognising and life offices rewarding the 99% of ethical people in our industry rather than continuously casting aspersions based on 1% of the bad apples we all know exist in EVERY industry AND in every government and in every bureaucracy.
Claire Plater has obviously no experience in the industry and has certainly not read the report of the British Govt into the matter when they re-introduced commission into Life Insurance last year.
Yes Claire, the Financial Services Authority in the UK took your idea and beat the daylights out of the life insurance industry with it, and so badly did the consumers and companies react that they figured it was one of the those left wing socialist ideas of controlling the nasty capitalists taught by paternalistic thankfully non tenured now Uni tutors who have never had a real job.
So they dumped it all and went back to; yep you guessed it commissions..
Someone with a life insurance policy is a whole lot better off than someone who has none.
I wonder what Claire Plater does for her life insurance if she in fact has any.
Claire makes a statement that “It is pretty clear that ASIC would have liked to see Life Insurance commissions banned as part of the FOFA reforms.
It took the voices of many experianced advisers tp point out that the retail Life Insurance Industry would have been devastated and the levels of life insurance held and purchased by Australians, would have reduced if these suggestions had been implemented.
Claire also said ASIC did a shadow shop which exposed high levels of churning.
It would be nice to know what questions ASIC asked in order to determine if a policy lapsing was churned, or because of other reasons.
What exact data is ASIC obtaining from the Life Companies, as unless the data is correctly attained, it is useless.
Until there is clarity around what the problem is, there can never be a correct solution.
This debate is becoming exceedingly tedious.
ASIC, quite rightly, expects an adviser to be able to demonstrate the basis for any advice provided. As a taxpayer and as the owner of an AFSL I am a very keen stakeholder in ASIC: I’d like to understand what their basis for directing their very tight resources to this review.
All advisers and consumer advocates should be contacting their local federal members of parliament as well as their local senator and asking for an explanation.
I have and will again.
OK Jamie, good move we should all be thumping the desks of our local members and asking why ASIC has commenced this fear and intimidation campaign against the professional mainstream advisers. Hey, throw the so called churners out and leave the rest of us to get on with our struggle to see people. I will be seeing my local Federal member, Mal Brough up here on the sunny coast and I know him well.
Phillip,Mark & Jeremy, very good points ! I have been on the Hybrid commission system for every client since 2004 & it was the smartest decision I’ve made. I rarely change policies except for situations where perhaps cost has become a major issue & a burden to the client. Or (usually) they are so under-insured it’s irrelevant. I push Level premiums hard but it’s up to the client in the long run. I don’t “churn” & never have, I have no reason to. I understand the Insurers are looking at the sustainability issue but they have made a rod for their own back. When will one of them have the courage to limit full up front commissions ? Probably never & this is the danger, the regulators (ASIC) will then have the pretence to step in & make that call (or worse) & force the issue. This is the last thing that we (& the insurers) need, look at the UK experience, it was a disaster & rightly the decision was reversed, but not before many in the industry were wiped out. As far as direct insurance is concerned, the lapse rates there are horrifying but that problem seems to be bundled up as an industry wide (IFA’s) problem, which of course is very misleading & I suspect the insurer’s are using this to advance their argument. We all have a lot to lose if we don’t find an equitable solution !!!
I think one must ask why is the churn issue is being discussed? They way my skeptical eyes look at why churn has been raised is because insurers are not making the huge profits they have on overpriced commission based life products. Lets just consider this, a life company must pay out over 100% of the premium before it has recovered anything more than a 1/12th from the policy payer, not to good for the balance sheet. The policy’s don’t become profitable until year 3 onwards and then they increase in profit ie: price over cost.
With the changes brought about by FOFA we see many advisers turning to life sales to prop up their revenues , and in many cases churning.
The solution is very simple , but unlikely to be implemented by the life companies. If life companies were to produce properly priced Life cover , ie: prices like we see in Corporate Superannuation Funds, with nil commission as well as the high cost to consumer commission products then I believe churn would stop. Why ?
Firstly under an advisers obligations to provide “best” for client would require the adviser to show the client the benefits in either paying the adviser a fee or paying the adviser via a higher premium and commission. It would mean that the practice of telling clients that the life office pays the adviser would have to cease , and the client would be able to make an informed decision about the changes being suggested by advisers.
This is a simple solution, but I am sure not a popular one especially by the aligned commission driven advisers.
Ian, the unfortunate position we all face, is a substantial amount of time and expense in complying with all the regulatory and Insurance Company requirements to advice, get the Insurance underwritten, administer and chase up, fix up mistakes etc, which clients will not pay for.
