FMA starts major investigation into churn
The Financial Markets Authority has launched a massive investigation into life insurance churn using special powers it has under law.
Friday, May 29th 2015, 6:00AM 
7 Comments
The authority has written to 12 insurance firms ordering data on all new policies written in the past five years including policyholder details, adviser details, commission payments made to advisers.
It has also included a detailed questionnaire asking questions including ones around what premium levels would be if churn was reduced and also questions around claims experiences on replacement business.
Partners Life managing director Naomi Ballantyne welcomed the enquiry saying it would “sort the wheat from the chaff.”
She says there have been a lot companies accusing others of churning business and this enquiry would get the facts on the table.
While there are reports churn is making up around 80% of business written at the moment, there is no data to confirm this. Ballantyne says she has always believed replacement business makes up 40% of the business written.
When Partners started around 60% of its business was replacement and that fell to around 40%, she says. However there was a spike when Fidelity bought the Tower business.
Ballantyne says when business is replaced often new business is written for the client at the time.
She said it was very difficult to quantify what would happen to premiums if replacement business reduced, and she was pleased the FMA was asking about claims experiences.
AIA chief executive Wayne Besant said the enquiry will give a good sense of what the market is doing. "It's good to have a really close assessment of the market."
"At this stage it's just a request for information."
He says the FMA is focussed on what is best for consumers and if this helps more New Zealanders get life cover that's a good thing.
As for the issue of churn he says: "I haven't get a view on churn."
The industry tried to engage with officials two years ago on the issue and investigated opening a formal discussion with the Commerce Commission. However it chose not to proceed down these lines as it was going to cost at least $500,000 to have the discussion with officials and there was no guarantee they would get an outcome.
"Attempts to address this issue by discussion have been thwarted by the Commerce Act which requires an authorisation before any conversation or negotiation on these issues can occur," Financial Services Council chief executive Peter Neilson says. "Our advice was that such an authorisation would be likely to cost $500,000 and would be incurred without any guarantee of a useful outcome."
"The FSC insurance members therefore decided to use the Financial Advisers Act review to address any issues with them," Neilson said.
One high-placed industry source has suggested the exercise is not a good use of time and money as the FMA really needs to talk to policyholders and advisers about why business was moved.
“It’s a very expensive way to get to the nub of the issue,” he said.
“It’s a legitimate area to make enquiries,” he said. “I’m not sure it will help.”
The enquiry is being made under Section 25 of the FMA Act which gives it wide powers to gather information. Companies have to supply the information by mid-July.
No-one was available from the FMA for an interview on its enquiry.
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Comments from our readers
The FMA has requested information under Section 25 from the main life insurance providers in the industry. The information will form part of an exploratory project into insurance churn and replacement.
We have requested a range of data over a four year period, including premiums and policies sold and cancelled, and commissions paid by providers.
The data requested relates to life insurance including Total and Permanent Disability and Income Protection.
The FMA identified the sales and advice practices around life insurance as a key focus area in our Strategic Risk Outlook in December 2014.
We are at the early stages of discovery into whether there is churning of insurance policies in NZ and what the size of this issue might be.
Once we have completed our review we will be contacting providers directly, and this will inform the FMA’s future monitoring activities of all sides of the life insurance supply chain.
There is no timeline scheduled for this project, until we have received and reviewed the data.
Andrew Park, FMA
- Growth in market share between players would slow to a crawl and new Insurers to the market would have to plan on much longer lead in times before they reach 'critical mass'. A real impediment to new entrants
- Many clients would be left in poor quality products for longer than they are now because the cost of advice to move them to better, or more competitively priced products couldn't be justified
- The average size of a brokerage would increase dramatically as smaller operators would find it impossible to operate without very large clients-bases
- Tied advisers would, again, become the norm and the advice they offer would be heavily slanted towards products in their dealer group
- The key players in the market would not necessarily be the most innovative but rather those that have been in the market for the longest
- New brokers to the market would have no choice but to join an established large player and would have little opportunity to build their own business without buying an expensive established client base.
