Churn debate: Don't follow Australia Jennings warns
Fidelity Life chief executive Milton Jennings says there is a churn problem and if New Zealand follows Australia many good advisers will suffer.
Thursday, June 4th 2015, 3:01PM 
6 Comments
Jennings says there is a churn problem in the life insurance industry but it is only a small group, maybe 10%, who are actually churning business.
He says it is not the advisers who are causing the problem it is the life insurance companies themselves with things like high upfront commission and write backs.
"The two-year write back doesn't help," he says. "We need to stop these incentives of moving (business) over after two years."
He also says when commission levels should be coming back they keep going up.
"It's not the advisers (that are causing the problem) it is the insurance companies," he says. "Some of the behaviour is terrible. The only way you're going to fix it is regulation."
He says the industry's got "no show" of fixing the problem, and regulation maybe the way to go.
Jennings isn't keen to follow the Trowbridge approach suggested in Australia. Actuary John Trowbridge has suggested an overhaul of commissions for Australia’s adviser that would limit them to $1200 in upfront commissions for life insurance advice, per client, no more than once every five years. Advisers dealing with clients with premiums below $2000 a year would be limited to commission of no more than 60% of the first year’s premiums.
"We want to protect advisers," Jennings says. "We don't want to kill advice off for the sake of $1200. That would just favour the banks."
“If we go to the level Trowbridge is talking about, we could lose a third to a half of all advisers, we need to make sure that doesn’t happen.”
While a lot of the blame for the problem lies with life companies there are some bad advisers out there too. “There’s been some pretty bad behaviour by a small number of advisers. They ruin it for the good ones.”
If there is change it has to make sure that the good advisers aren't disadvantaged too much.
Otherwise "there will be many good advisers who are going to pay the price for the rogues that churn from one company to another."
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On 6 June 2015 at 1:51 pm Mark Ogden said:
I feel that not only is the commission wrong (high upfront) but so is the way product is sold. Most are selling short-term solutions you know are going to get more expensive and clients are going to shop around again when it keeps going up.
When I buy milk I get 2-3 litres to last a week. I don't go to the dairy every day and buy 300mls because 300mls is cheaper than 2 or 3 litres. I suspect a lot of advisers do because that is how they sell life insurance, they pitch product for a year (YRT, like buying milk every day) then surprised why the clients shop around again every couple of years when it goes up.
My clients that have had their level premium product after 5 years are unlikely to switch companies, I can't "churn" them and the reviews we have (with clients) are to see if they need to transfer more of their stepped cover to level or maybe let go of some of the short-term YRT, yes we tailor both, we actually ask clients how long they need it for(most are surprised they can't afford to have it when they expect to die!). Maybe some YRT, some to age 65 or 70 and a pinch through to age 80 if they need it that long.
Stop selling short-sighted, short-term solutions and the industry won't have a problem because there will be no need to move or an excuse to churn.
The other problem carriers create is by playing the ratings game with Trauma and IP etc. Here an idea - let’s give clients a reason to move and advisers the excuse to churn.
Carriers need to create a "Life product" as in fit for life. Life insurance is almost there, with the guarantees of upgrade. But what about trauma and IP product guaranteed to be upgraded even if there is a pricing increases or guarantee giving clients the option(the clients have the choice to pay the extra no underwriting). Then as a client I don't care if "XYZ Life" improves it heart attack definitions because I know mine will be upgraded in due course too. It doesn't have to always be the best, just as long as it is sometimes.
Look at any of the plans that are put in place for anyone in their mid-40's plus that are solely YRT and ask yourself, how palatable will these premiums be in 5 years’ time? Of course there will be opportunity to shop it around again and the only one that loses out is the client.
I have had my life policy for about 10 years now, it has not been sold for a couple of years, it is still the exactly the same latest top rated product I sell today because of the guaranteed upgrades, every single new benefit and feature passed back. Because it is level premium it is cheaper than I can get YRT now. The only reason I will cancel it is because I no longer need it, there is no better cover for me! Churn proof and hundreds of my clients have the same great value.
On 8 June 2015 at 12:29 pm dcwhyte said:
ASIC's conclusions and Trowbridge's recommendations are based on statistically insignificant research results.
Very few non-aligned Australian financial advisers pay fees to Consulting Actuaries - but you can bet the 'Big End of Town" pays plenty!
If Mr Trowbridge was looking for conflicts of interest, he should perhaps have looked closer to home!
I don't know if commission is too high or too low, but the competitive market has determined the current level.
And as an adviser in the UK, I never had any questions around commission when claims were paid!
On 8 June 2015 at 4:08 pm gavin austin adviser business compliance said:
David you should read the ASIC report again as it tells a different story to what you’re saying here.
There were two phases to the research:
Phase1
Industry based on 12 major insurers looking to identify where lapse issues and churn may have some correlation.
To quote the report:
Of the pool of AFS licensees identified in the high selling category by insurers, we excluded licensees that had been the subject of recent regulatory action by ASIC. We then chose two large licensees and three medium licensees from the remaining pool. We added two small licensees to the sample so that our final sample included advice from a broad mix of licensees.
