A churning problem

ASIC’s Review of retail life insurance advice says “high up-front commissions are contributing to poor commercial outcomes for insurers”[1].

This is ASIC’s euphemistic way of saying high up-front commissions are causing advisers to recommend clients take out new life insurance policies for the dominant reason of triggering commissions without any significant benefit to clients.

In other words, ASIC is saying advisers are churning insurance policies.

Many industry observers deny this. The financial planning press reports many statements along the lines of “churning is not a problem” and “churning happens in less than 1% of cases”. These statements lack credibility and are at odds with the facts, and common sense.

Not every switch is a churn. Some insurance premiums have increased considerably and some advisers are saving some clients as much as 30%  by changing policies, with identical cover and no loss of benefits. Here it is in the client’s best interests and it is appropriate to the client for the switch to occur. The client could rightly complain if the switch did not occur. Premium are high and getting higher, which means advisers have to consider cheaper options as part of their duty of care to their client.

Commission rates of up to 120% mean advisers may receive more than $10,000 for introducing a new suite of risk insurance products, and cancelling the old suite.

In this environment it is unrealistic and even naive to suggest a rewards system based on new sales does not influence adviser recommendations, at least sometimes. Obviously in some cases the dominant purpose of the recommendation is to trigger a commission payment, and there may be no significant benefit to the client and there is possibly a detriment, such as a loss of continuity of cover or a narrower range of benefits due to health exclusions. Such advice breaches numerous provisions of the Corporations Act, including the duty to act in the client’s best interests, the duty to provide advice that is in a client’s best interests and the duty to prioritise the client’s interests.

The Corporations Act makes the AFSL responsible for the adviser’s actions, and requires the AFSL to report serious contraventions, such as breaches of these three duties, to ASIC. AFSLs breach their Corporations Act obligation to run an efficient AFSL if they fail to report an adviser’s breach of the Corporations Act.

You can read an article exploring the reasons for policy lapses and churns by Glenn Freeman on 12 November published in Professional Planner here: Life insurers, not advisers, are to blame for high lapse rates: Centrepoint.

There is much denial and finger pointing whenever churning is brought up as an issue. The simple fact is it happens. Who is responsible? That’s an interesting question. Is it the insurers who reward advisers if they recommend advisers cancel their competitors’ products? Is it the advisers who, facing an AFSL imposed monthly sales budget, systematically overstate the client benefits in switching? Or is it the AFSLs, conflicted by their institutional ownership and hungry for extra income, turning dollar-blinded eyes to an obvious product bias?

Or is it just the way it is?

ASIC’s 2014 report 413 Review of retail life insurance advice identifies a number of problems (euphemistically called “key structural challenges”) including:

  • increased claims experience connected to “deteriorating economic conditions” (this is intriguing because most economic indicators including the employment rate are up right now)
  • profit write downs by major insurers
  • increasing costs
  • increasing lapse rates (with the concomitant of shorter average policy life)
  • poor quality advice and
  • high commission levels.

In other words, ASIC says churning is a problem. It’s report sets out the statistical case for this position. You can read the report here: ASIC Report 413 dated October 2014.

The Federal Government clearly believes churning is a problem. You can read what the Assistant Treasurer Kelly Dwyer has to say about this issue here: The Assistant Treasurer’s views on churning.


Dover and churning

MLA Lawyers reviews every Dover SOA before it goes to the client. The review focusses on the client’s best interests, the appropriateness of the advice and the prioritisation of each client’s interests. Dover does not share insurance commissions and does not benefit if a commission is paid to an adviser by an insurer.

Dover does not have any institutional connections and is not paid by anyone other than its advisers.

Dover believes these structural quality controls mean it is highly unlikely that inappropriate advice including churning will occur under its watch. Any recommendation to replace policies will be in the client’s best interests, appropriate to the client, and will prioritise the client’s interests over the adviser’s interests.

[1] Report 413 Review of retail life insurance advice at paragraph 146 and following

The Dover Group