In October 2014 ASIC released Report 413 titled “Review of retail life insurance advice” listing out all the things ASIC thought advisers were doing wrong. You can read Report 413 here: ASIC Report 413 Review of retail life insurance advice.
As you can read, ASIC found a lot of poor advice. The poor advice included failures to adequately consider clients’ objectives, circumstances and needs leading to situations where clients suffered losses due to:
- inferior policy terms
- higher premiums
- health issues being excluded
- claims being denied which were previously covered
- unnecessary switching of policies to maximize commission income.
ASIC found policy lapse rates were high, with stepped premium policies lapsing at rates as high as 14%, and average terms of less than eight years. ASIC attributed this to:
- product innovation by insurers and
- affordability issues but mostly
- advisers churning policies to maximize commission income.
ASIC connected the poor advice to the high lapse rate.
ASIC did not use good science. ASIC did not sample a normal distribution of advisers. ASIC consciously focused on a handful of prolific risk writers at risk specialist AFSLs. Not surprisingly, ASIC then found the quality of advice was poor.
It’s fair to say Report 413 is critical of advisers and the standard of their advice, and is not critical of insurers. Report 413 displays a selective and simplistic view of the world: all insurers are saints, and all advisers are sinners, lapse rates are really bad, and are caused by poor advice from poor advisers.
It’s all the fault of those advisers…. Insurers are blameless.
Report 413 ignores the many ways insurers cause their own high lapse rates, including:
- premiums increasing by as much as 30% a year
- disgraceful claims management practices
- immoral policy definitions that do not mean what everyone thinks they mean and
- large incentives paid by insurers to advisers to encourage them to lapse competitors’ policies.
(I could add, based on press reports this week, disguising requests for quotes as applications, and charging the “client’s” bank account for a service not actually provided is probably contributes to high lapse rates.)
Have you ever seen an underwriter decline an application on the grounds that the old policy has only been on foot for one year, and acceptance will create a lapse for the other insurer?
I have not. I have never seen an insurer express any concern at all about creating a lapsed policy at another insurer. And I expect I never will. Underwriters are fully aware the old policy is quite adequate, and only a year or two old, but they proceed anyway. That’s how they make money.
The insurers’ collective hypocrisy in complaining about high lapse rates is breath-taking: one insurer’s commendably high new business experience is another insurer’s deplorably high lapse rate. Yet as a group the insurers complain bitterly about high lapse rates. Its a self-inflicted wound.
The solution is not as simple as ASIC thinks. The Corporations Act requires advisers to act in the best interests of their clients, and does not not require them to act in the best interests of insurers. But reading Report 413 you would think it’s the other way around. ASIC forgets forgets clients and insurers sit on opposite sides of the table. Their interests are not aligned. Their interests are directly opposed.
There is a fundamental conflict of interest between insurers and clients. The insurer’s income is the client’s cost. Advisers represent clients, not insurers, so this means there is a fundamental conflict of interest between insurers and advisers, and their AFSLs. There has to be: its the law.
So Dover is not really concerned about the insurers’ lapse rates and insurer’s profitability issues. We wish them well on both counts, and hope things improve. But insurer lapse rates and profitability are not our responsibility.
Dover is only concerned with whether the advice to the client is appropriate to the client and in the client’s best interests. Its what the law requires us to do. If we did otherwise we would leave ourselves wide open to a successful complaint that our advice benefited a life office to the prejudice of the client.
Dover is only concerned about our clients.