FMA says commission drives churn
[UPDATED] The long-awaited Financial Markets Authority report on life insurance churn is out and advisers who replace policies regularly will be watched closely.
Wednesday, June 29th 2016, 11:01AM 
26 Comments
by Susan Edmunds
The FMA requested four years' data from the 12 main insurers in New Zealand to conduct research on replacement business.
It looked only at insurance advisers - not banks or other product providers - because while they might have a risk of mis-selling, the FMA said it was only advisers who could "churn" - move clients for the benefit of the adviser - multiple times.
FMA director of regulation Liam Mason said: "The reason we are looking at this issue is not because we say this is the only potential issue in the life insurance market. This distribution channel covers over 40% of the in-force life insurance policies in New Zealand and is where there is a high risk of churn. This was a specific data-gathering exercise to look at churn, not a clean bill of health for other distribution channels."
The FMA took a particular interest in 1100 AFAs and RFAs who have more than 100 active policies on their books and 200 advisers who were seen as "high volume", with a high rate of replacement business. Forty-five of those replaced more than 20% of policies in a single year.
Mason said it was quite pleasing to see that the majority of advisers did not have high levels of replacement business. "But at the same time a relatively small number do seem to have unusually high levels of replacement business."
The advisers identified as high-volume have not yet been told they have been singled out as such.
The report said replacement business was a worry because there is a risk consumers could have claims denied that might have been accepted under their original policies if they are moved. They could also lose benefits in their original policies, end up paying more over the long term or be over or under-insured because of poor advice.
"The type of commission was the most significant factor in whether a policy was replaced," the report says.
"The next most important factor was whether the clawback period had ended, followed by the age of the policy. The quality of a product (known in the industry as ‘product scores’) was only a minor factor. This suggests that some advisers are acting in their own interest."
Policies with a high upfront commission and a lower trail commission were 1.6 times more likely to be replaced after the clawback period ended.
The report said overseas trips were an effective sales incentive for advisers. Policies no longer subject to clawback were 2.2 times more likely to be replaced if overseas trips were offered as an incentive. Even new policies still subject to clawback were 8% more likely to be replaced if an overseas trip was offered.
During the review period, advisers were offered trips to destinations such as Shanghai, Prague, Las Vegas, Hollywood, Rome, New York and Rio de Janeiro as sales incentives by life insurers. The high-replacement advisers took an average of two of these trips each. One high-replacement adviser took 10 trips in four years.
On average, RFAs had higher rates of replacement business than AFAs. About two-thirds of the high-volume advisers, and 86% of the high-replacement advisers, were RFAs. Some RFAs replaced more than 35% of their life policies in one year.
Mason said something that had come through clearly was that AFAs and RFAs were being held to different standards, while dealing with the same products. "We don't think that's particularly helpful for consumers. They should know what to expect from an adviser."
The high-replacement advisers earned almost 50% more from commissions on life insurance than other high-volume advisers. More than half of advisers had 90% of their policies with one provider.
The FMA will now use its findings to focus its monitoring efforts. Mason said the report highlighted that while most advisers were doing well, it should focus its efforts on those who were not behaving responsibly.
The FMA has given its findings to the Ministry of Business, Innovation and employment as part of its review of the Financial Advisers Act. It has also held talks with insurers and financial adviser groups.
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On 29 June 2016 at 11:45 am adviser said:
well some advisers may churn for their own gain and some may churn as the clients get a better policy ..... and the Banks churn because they have a quota to fill and THEY don't care about the clients and the quality of the insurance products. Once again The FMA has done a half arsed job On 29 June 2016 at 12:09 pm bridgepa23 said:
I replaced my own policy 3 times will I be in trouble? On 29 June 2016 at 12:18 pm AdviserMan said:
Once again the FMA has missed an obvious opportunity to uncover the facts in the industry.
Targeting Advisers only sends a message that the issue is just with the Adviser market, which is not true.
How many policies has the Banks churned, I mean diligently replaced, and how much business does direct insurers replace, like those promoting switch to us for a 20% discount, or those selling policies online with incentives to do so?
While a select group of Advisers may be replacing policies, it would be good to see what the stat's are on why they were replaced, and if replaced after an assessment was done, and other important questions like, did the client request a better/lower cost option?
