Insurance replacement business - who benefits?

Do some Financial Advisers recommend and sell new insurance policies to existing insurance policy holders just to get the commission?

We believe some do and the Financial Markets Authority (FMA) might be about to prove it, or hopefully disprove it (yeah right). Those who just sell insurance policies used to be called Insurance Salesmen (because most were men) now they are legally called Registered Financial Advisers, irrespective of whether they give any other sort of financial advise. The first part of the release reads:

"The Financial Markets Authority is calling for cooperation from the life insurance industry and financial advisers to address the potential harms to consumers from the relatively high levels of switching of existing insurance policies.

The FMA today released its first report into sales practices within the life insurance industry. The report shows that of the $1.7bn New Zealanders spent on annual life insurance premiums in the year to 30 June 2014, a significant number of existing policyholders were switched between providers. This switching activity is called ‘replacement business.’

The report uses extensive data from 12 life insurance providers, gathered and analysed over the past 12 months. It focuses on replacement business sold through either authorised or registered financial advisers (AFAs and RFAs, respectively). The review focused on this distribution channel because advisers sold over 40% of the policies in force in June 2014; and because there is a higher risk of churn in this group, because they generally sell policies from more than one provider. ..."

Of the 8,200 people registered and legally able sell insurance policies (not all that are registered do) the FMA analysed the statistics and found 200 that met their criteria for a high estimated rate of replacement business. So a small percentage, doing $110 million in annual premium business. The FMA's report has found that some advisers replaced more than 35% of their life policies in one year. That's all their clients policies replaced every three years. Nice steady income stream for those advisers.

Bay Financial Partners have agency agreements with a number of Life Insurance companies. Each year policies are renewed automatically by the Insurance company. Every so often we check that the policies that people have in place are still suited to their needs and are still priced competitively. It is rare we find a genuine need to change the insurance provider. Usually we find that changing the existing policy with the existing provider does the job.

Sometimes you should switch your policy to another INsurance Provider

There is no doubt that sometimes, peoples situations change - perhaps dramatically. Sometimes it is necessary to change the insurance company you have your insurance policy with. But it certainly doesn't happen to a third of our clients every year. Life Insurance companies sometimes revise the terms of new policies they offer. Sometimes we find that a new policy "enhancement"offered is  worthwhile for some to considering switching. But often times enhancement are little more than window dressing.

One time you should definitely consider switching is if your insurance company is not financially sound, no point paying your premiums if the insurance company isn't going to be around to pay out when you die. In New Zealand the Life Insurance industry is quite strictly controlled and monitored, it's unlikely to be an issue. But some are more sound than others.

Another reason to change is if your existing company is difficult to deal with and you'd prefer to deal with someone else. Some are definitely better than others! There are a couple of life insurance companies our clients have existing policies with that we don't recommend people use for new policies because they are just so difficult to deal with.

If you are having trouble talking to your insurance company, aren't sure they are financially sound, or don't know whether your cover is suitable for your needs we'd love to help put your mind at easy, call us on 07 578 3863.

Why would an adviser "churn" insurance policies?

Money, money, money - we advisers get paid by the insurance company if we sell a new policy. The commissions on selling a new life insurance policy can be quite a lot - over 75% of the first years premiums, sometimes more than twice that. And it can be in an upfront lump sum. $200,000 life insurance each for a 50 year old couple could be as much as $130 a month, so that's over $1,100 commission, upfront minimum.

But generally there is a two year "claw back" provision on life insurance commissions. If the policy holder changes to another provider within those two years the adviser has to pay the commission back. After that they are free to keep the original commission and recommend the client switch their policy to another company, for another commission. We rarely do.

Most insurance companies offer other options for commission payments, a bit upfront and then a bit on-going, this helps discourage switching, it's what we prefer.

We applaud the effort of the FMA, wish them luck in their review and pledge full support and cooperation from us should they so desire. Most life insurance advisers we know are scrupulously ethical and do not "churn" policies just for the sake of a new commission. Maybe some do?

Why does it matter?

There may be a view amongst some that so long as the new policy is as good or better than the old one and doesn't cost the consumer any more there is no harm done. So the adviser is entitled to their commission. We don't subscribe to that view. Commissions are a cost to the industry and so ultimately to those who pay the premiums - the consumers. If policies are being switched unnecessarily that is an added overhead in the model that increases premiums and so less people can afford the level of cover they need.

There is also a view amongst some that many advisers wont be able to survive financially if existing practises and the commission model is tampered with. That may well be true, a full insurance review is a time consuming and so costly exercise for the adviser and there are bills to pay. There certainly wont be as many insurance advisers buying new luxury cars.

Expect cries of anguish from many in the industry, mainly those who benefit from the practise of churning. But as few understand the industry and even fewer care, we expect little, or nothing, will be done. So luxury car dealers can probably sleep easy.

New Zealanders are vastly under insured compared to other countries. Many have no life insurance to care for their loved ones when they die. We believe that most, but not all people, need some life insurance. It is part of an advisers job to ensure that people get the level of insurance appropriate to their needs. Advisers need to make a reasonable living and pay the bills. If you'd like to switch your existing cover or take out a new policy please give us a call on 07 578 3863 and help pay our bills!

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