- There would be a gradual decline in the number of financial advisers in the industry
- An increase to the proportion of the population with insurance wouldn't necessarily be an outcome as people who don't feel the need for insurance at $100/mth, with considerable coaxing, certainly won't feel the need for insurance at $70/mth, with no coaxing
We can look at our relatively recent past to see what the industry would look like in a level commission environment with little churn. In the mid-80's there was a 'Twisting Agreement' between Insurers. If an adviser was found to have convinced a client to cancel one company's cover and place it with another the new insurer would claw back the commission paid and pass it back to the previous adviser. In that environment you would expect the client to receive quality advice, low premiums and innovative products. The reality was:
- upfront commission rates as low as 45%
- average persistency rates in the 93% range
- premium rates around 25% more than they are now
- the choice of AMP, Government Life & National Mutual as your main product provider
- a financial adviser who was tied to one or other of these providers
- products that weren't even innovative enough to offer a terminal illness benefit
- enormous profits for insurers
A level commission low churn environment will be a perfect habitat for AMP, and other companies that offer brand and (their) financial strength as their only advantage. The PartnersLife and Sovereign (of the past) wouldn't be able to enter the market and create the kinds of innovative, more cost effective products that the public enjoy today.
I agree the level of commissions has got out of hand, but this is driven by the insurers not the adviser. Lost market share comes from lack of innovation and the easy fix is to pay people more. This only goes so far and then it starts to unravel.
If the insurers focused on what they are good at, spend that money on truly innovative and sustainable products and kept their houses in order then we would have a truly resilient market.
Partners Life is doing a great job so far following on from what Sovereign started back in the 80's and Club Life did in between, innovated in the insurance market.
With this going on professional advisers could still make a good living and the ratbags wouldn't have the opportunity to screw it up with such large incentives to do what they do. Remember when people good businesses and incomes and the top commission rates were 150-160% not 200-230%.
Life insurance needs does need to be advised and sold, people need to be prodded along. You need a reasonable commission model to drive the people who are prepared to do this job. If the rewards for doing the work aren't there they will find other ways to make a living outside the industry.
Paying people salaries to sell life insurance doesn't work, you either get under performance or bank advice. Keeping in mind that bonus incentives are just another form of commission sales.
My suggestion in addition to reducing upfront commissions, is have a look at the business replacement advice. In my time in the industry, 15 odd years, I haven't seen one yet where the insurance company refused to process new cover based on the BRA. And I had one cite 'my BDM said so' and the insurer still processed it.
With Onepath removing the BRA it's a good sign that it's a document completed by the professional adviser that is getting ignored by everyone else. For the insurer presently it's a tick box, is it required? is it there? yes to both, good our job is done. How about some basic policing of this as a requirement for compliance.
Followed by the second one of making the trail commission higher and work as service commission that follows the servicing adviser. If the 'new' adviser is going to pick up the 'trail' for looking after the policy in the future there's less incentive to go through the hassle of changing providers (churning it).
The potential loss of revenue from lost servicing would also put the focus on advisers actually servicing their clients. Presently this is a cost to the business unless there is an opportunity for increased sales or moving of companies. If the service commission is at risk then people will be more attentive to their client bases. This would also lead the reduction in churn behaviour as the professional adviser is less likely to churn it and the client is less likely to go elsewhere if they are being looked after.
New business would be genuine new business as new opportunities being found from the existing client base would naturally evolve.
to make these at least minimally effective, the company that is LOSING the business should at least be given a copy of the ARB, which identifies the adviser. As patterns arise, to stop the leakage, companies could either:
> upgrade their policies & definitions; or
> where an adviser is getting it wrong, then the companies could seek to re-educate them
What gets me is most providers do require a BRA, so as an adviser signing it off with a crap excuse for moving, you're lining yourself up for a PI claim.
Even when the policy isn't in my product stable, I'll still get hold of the policy document, even if it's offshore. Just so I'm getting it right. End of the day if I'm signing off a BRA that they aren't losing a benefit, or even saying I haven't done a comparison given doing a comparison is a basic client expectation, without actually checking it, how's that going to fly with my PI insurer if it gets to that point and the client has missed a claim?
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And how will the FMA be able to differentiate between genuine business upgrades and 'churn'? Indeed how will 'churn' be measured as one company's new business is another company's churn.
The only real way to stop movement between providers is for all companies to offer exactly the same products at the same premium? As long as companies regularly upgrade their products there will be business replacement, and as an AFA I'm obliged to ensure that my clients have the best possible protection to suit their needs.
I think most of us know who does the churning and it can be narrowed down to one or two groups. No doubt incentivised by the owners who are clipping the ticket big time.
If a company is receiving floods of applications to replace business from another insurer then they must know that this is 'churn' and they could certainly sort the "wheat from the chaff" at that point?
It'll be interesting to see what the FMA makes of it all.