Some of these Advisers are likely also the people who see high numbers of people each year, as they have successful business structures allowing them to do so, and a good question here we should ask is:
Does high turnover mean something is wrong or bad, no it doesn't. The intention is what we need to be concerned about. There are many policy holders in the public who have the wrong products and incorrect sums assured for their situation, so if you meet these people, and give them correct advice, it is wrong to leave them with what they have, when you know different, and have shown them why it is wrong?
Unless both providers and banks are included, the findings are meaningless as the whole industry should be reviewed, this is nothing more than an attempt to target Advisers, and make them appear less credit worthy than they are.
Shame on you FMA, you are not the independent body you make yourselves out to be.
On 29 June 2016 at 12:39 pm Majella said:
Not sure whether I', 'High Volume" or "High Replacement" as yet, if either. I'm just a humble RFA but I would be entirely happy - even pleased - to supply a copy of the written advice I've provided on any case the FMA or anyone else, requires. On 29 June 2016 at 12:45 pm Dirty Harry said:
So of the adviser universe of about 8,000 advisers, there are around 200 that need some attention. 2.5%
It looks like previous comments by some on here regarding widespread churn are more than a little overstated. 45 advisers replaced 20% or more of their own policies in a year. 0.56%
That's a pretty small hit list. Not many “cowboys” eh?
So back to the banks and their “mis-selling”. It’s not fair to say the FMA is only targeting advisers, they have long been looking into bank selling practices, but for some reason this little sideline has been a major focus for a while.
Oh well. Since so few advisers are really causing problems, the FMA should easily be able to deal with them and still have some time after lunch to get stuck into that thorny issue of bank staff replacing good with bad, cost-effective with relatively expensive, level with stepped and so on. And on. All with no personalised disclosure, no Replacement Business form, no research/analysis...
On 29 June 2016 at 12:49 pm AFA_Adviser said:
The big issue here is that the Banks and online (Rabo Advice) statistics have not been included in this report.
Take a well known bank for instance; they advertise their mortgage rates are available if you sign up to another of their bank products. Could this also include their insurance and would this lead to the churn of an existing product with another insurer put in place by an Adviser who has given sound advice?
We all know that the possibility that the client will sign up for this is highly likely, thus creating churn.
These are things that should be included in this report.
On 29 June 2016 at 12:59 pm Backstage said:
Having read the report I can see already there are holes. For example no mention or measure of natural attrition through client cancelling, Insurer premium increase or expiry age attained.
Also like other experts there appears to be language such as, "this suggest that some advisers..." - they could say, so we assumed. The risks they mention could also be the same risks of a bad adviser selling a brand new policy.
Again a poorly constructed report by another body struggling to appear relevant.
On 29 June 2016 at 1:16 pm Comprehensive Planner said:
On balance I feel that this is a reasonable report on an issue that needs to be sorted out for all insurance consumers and professional advisers alike.
I feel the report should have covered all replacements, both internally within an adviser practice and externally across practices as it seems only to cover off on business replaced by the original adviser, it also excludes replacement done by QFE Advisers which is a shame as it would likely recalibrate the position of many of the findings.
While there are some significant issues identified in the report, to simply assess those replacements that are processed by AFA’s and RFA’s in misleading in itself. The fact however remains that there are a significant number of errant advisers and if we use the data from this report, many are RFA’s, who are replacing policies with apparent abandon and the fact that there is a significant correlation between soft dollar offerings and the rate of replacements sends an ominous signal to the regulators and the FAA review.
If I was to be scoring this report, I would probably give it a reserved pass mark as I feel they could have done much better with a broader scope
On 29 June 2016 at 2:10 pm tallpoppy said:
I certainly don't condone advisers who churn their clients for the sake of it.
However, how often have you taken out an insurance policy only to find a year later the premiums jump? You shop around and find that another insurer is then willing to underwrite a new policy on similar terms for less premium. The savings are considerable and this has been my experience for years. I would prefer not to have to replace my policies but it is hard to ignore a saving of $300-$700 p.a.
I think there needs to be a careful look at the practices of inusrance premium pricing in NZ. I get the sense that some insurers offer a discounted initial rate and then try and nudge the premium up each year to their standard rates.
On 29 June 2016 at 2:56 pm work for your client said:
There are those companies (probably all if they are honest) that incentivise churn. As a trustworthy adviser, you can always find an excuse to churn. But really??? Comments about better premiums and better policy wordings in this trail are BS. Everyone knows that there are ways to combat those issues without churning. We all justify our actions in our own minds to support what we think. But the reality is we can do a client focused job without resorting to churning the business. That is why only 200 are isolated. Most can do what is right and choose to do so.
