The reasons for churn in the life/risk arena are long-standing and well-known and insurers need to accept their share of the blame.
The financial planning industry took another negative publicity hit earlier this month when the Australian Securities and Investments Commission (ASIC) released its Review of Retail Life Advice, inclusive of the outcome of a shadow shopping exercise.
The report was the result of work conducted by the regulator between September, last year, and July, this year. However, it arguably had its origins at least six months’ earlier as a result of a letter written by the former Minister for Financial Services and now Leader of the Opposition, Bill Shorten.
In that letter, delivered in early 2013, Shorten said he expected the industry to address the issues and deliver on self-regulation.
Importantly, ASIC similarly signalled to the industry at that time that it would both be seeking data from the industry and undertaking surveillance. The report released earlier this month was the result.
But, as is often the case in such instances, the ASIC review has not substantially advanced the industry’s knowledge of the issues. Rather, it has served to reinforce what was already known and to traverse the factors giving rise to the industry’s problems.
The ASIC review outlined the “drivers” behind high lapse rates as including:
(a) product innovation by insurers, such as changing actuarial assumptions at underwriting or the redesign of key policy features such as definitions and exclusions, which leads to the repricing of policies;
(b) age-based premium increases affecting affordability; and
(c) incentives for advisers to write new business or rewrite existing business to increase commission income.
The ASIC review then noted, “We also found a correlation between high lapse rates and upfront commission models”.
None of this is new. All of it is well-known and was widely canvassed during each of the years that Shorten held responsibility for the financial services portfolio. It was knowledge of these facts and the Government’s attitude which gave rise to (ultimately aborted) efforts by the Financial Services Council (FSC)to implement an anti-churn regime including commission claw-back provisions.
Then, as now, there existed consensus that while some life/risk advisers had been guilty of less than exemplary conduct, so too had the commercial arrangements pursued by the product manufacturers led to this circumstance.
And that is why, rather than simply pointing the finger at advisers, the publicity surrounding the release of the ASIC review should have ensured equal light was directed towards the insurers because, in fact, the regulator quite clearly pointed to the approach of the product manufacturers as being a cause and recommended that they:
(a) address misaligned incentives in their distribution channels;
(b) address lapse rates on an industry-wide and insurer-by-insurer basis (e.g. by considering measures to encourage product retention); and
(c) review their remuneration arrangements to ensure that they support good-quality outcomes for consumers and better manage the conflicts of interest within those arrangements.
At the same time, ASIC recommended that AFS licensees:
(a) ensure that remuneration structures support good-quality advice that prioritises the needs of the client ;
(b) review their business models to provide incentives for strategic life insurance advice;
(c) review the training and competency of advisers giving life insurance advice; and
(d) increase their monitoring and supervision of advisers with a view to building 'warning signs’ into file reviews and create incentives to reward quality, compliant advice.
Any objective reading of the ASIC review makes clear that while advisers may have copped the most negative publicity from the exercise, the problems with respect to churn are, in part, owed to the commercial environment in which they work.
It makes good sense for the FSC and the Association of Financial Advisers to have established Life Insurance and Advice Working Group to address the issues raised by ASIC. The answers definitely reside in taking ownership of the problems and fixing them.