Adviser Response to Churn Debate

1. Banning of upfront commissions would pretty much stop churn. But it would leave clients with old policies and a big mess generally, because advisers would have to use the platform of a client’s older policies on which to build the correct coverage figure.

   All of this, of course, doesn’t address the problem I’ve regularly spoken about here: how difficult it would be for new advisers and those with small client bases. Most wouldn’t survive and then who is going to sell insurance? Accountants? Don’t have the sales and people skills. Solicitors? Too busy chasing down class actions, finding some unfortunate/s to sue. That leaves us with Tom & Jerry. They’d probably do an infinitely better job of selling insurance than those who propose these red herrings.

   • Forget about sales or people skills Paul.

     Unless you are a qualified, experienced financial planner you don’t have the technical skills to advice to mums and dads let alone sole traders and SMEs.

     • What you’ve said on giving advice is quite true of course, Jamie. But my comments still stand re sales and people skills. To be an effective planner such skills are fundamental. It seems from polls taken over some years that sales and especially people skills are even more important than technical expertise. These aren’t my words; they are those of poll findings. Anyway, apart from we advisers, who else can really deiiver on these vital matters?

       • Fair point Paul. Sales skills, bedside manner, call it what you will. An ability to relate to a client and understand their needs and to then provide them with advice that suits their needs and their means is essential regardless of whether your a doctor, a lawyer or a risk adviser.

   • Agree Paul, but look, churning is the least of my worries right now. Incidentally I have never churned, never will and never will have the need to do it. I believe the real issue in the industry now is the future viability of the advisory force and general sustainability of the insurance sector. It is a dog’s breakfast (and dog eat dog) with no longer a level playing field for those engaged in the risk business. I have never known conditions to be so bad with drop out and lapse rates, difficulty in obtaining new business and the constant over regulation by government. The current fear and intimidation campaign by ASIC is a disgrace and is treating long standing and professional advisers like criminals. I say enough is enough and it’s time for government and regulators to focus on the real problems and cease the threats. Just let us get on with our task of insuring Australians in very difficult times.

2. I find the question ambiguous and misleading because until there is an industry accepted definition of what churning is and what it is NOT, then I don’t think anyone can accurately assess the results of such a survey.

3. We still have the problem of defining,”What is a churn” veres “What is a lapse” verses “What is a cancellation”. These are important distinctions, and depending on how these are defined BY THE INDUSTRY and PLANNERS(by consensus) we could arrive at eaxctly what is churn in the first place. All professional advisers will replace a product from time to time[Best Interest(provable) for the client] I am advised that insurers put all this in one big basket (to enhance their adenda?)
   Instead of debating the commission issue, we really all need to step back and find out exactly where all these definitions are, and the break down of them. Once a set of provable facts on this sublect emerge from the Insurance Companies, we may be able to have a serious logical discussion

4. Yesterday I had a call from a client who said, “my (life) insurance has become too expensive. I need the cover but I want you to find me something I can afford.” I had a quick look and found the same cover for $1,200 a year less with another company. When I told him, his response was, “why haven’t you told me about this? Why have I been paying more than I need to? Are you looking after me or the insurance company? If you want me as a client you should be looking at this every year to find me the best deal going.”
   Central to the “churn debate” is the question of how long an existing policy has been in force before being replaced.
   I have a legal duty of care to look after the client’s best interests. Can someone please explain to me how it is that I would be acting in the client’s best interests if the existing policy was 15 years old, but “churning” (ie doing the wrong thing) if it was put in force 15 months ago?
   Many of the same companies that say 120% upfront comm is unaffordable and unsustainable pay up to (and in some cases over) up front commissions of 200% in New Zealand. Does that mean the NZ industry is going to collapse?
   No. Two big differences: 1) their products are priced to be sustainable (rather than to undercut the market for short term gain) and 2) they include a longer responsibility period. I’m happy to accept greater responsibility if I am adequately rewarded for the risk.
   Finally, Paul is right. Reducing up front commissions will move the commencement of a career in this business from bloody difficult to impossible.