How about dump that 200 advisers so that we can clean the scum off the water and let the rest of us do the correct job for our clients. These 200 tarnish the hard work done by the bulk of advisers. We do not need them, and more so, we cannot afford these scum bags.
Of course you are all correct - FMA should take a peek at the banks, the most dishonest players in the insurance market. Pity that the FMA are too weak to investigate the real pirates of the insurance industry.
On 29 June 2016 at 4:10 pm RiskAdviser said:
Reading this article, the report and the comments, on balance, the report has missed the opportunity. The first-page statement on the report itself, Churn is bad but replacing could be good for the consumer hits at the heart of the problem. Was the replacement in the interests of the client?
That data is not on the average business replacement advice form. It has little to no bearing on the actual client situation as it is about the specifics of the replacement of policies, and more often than not it is very light on specific details. If I'm not replacing a policy I don't mention it on a BRA, I'm not asked to. That means there is no visibility on the full situation and doesn't show the other 2-3 or 8 policies that might still be in play for that client. It is also assuming that the adviser advised the insurer of the replacement too. There are many advisers out there who don't do BRA's and not all companies ask for BRA's.
I'm not surprised at the weighting of AFA to RFA, the majority of AFA advisers are so because of a choice to either give investment advice only or provide a wider range of financial advice including investment advice. I'm not an AFA because I don't have to be. If you 'sell' life insurance then you're an RFA. Why would you expose yourself to more scrutiny and requirements from a regulator than you have to?
It's human nature to do as little as possible for the greatest reward. Which is part of the problem that drove the need for the report in the first place.
To exclude aligned (1 provider) and direct advice is a serious fault in both the data collection and the scope of the report. In a direct or aligned role, commission or wages, there is still the pressure to sell, if you don't sell you don't have income or a job, so there are more incentives to move business than for an adviser who is able to service existing policies.
I have heard comments from aligned/direct advisers where the client has said I want you to look after me because the previous guy has left/poor service/can't find/won't help. The only option to achieve this is for the aligned/direct adviser is to move the policy. Often to a poorer quality product and without any real review and assessment of the lost benefits or even an explanation of the exclusions they cop on the way through. For this to me missed in the report is a serious hole int he quality of the data and the quality of the assessment of advice.
Add to that the comments about not moving their own book, many may not move their own book, but they do others books. Why because situations have changed and product and policy changes are required. Change of health does impact approaching a new insurer. But the adviser doing the work still has to eat too. Clients are resistive of paying fees for advice on insurance, maybe this will change , probably not as other markets have indicated.
The point raised is about the due care, skill and dilligence of advisers on the back of an FMA policy statement that effectively says consumers should move until they can't, to ensure they have the best deal and options for them.
To try and do this off the back of how many policies and adviser has replaced does not qualify the harm. it does not give any picture of the market other than the volume of policies that move for some reason.
What we do know is about 8-9% of policies lapse in any given year, some more some less. Some of those are because the policy is no longer required, some are because benefits have ceased due to age or term, some are moved to other providers for the benefit of clients and yes some are moved for the benefit of the adviser.
To establish the intent and motivation of the adviser can only be established by looking at the client files directly, the insurer may have an idea about a certain advisers business but they really don't know until they too look at the client files.
I guess all the FMA really has now is a list of the first 200 advisers who can expect a knock on the door. The rest of us have been put on notice that we need to be very clear about our intent and documentation about replacement and the advice to change.
On 29 June 2016 at 4:49 pm Brent Sheather said:
I know nothing about insurance or commission but the FMA frequently seem to find reasons why they should not look closely at the banks’ behaviour.
First it was Kiwisaver, now its insurance. Because of the obvious conflicts of interest the FMA, its Board and its staff have, given many either worked for banks, currently work for banks or will work for banks, they should be acting more independently otherwise people will draw their own conclusions.
This is stating the obvious but the regulator needs to be independent of the industry it is regulating. Perhaps we need a visit from Elizabeth Warren.
On 29 June 2016 at 6:52 pm AFA Muggins said:
I agree with Brent Sheather on his points. While I'm disgusted by the fact that there are some 'advisers' out there behaving badly, the FMA is lobbied by the banks and seems to have a revolving door policy with the banks staff.
I once attended a presentation by the FMA and prior to the meeting noticed the FMA reps and bank staff were on first name basis.
