Holidays, commissions drive insurance advice: FMA

Study of sales practices in life insurance finds clear link between customer churn and sales incentives.
Financial Markets Authority director of regulation Liam Mason

High commissions and free overseas holidays are the most influential factor for financial advisers recommending a switch of life insurance, a Financial Markets Authority study says.

The regulator’s report focused on sales practices in the life insurance industry, in which $1.7 billion was spent on premiums in the year to June 2014.

It found that the number of policies grew at less than 2% a year between 2011 and 2015, although insurance companies classed up to 13% of their policies as new, indicating they were replacing existing policies.

That replacement activity has the highest risk of churn, where policies are switched to benefit the adviser rather than the customer, the FMA said.

The FMA’s director of regulation Liam Mason said most advisers did not have high levels of replacement business, regardless of the way they were paid for their services.

“However, there is a clear link between high rates of replacement business in certain areas and high up-front commissions, or incentives for high sales volumes, such as overseas trips laid on by providers.”

The report found the most common commission structure was a high up-front payment of up to double the annual premium, with a trail fee of 5-7% in each subsequent year.

If a customer cancels the policy within a clawback period, typically of two years, the adviser must repay a portion of the up-front commission to the insurer.

The FMA said it found policies with high upfront commissions and low trail commissions were 1.6 times more likely to be replaced after the clawback period ended, a probability that increased to 2.2 times if overseas trips were offered as incentives.

It classified about 200 advisers as “high replacement” advisers, who earned on average 50% more commission per policy than other high volume advisers.

This group also took more overseas trips, with 30% of them taking three or more.

Shanghai, Prague, Las Vegas
The FMA said destinations during the review period included Shanghai, Prague, Las Vegas, Hollywood, Rome, New York and Rio de Janeiro. One high-replacement adviser took 10 trips.

For customers, policy churn carries the risk that the new policy does not provide as good cover as before, or carries higher premium costs in the long term.

The cost to insurers of high replacement commissions would also be passed to customers, said the FMA.

“If policies are being churned, all consumers are literally paying the price for this.”

It quoted a report from published last month by the NZ Institute of Economic Research, titled “Resetting Life Insurance,” which said life insurers are spending about $430 million a year on commissions and if this were reduced by half, premiums could be cut by up to 12%.

Meanwhile, advisers focusing on switching existing business were not selling to new customers who might benefit from it, the FMA said.

“Following our report, FMA staff will be taking a closer look at the conduct of those advisers with the highest volumes of replacement business as the next stage of this work,” Mr Mason said. 

“We will be examining the basis on which policies have been switched or replaced and the drivers for that activity – with a particular reference to incentives (of whatever form) provided by insurance providers.”

The FMA study began in May last year when it asked for four years of sales data from the 12 main insurance providers.

Unacceptable practice
The Financial Services Council, which represents insurers, said the report would provide a basis for discussion on ways to address the FMA’s concerns.

“The FSC believes churning of policies in this way is unacceptable,” FSC executive director Owen Gill said.

“More broadly, the FMA’s report and the discussions alongside it have allowed the insurers, and bodies like the FSC, to focus on what consumers should know, and understand, in buying life cover, and other initiatives that could be taken.

“The FSC has had one constructive meeting with the FMA on these subjects and we anticipate further ones, in the near future.”

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