The second phase then looked 202 files not the 70 you quote from those 7 licensees. The results showed that a third of the files failed the “good advice” test
If you re read paras, 54, 55 and 56 you’ll see that the 202 was filtered down from 243.
Quite a different story from yours.
On 8 June 2015 at 5:12 pm RiskAdviser said:
All valid points and points to the fact commission isn't so much the problem but service. There will always be an acquisition aspect to all adviser businesses, fact of life, clients move, move on, retire and unfortunately die. Come s with the territory.
I concur with Mark, servicing and structure based on need and flexibility of the products allow this to change with the clients. we don't have enough of this, and as I mentioned in another post we are lacking innovation while the insurers continue to try and compete based on commission.
Fact of the matter, the longer a policy runs the more likely the insurance company will have to pay a claim. Moving of policies helps the insurer manage claims by exclusions upfront and non-disclosure later, so why wouldn't they encourage moving. Its good business.
Most insurers are pricing on a 7 year average policy term, probably less now that product changes and commission incentives are so much higher.
A clear indication that policies sticking longer aren't good for claim stats. Level premium products mean things stay put longer. Unfortunately when the current level premium options are presented clients do shy away looking to make their plan work and not need the cover later, hopefully.
Given the age group I'm talking to is possibly quite a bit younger than Mark's clients as my experience has been older clients do tend to take the level options understanding the affordability issue.
As advisers we do the best we can with the products and tools we have. The product manufacturers need to better consider the clients lifetime needs and design their products around them.
Anybody know of a good geriatric care cover? I don't think it exists yet, but we're in need of it as boomers and X'ers face retirement without significant assets and a government that will struggle to fund it with the numbers screaming into retirement. much food for thought!
On 10 June 2015 at 12:49 pm dcwhyte said:
Gavin - appreciate your wise counsel as always.
After 5 years in Australia, leading leading a major life company, understanding the regulatory position there, and also latterly as CEO of Taylor & Associates (now Beaton & Co) which publishes annual qualitative management research on life companies in Aus and NZ, I feel reasonably well qualified to stand by my earlier remarks.
ASIC produced “Report 407 – Review of the financial advice industry’s implementation of the FOFA reforms” in September 2014.
The research for the report was conducted by ASIC between September 2013 and July 2014.
From the arbitrarily filtered research sample of 749, a mere 80 licensees were approached, and only 60 participated - out of a total of 5,100.
These licensees embrace an individual adviser population of 9,918.
To measure accuracy and validity, researchers use confidence interval calculations.
These are really only valid when a truly random sample of the relevant population is accessible.
However, if we give ASIC’s methodology the benefit of the doubt for illustration purposes, to be confident that 95% of the licensees would produce the same results (with a 5% margin of error), the sample size would need to be 357.
The sample selected produces a margin of error of 12.5% - the generally accepted margin is between 4% and 8%.
This fundamental flaw in the research leaves the statistical integrity of the research open to question.
There are therefore aspects of the representative nature of the research that are at best suspect, at worst dubious and/or statistically not significant, accurate, valid, or reliable.
ASIC published “Report 413 - Review of retail life insurance advice” in October 2014.
The research concluded that 37% of the 202 files reviewed from 7 licensees, representing a total adviser sample of 79 individuals, contained advice that failed to meet the relevant legal standard.
In this research, the concepts of accuracy, reliability, and statistical significance based on random sampling were completely abandoned.
Taking 202 files from 79 advisers (out of a total population of 18,000 according to the Ripoll Report), representing 7 licensees (out of a total of 5,100 on the ASIC database), is quite simply of no statistical significance.
Put simply, there is no statistical evidence to suggest that the Australian financial advisory industry indulges in widespread malpractice
Whichever way you choose to interpret the research, 18,000 advisers with 150 client files each (?) = 2,700,000. Reviewing 70 client files does not produce a result that can be assumed to be present across the entire Australian client data base.
Furthermore, when John Trowbridge was questioned on a recent visit to NZ by Jeff Page and others (see elsewhere in GR) on the evidence of churning, he was unable to provide a satisfactory response.
I don't deny or reject the assertion of 'churn' as defined.
I call for accurate analysis of the scale of the issue in NZ before dashing off down a regulatory or legislative path that is fraught with unintended consequences.
I rest my case - and my typing skills!
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If the Insurance Industry and Advisers were regulated around replacement business then surely this would stop the deliberate churn from that very small percentage of advisers who are replacing policies for the wrong reasons. Why don't we consider paying no commission on business that is churned for the wrong reason, as mentioned above if there was a mandate around that, we might fix the issue.
I asked John Trowbridge that question and he agreed, that could be one way of solving the issue, but he has elected to recommend a complete overhaul of the total commissions. Another question I asked Trowbridge, if (& when) commissions in Aus come down, does that mean that the consumer is going to enjoy the benefits of cheaper premiums? his answer to that is "no probably not". I bet the large Institutions, (Banks) in Aus are going to think this is good, and this of course is who is driving the changes in Aus.
I agree that at some stage up front commissions should come down a tad, but are the changes being proposed in Aus around commissions going to fix the issue of churn?.
We have a different market to Aus, we have a huge underinsurance issue in this country and I for one do not want to see the consumers in NZ being unable to get good quality Independent Advice.