Conflicts of interest; and the real advisory force seems to be targeted to look bad where as the banks are never a problem.
On 29 June 2016 at 7:03 pm Pragmatic said:
I agree with Brent Sheather. The bank’s involvement in Kiwisaver is (at best) against the interests of consumers, and (most likely) going to contribute to a huge systemic issue in the not-too-distant-future. The FMA must quickly tackle these structurally corrupt enterprises head on, or face the wrath of poorly advised consumers.
The same statement can probably be made against insurance – although (like Mr Sheather) it’s not a world that I’m overly familiar with. Note to the Regulator: it’s time to grow some…
On 29 June 2016 at 7:21 pm Steven Popodopolus said:
Until the FMA sorts out the 1500 Kiwisavers a month getting churned to the banks they have no credibility at all lets be honest. 45 out of 20,000 total advisors have been identified as a problem. The screaming headlines however ruin the everyones reputation On 30 June 2016 at 8:58 am Backstage said:
I really find it difficult to accept the report in its current format and language. I would need to know more about the data collected and statistical methodologies applied to extract findings.
I also find some of the rant about "rogue advisers and scum" emotive and useless.
Personally I wonder whether as an interim if silly vesting rules were dropped and the appointed servicing adviser was able to adopt the trail commission whether some churn would disappear and some advisers would better take care of their clients.
I also cant help cynically imagining how much insurance company executives love promoting this churn concept and blame increasing premiums on advisers.
I think the FMA should give us more detail on how their imagining were constructed and how they arrived or if they arrived at real statistical relationships to support some of what i would call assumptions.
The report in its current format I would not pay too much attention to if it was handed to me.... unless it was a 6th former completing an assignment and i might say good effort, but their are gaps.
On 30 June 2016 at 9:50 am Dirty Harry said:
The report identified that advisers have a 40% market share.
The report also identified advisers having a higher risk of inappropriate replacement due to initial commissions and the ability to select from multiple insurers.
The report has not looked at the replacement of third party business such as switching clients from outside the advisers firm to a product within it - be that bank staff or tied or independent advisers.
How, pray, did the banks achieve their 60% of the market in the last decade? May I suggest it was at least in part by promoting their products using bundled sales and unqualified price-based comparisons? Would anyone venture to suggest a reason that this sort of replacement business has not been examined yet?
A contributor above has suggested trails go to the adviser whom the client appoints. I would support that and submit that those in favour see it as an opportunity due to their confidence in their client servicing and relationship building abilities, and those who see it as a threat, well, I've already discussed the lack of client servicing in a previous post.
On 30 June 2016 at 10:03 am mike6156@gmail.com said:
The FMA report clearly stated they only used a sample of 1100 AFA’s/RFA’s, out of a arguable universe of 2,000 AFA’s and 6,000 RFA’s. The FMA report also clearly stated they are yet to sample the work of the arguable 25,000 QFE adviser universe, not all will be involved in offering insurance product advice.
I personally think it is alarming, 200 advisers were seen as “high volume” policy replaces. I hope extrapolating this out over 8,000 advisers doesn’t mean there is another group of “high volume” policy replaces to be found.
I imagine the FMA will now be putting a huge amount of resources extending their reach to investigate the other 6,000 odd AFA’s/RFA’s and 25,000 odd QFE Advisers.
The FMA’s next step will surely be asking for copies of a number of written statement of advice's from the “high volume” Advisers.
On 30 June 2016 at 10:03 am w k said:
it seems to me the usual report structured to suit the outcome. just a thought. On 30 June 2016 at 11:17 am Another AFA said:
In my opinion, most comments above are missing the point of the report - it's not about AFAs, RFAs, or even the QFEs (banks). Its about how commissions and incentives change behavior to favor the insurance company (and adviser), instead of the client.
Remove the incentive, remove the conflict, change behavior.
On 30 June 2016 at 2:11 pm James Sheridan said:
I think it is prudent for the FMA to examine the markets under it's jurisdiction. I wonder how the terms of reference for the investigation were set though. In other words who's agenda is being served?
1. Insurers have an incentive to put up prices for Life insurance, as this will increase profitability. They are also incentivised to maintain poorer or older policies that pay out in less circumstances.
2. Advisers are incentivised to look after Clients and to appropriately look for 'better policies and move their Clients there.
There is a consequential relationship between 1 and 2. Insurers are obligated to maximize profit and one of the factors holding them back is the 'non tied' adviser community who will hold them to account if their product or price strays out of line.
