Australia’s life insurance providers must develop a new generation of fee-for-service insurance products and adopt a stringent replacement of product protocol if the practice of churning is to be stamped out, an industry executive has said.
Former My Adviser chairman and managing director Michael Summers said the solution to churning is in “the hands of life companies”.
“Firstly, they must adopt a “Replacement of Product” protocol as stringent as that currently applying to financial planners,” Summers, now a director of business IT company Jeenius, said.
“Meanwhile, they need to design a complete new generation of insurance products that are not dependent on a sales commission structure. It can be done.
“Insurance advisers who believe that the present commission structures are here to stay – and will fight for them – will be sorely mistaken.
Summers said 20 years ago churning was “a way of life for a significant number of insurance “advisers” and life companies were only too happy to turn a blind eye as long as new premium was coming in.
“The evidence appears clear that this practice has reduced – and not before time – it may have reduced but it hasn’t gone away,” he said.
“The churning debate highlights the conflict confronted by advisers who genuinely act in clients’ Best Interest by reviewing and changing their risk cover – possibly cancelling it if it is no longer required.”
Summers comments were in response to a report posted on a CoreData-owned website regarding the churning debate and the Financial Services Council’s (FSC) new replacement business framework.
The report ‘Churning Distraction’ quoted interim findings from CoreData’s annual Risk Study that found two thirds of advisers (66.7 per cent) do not support the FSC’s framework, and two in five (43.5 per cent) say life companies are not doing enough to stamp out inappropriate replacement business.
“Advisers are understandably feeling frustrated that the minority in the industry who are churning clients have created a need for regulation,” CoreData head of advice, wealth and super Kristen Turnbull said.
“Many believe it’s a storm in a tea cup that could be avoided if the insurers and BDMs [business development managers] took more responsibility for stamping out inappropriate replacement business.”
Turnbull said there is also a perception among many that the three year responsibility period is too long, and could mean they are not remunerated for work done legitimately for clients whose policies cease within three years due to reasons outside their control.
Asked whether the research, which is still in field, had found evidence of providers considering fee-for-service options, Turnbull said at this stage it had not.
While she said it is a “worthwhile aim to get to a point where advisers are not having to explain the value proposition and convince people to take out life insurance”, seeing that insurance is still sold and not bought, the industry is not yet at that point.
“The large majority of people don’t’ understand the benefit or the need for insurance so it does become difficult if they don’t have the incentive to sell the product,” she said.
“The barrier is more on the consumer side. Until more people understand, that type of product doesn’t necessarily have a market.”
Last month, the FSC announced broad sweeping changes for Australia’s life insurance sector under a new life insurance framework
CoreData will release its in-depth report into Australia’s risk sector in October.
