- Unfairness - clawbacks will apply, even if cancelling or moving the policy inside 3 years is in my client's best interests (60%)
- Uncertainty - to my business, caused by the extended 3-year period during which my income coud be clawed back (23%)
- Unsustainability - my current business could only sustain a 1-year clawback period (11%)
- Unsustainability - my current business could only sustain a 2-year clawback period (2%)
- Other concerns (2%)
- Not sure (2%)
Our latest poll asks you to identify the main concern you have with the clawback provisions contained in the Life Insurance Framework proposals.
In responding to our poll last week, advisers outlined their objections to the proposed clawback provisions (and to the poll itself!), where their concerns could be grouped into three main categories:
- Unfairness: the unfair nature of the proposed clawback provisions, particularly taking into account the fundamental principal of serving the client’s best interests, if this involves policy cancellation or change inside the first three years
- Uncertainty: the uncertainty to a small businesses created by the prospect of having earned income clawed back up to three years after having been paid
- Unsustainability: the belief that a proportion of advice businesses would become unsustainable if exposed to an extended clawback period
A cross-section of comments we received from advisers last week included:
Best interest duty should overturn any insurance company from instigating a clawback…
Clawbacks that the adviser has no control over – such as the client cancelling due to changed circumstances – should not be levied against the adviser after the first 12 months
…if the insurer increases premiums (particularly in the case of level premium policies) then the adviser should not be subject to a clawback – even if the product is replaced.
The clawbacks should not affect any business that is not churning. Best interest duty should overturn any insurance company from instigating a clawback.
Most of us would accept that there could be a slightly higher clawback period if an adviser replaces the business themselves but that is not why most customers cancel – they do so because of the excessive increases in premiums by the insurance companies.
Advisers also reminded their peers that the entire clawback issue being debated today can be traced back to the industry being urged to act on the issue of churning:
Yes a 12 month responsibility period is warranted. We NEED an industry wide “Churn” definition NOW before we proceed with our Business plans after Jan 2016.
There really needs to be provision for poaching. No clawback for poached policies, but the poacher receives reduced comm commensurate with what would have been clawed back.
There is no justification to have a 2 or 3 year clawback as there is still no documented proof that churn exists.
…And in yet another call for naming and shaming and/or black-banning, which has been a consistent message from advisers to the industry for many years, one adviser commented:
It’s time to name serial churners…
It’s time to name serial churners as I am fed up with being bundled in with the cowboys of our industry.
In seeking to isolate your major concern with the proposed clawback provisions, we readily accept there will be many advisers who would argue the proposed provisions tick all three boxes of unfairness, uncertainty and unsustainability. But if you can, are you able to identify the option that most closely reflects the reality in relation to your own business?
Tell us where your biggest concern lies. And under the assumption that the status quo no longer remains an option, we’d welcome your views on the best solution to accommodate the seemingly unstoppable demand for change – a solution that will serve the best interests of your clients, while sustaining your advice business…
In order for Retail Life Companies to be able to pay claims, meet their other expenses
and make sustainable profits, it would seem fair that the adviser who sold the policy, helps maintain the policy with the Life Company.
However, this becomes difficult when on the first, second or third anniversary, the Life
Company notifies the client their premium is rising 10, 20 or 30%.
Clients will NEVER accept those rises going forward, as they know inflation is 3% and they also know it is now only a phone call away to a plethora of policy peddlers.
A 3 year clawback is justified if the adviser who wrote the Business, moves it within a
couple of years and that person should not be allowed to receive any upfront or
hybrid commission on a replacement policy.
I would have categorised the above adviser as a churner, so ”that” adviser should be
penalized, not the vast majority of honest, ethical advisers who do the right thing.
Jeremy, you are right on all accounts. I can’t imagine the mess all round when premium rates inevitably increase under a 3 year clawback regime.
Now, assume for a second that one of the issues that life companies are trying to remedy (even if they don’t explicitly say so) is that premium rates were set on an assumption of lapse rates at a level that is now well below the current level of actual lapse rates. Many of the life companies have made specific mention of increasing lapse rates in their reporting to market over the last 3 years or so, so it is clearly an issue. And they know it’s not all due to serial churners.
So, if you take that scenario as a given, what is the solution?
I personally don’t agree with the 3 year clawback, and I can’t quite fathom how it came to pass – but as a blunt tool it helps address the issue (whether you agree or not, evidence shows that clawbacks do have an impact on lapse rates). The initial 5 year rule proposed, while probably impossible to administer, may have been a fairer outcome?
Of course another “solution” that works to reduce lapse rates based on factual evidence of data is a level commission structure. But as has been commented on many times, that has many problems for generating revenue to sustain a business.
Yet another solution is that the life companies could accept that the higher lapse rates are here to stay and to increase process accordingly. That itself creates further lapses, so becomes a vicious cycle.
So, none of those are great solutions. Again, taking the scenario as a given – any other solutions out there?
If a three year clawback period is enforced then, at the very least, a 3 year guarantee that no premium increases will occur in that time should be mandatory for that client. If companies object to this on the grounds of ‘not being able to foresee the market that far ahead’, then why the hell shouldn’t we be afforded the same provision. Oh, the irony!
Where’s the ‘all of the above’ option? I’m sick of these so called surveys coming up with a supposed opinion from advisers which then suddenly used by the vested interest groups to push their barrow. Note my response as ‘all of the above” please.
Unfairness: the unfair nature of the proposed clawback
provisions, particularly taking into account the fundamental principal
of serving the client’s best interests, if this involves policy
cancellation or change inside the first three years.
So not putting AMP on the pedestal but they (in conjunction with their advisers associations (all 3 of them) approval) with the 5 year single payment plan (SPP) 80/20 +GST hybrid with 1 year clawback. If BID came in during the 5 yr period then cost to serve only applies.
In all fairness this is 100% better for the advisers because AMP had the advisers involved with them understanding that it needed to be addressed..
Trowbridge has the backing / involvement of politicians who get all the perks in the world yet want to cripple the advisers who write risk.
Tell them to get rid of their flying perks etc and then they might get some respect from the community.
Sick of this crap.
I think this poll is certainly more accurate that the last one. The issue with a 3 year clawback is still the uncertainty of customers cancelling due to affordability and the excessive premium rises by insurance companies.
If the 3 year clawback happens most advisers I know are planning to sit on their trails, look after existing customers and try and write other, more profitable business (not risk) and many are looking to downsize (i.e. get rid of staff). Some are saying they are just going to sell up and exit.
I still find it amazing that government have been misled by the banks and insurance companies into believing this will help fix the underinsurance problem when its just going to make it worse and increase unemployment.
More amazing is the short-sightedness of the insurance companies themselves. At this stage the CEO’s are probably celebrating the short term profit this will give them without actually realising that they are cutting their longer term new business.
If this goes through my prediction will be that AIA, Clearview, Zurich, TAL and Macquarie will really struggle and at least some of them will have to exit the market making things worse for customers.
Most of these companies will have to increase their direct selling and will quickly realise how expensive this is with even greater lapses and huge advertising costs.
BDM’s and underwriters will also be the first to go to cut costs (more unemployment). Last will of course be the CEO’s!
Insurance companies will be saving on the one hand and losing more on the other so my prediction is that premiums will actually end up increasing.
If we advisers think this is bad I wouldn’t like to be a BDM or underwriter in the new world because when they start getting axed they cant even fall back on changing to risk advice because no one will be able to afford to start a new risk business in the future.
Well said Reality Check – I couldn’t agree more. It really is amazing that so many of these players can be so short sighted!
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