The insurers would be incentivised to lobby the authorities to reign in the non tied advisers as this holds them back from their profit goals. This would enable them to increase prices and diminish product efficacy unchecked.
Here are a few further questions that may be asked to further complete the picture.
a. Are Insurers products that works with a captive sales force better or worse than insurers who deal with the non aligned market? In another words if you examined some Banks (the ones that only sell their own product), are their policies better or worse than the products available to non tied advisers.
Here is a quick but basic example on Life cover. Is there any funeral benefit paid in the policy? A very basic benefit these days. I couldn't find any reference on any tied Bank policy document documented on Quotemonster. Looking at the policies of AIA, Asteron and Partners Life there were up to 43 references for 'funeral' in the policy documents paying out in addition, paying out for kids etc etc.
This points to insurers who have captive sales forces as having poorer policies. Why would they not. If a non tied adviser comes across such a policy, it would be in the best interest of the Client for them to move.
b. Legacy policies. It is the best interest of the insurers to only increase the product benefit for new clients, and leave old or legacy clients locked into poorer policy payout likelihood. The legacy products will be consequentially more profitable than the newer products with higher policy scores.
A non tied adviser who comes across such a policy should be investigating upgrading it to a better policy. The insurer with the legacy policy will not upgrade the policy unless full underwriting is completed for non life. In other words the insurers does not want this to happen. If you go through new underwriting this is the same as a new policy replacement. The adviser is incentivised to seek out and replace this policy. The insurer is incentivised to make this more difficult.
c. Price Increases. What is to stop an insurer creating a new product, gaining lots of new business and then subsequently increasing the price? The answer is the non tied adviser who is incentivised to seek out expensive policies and replace them with similar, cheaper products.
Perhaps the churn debate is therefore not just about the incentives of the adviser but also the incentives of the insurer.
My belief is that the insurer's and banks must have vastly more dialogue, connections, or power to force the dialogue, the discussion and the agenda towards their own agenda.
The New Zealand Adviser community has no such meaningful dialogue or connections with the authorities. If we had an adviser community similar to the Law society, that has real power in this space, then perhaps a more complete picture would have been told.
On 1 July 2016 at 11:16 am Donald said:
On just reading comment by Naomi Ballantyne of Partners Life, her balanced opinion both in support of the FMA in part and the adviser industry as a whole to me indicates that she is someone that leads with honesty and clarity. It may be that her company has been the recipient of considerable new business to the detriment of other providers, however with best in class products across the Partners Life product range the opportunity has been provided for client focused advisers to ensure their clients also benefit where ever possible. On 1 July 2016 at 1:15 pm Majella said:
@ Donald - a succinct assessment of Naomi's contribution to this discussion, especially given it was she who slammed Trowbridge (& MWJ) for unfounded assumptions. She was instrumental in getting the FMA to undertake this review of actual FACTS. On 1 July 2016 at 1:51 pm blogger billy said:
our big problem
Google Elizabeth Warren and read all about revolving doors
It happens in NZ with our politicians, FMA and the banks
It means the playing field is tilted against all AFA's and RFA's who are NOT tied to a big QFE
email the minister
Paul.Goldsmith@parliament.govt.nz
and keep emailing him till he does something
email Winston.peters@parliament.govt.nz too
On 12 July 2016 at 12:49 am Aussie Adviser from NZ said:
Well over here in Australia we have seen a concerted attack on independent advisers via the FSC and Trowbridge.
Be very concerned that those of you not tied to the big end of town will be targeted under the guise of better governance.
The laws proposed over here have sneaky clauses excluding direct insurance offers and bank employees. So make no mistake this is a grab for market share. Punish those responsible that are doing wrong and let those who do a good job get on with it.
Our large Associations take big cheques from the corporate end of town and have let their members down. Don't let it happen to you, make sure your associations represent you their members, you won't regret it.
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About time this practice was exposed for what it is. Sounds like the FMA may now be targeting individuals and businesses as a result.
"On average, RFAs had higher rates of replacement business than AFAs. About two-thirds of the high-volume advisers, and 86% of the high-replacement advisers, were RFAs. Some RFAs replaced more than 35% of their life policies in one year" Interesting.
Unfortunate and perhaps remiss that the banks were not included though - they are their own product creators, thus have a vested interest, and I have seen examples in the past of banks doing this as well.