5. .I think that our industry needs to understand that change is upon us, FoFA is having a big impact. I agree that parts of it totally miss the mark, but financial planners will continue to run profitable businesses.

   The life insurance model is quite simply broken beyond repair in so many ways and the sooner our industry recognises that and makes the changes required the better. If not, the government will change it for us. The upfront commission model that currently exists means an adviser looses the presumption of innocence when making any recommendation to change contracts. We are always going to have to defend our advice, “who’s best interest was that decision really made in.”

   If the whole industry moved to a level commission structure, let’s say 20% per annum, there will be little room for advice conflict with recommending a move from one insurance contract to another. The reason for moving will be client based.

   There seems to be a real concern that moving to a level commission model will destroy the industry. What we need to see is a sensible advice model (regulatory) to support a level commission model. Advisers will survive and thrive in such an environment; many have done so using the old group insurance contracts that only ever offered level commissions. Wouldn’t the value of our businesses be greater under this model??

   As to why clients would be stuck in old contracts, I don’t understand this concern at all. What would the adviser be doing for their 20% per annum, just managing claims!

   In my opinion, Research distorts our offer and advice. We have an overly complex and expensive model. The insurance companies have a huge role to play. They need to come to the party if we move to a level commission model as one element of cost should disappear, therefore that should be reflected in lower premiums. This in turn will aid future sales opportunities for the under insured. If we are to believe that most Australians are under insured, there must be plenty of opportunities for advisers to seek out those prospects and solve the real problem Australians have.

   Further, the amount of new business that I witness, simply chasing the next “insignificant” feature or temporary pricing cut adds to the churning problem. We always want to see competition and innovation, but the vast majority of clients just need a really good insurance plan that will replace their income in the short, medium and long term should something go wrong. We don’t want a model that has to compete purely because of Research to add the fluffy dice and fox tails to no real benefit other than future sales. Let’s change before change is forced upon us, review our current offer to make insurance affordable again for all.

6. BK, Bob, Guy, Trevor have all make salient statements.

   My own experiences this year when asking specific life offices to provide accurate lapse data has revealed the truth. Is a death claim treated as a policy lapse? Yes. Is a client reducing their cover after 10 years treated as a partial lapse? Yes. How about an IP policy reaching its expiry age? Yes. This is not to say all life offices record their data in the exact same way. But it does demonstrate that there is NO set reporting criteria where clearly one is needed.

   A 20% flat commission rate is NOT the answer on its own. One size never fits all.

   I started writing “hybrid” type commission products in 1993 when it was far from fashionable. But even in 2013 I still have the need to occasionally utilise upfront commission. One such example being an $800 IP premium on a single young man with no other genuine insurance needs [at present]. Due to the added complexity of what we do these days, I still had to follow the Fact Find path, SoA and so on, and the only way I could partially cover my time was with upfront commission. And I stress the word “partially”!

   With the aforesaid in mind, for the past 25 years I have approached my client base as a pool of clients; a collective if you like. I never know how many clients will be utilising my services during any given year. As such, I often “rob Peter to pay Paul”. It may not meet with our idealistic bureaucrats’ visions, but for me it is a simply case of commercial reality. It has always ensured that the smallest premium client receives the exact same level of service as the largest premium client. Would a fee for service regime do the same?

   I say the first ones that need to get their house in order are the life offices. If they can’t define the various forms and reasons for discontinued policies within their own books of business; then what hope has anyone else got [ASIC included] of determining the real “lapse” issues affecting our industry today?

   • Phillip

     Like you I also have a preference for hybrid and level commissions.

     So, whilst it would be to my personal advantage for upfronts to be banned, my concern is that if upfront commission were banned, that there would be a number of unintended consequences.

     The first consequence would be that the competitive pressure applied by adviser to the product manufacturers would all but disappear. Insurers could make changes to products confident that advisers are unlikely to go to the considerable effort to recommend and implement a product switch for no compensation.

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