The issue of churning being a big problem has not been proven yet and it appears maybe by using churning as a excuse, is a way to bring about lower commissions the Insurers will pay advisers in the future.
Let us hope clarity and openess is also part of the future.
Everyone seems to be missing the point…I’ve been with 3 AFSL’s over the past 12 years because of takeovers. One thing that I have NEVER seen in any of the 3 AFSL’s templated SOA documents, or in any comments above, is any reference to the 3 year Non-Disclosure clause. I’ve often raised the question with Life Companies why they can’t make it a lot more efficient to top-up an existing policy…mainly regarding underwriting (UW)? When topping up an IP policy for example, why can’t UW simply ask for a statement of continued good health as opposed to undergoing a FULL personal statement again? I’ll tell you…because the Life Company wants to restart the 3 year Non-Disclosure for the increased amount. If advisers spent 10 minutes helping their newly acquired clients understand the potential ramifications of the 3 year non-disclosure clause, I would suggest the client would most likely choose to stay where they are…because let’s face facts…people part with insurance premiums so they can receive the appropriate amount of funds; to the appropriate structures or people; in the shortest possible time and if a claim occurs within 3 years of policy inception, then the time to have a claim paid can be reliant on Medicare and PDS records. If you have ever had a claim, then you’ll know what I’m referring to. If you have never dealt with a claim, then ask yourself…if the phone rings today and it is a client who has just encountered a problem, would you have more comfort knowing the policy is 5 years old or 1 year old because it was replaced last year? Life companies have much more difficult time proving the non-disclosure was “Fraudulent”.
I respect Claire and her opinion, but I sense she is morphing into ASIC. Both are lawyers, with a lawyers attitude to 6 minute increments for advice charging purposes.
But some lawyers also act as ambulance chasers in damages cases, charging “success fees.’ Isnt a success fee just a nice phrase for commission, after all its expressed as a percentage of a settlement, calculated of course after “disbursements ”
Risk advisers work on success fees – no policy issued, no remuneration. We do admin for life companies gratis, but we wont do the insurers admin if there is no trail commission to help us service our clients and build a value to our businesses
Clients wont pay $360 per hour in 6 minute increments for risk advice, Advisers bear the risk of no sale, and the cost of claims management.
Really its a faux debate, activated by Mr Brogden and his new found ” mate” Mr Whitely of ISN fame. The FSC sees a commission reduction campaign as benefiting insurers who lost profit because of their unstainable D&TPD rates offered to the ISN group , but deep down FSC know they need IFA advisers for the quality and quantity of the business we submit, and salaried advisers are not the answer.
As for the ISN, less commission equates with ( ultimately ) less advisers attacking the poor advice deal offered to its ISN members. Not to mention stopping outpourings to SMSF sector
Here here BillB … this no win no fee is a farce. Sorry to digress, but I am boiling over the legal fraternity getting away with “misleading” advertising.
I know of a person who is stuck with defending his case in the supreme court as if he backs out now, having won in lower court – now insurer has appealed the decision, the lawyer will bill him for many many tens of thousands of dollars as he will not have “lost” unless he loses the appeal in the highest court. And if he wins the appeal the lawyer is paid first!! His life is destroyed – nowhere to turn… the lawyer will be paid whether the client receives enough compensation or not, he will have to draw down on funds in his house….all because he fell for the No Win No Fee misleading line. Where is the regulator in this instance, certainly not defending the vulnerable!! Too busy asking for more staff from the feds, to chase red haring’s and pamper to the insurers who refuse to look within for efficiencies.
They have it all wrong – churning can be an defunct term if the insurers will just refuse to do business with those who are churning, and they know how they are. I am tired of this boring topic…. insurers, you can just fix this problem…just do it so we can concentrate on repairing the underinsurance problem and put our efforts towards industry sustainability issues, the real ones can be identified.
Ms. Plater, what experience do you have in the risk insurance industry? Most of the comments above are relevent although those by Ian Bailey don’t make any sense. I don’t know what “churn” really is, is it changing a policy after 1 or 2 years for no good reason? If that’s the case how many advisers are doing this, the small percentage of desperates I suspect.
Those who deal with clients who have half a brain and also tend to do hybrid commission like myself never have a need to resort to this practice. So how many are doing it, do we really know? I suspect the threats and intimidation from ASIC are about it being under pressure (as they should be) for being asleep at the wheel with the real problems out there. This is simply using a sledgehammer to crack a nut.
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