In a statement announcing the decision to adopt a fee-for-service model along with hybrid or level commissions from 1 July 2015, Fortnum has hit out at the life insurers for not acting on known advisers ‘churning’ their clients.
“There are advisers who churn and they’re known to the insurance companies who continue to accept business,” Fortnum executive chairman Ray Miles said.
“Perhaps part of the problem is how executives are incentivised to deliver new business growth,” he added.
Fortnum’s decision to adopt new remuneration structures – in an effort to “self regulate and ward off further legislative attack” – follows similar actions by AMP and Centrepoint Alliance.
Mr Miles pointed out the changes to remuneration were necessary to ensure a sustainable insurance industry. However, he added that advisers and licensees were not to blame for the industry problems.
“Advisers are price takers not price makers,” Mr Miles said. “We don’t set the terms for upfront, hybrid or level commissions nor do we set the policy terms or premiums, yet most of the blame for the industry’s sustainability issues are directed at the minority of advisers who churn.”
Mr Miles also said that if recommendations to cap commissions at 20 per cent with a maximum year-one fee of $1,200 were introduced, many advisers will “simply treat risk insurance like health insurance” and tell the client they need it but to organise it themselves.
“In many cases, advisers who derive the bulk of their revenue from risk will exit the industry altogether. The end result is that fewer Australians will receive insurance advice,” Mr Miles said.
He also urged the regulators to focus on the wholesale or group life market, particularly sub-par underwriting practices and automatic acceptance, if they wanted to create a more sustainable and profitable industry.
I take it that it is just a coincidence that many of the recommendations in the Trowbridge report were almost word for word from the FSC submission, yet you honestly believe that Trowbridge thought them himself and was not influenced by the FSC submission? He must be clairvoyant.
For the record my business has always operated on a Hybrid income model and I fully agree upfronts should go.
The problem/s as i see them are as follows:-
1./ If the Life Companies can keep premium rates quite uniform and the products in line with current updates – then there will be no requirement to SWITCH insurers not Churn .. How do you review a client annually and not report to the client a company which is offering the same level of cover at 10 to 20% off their current premium.. which may have not been competetive 3 years ago when the client took out the policy now is & by the way has better definitions within their contract ??
2./ As an adviser we must always put the client first … Life Companies are NOT our clients we seem to forget that .. we have NO ALLIANCE to any Life Company … keep the policy up to date with current premium costings, update your policies to reflect better terms and definitions – and they will be advised to remain with that company ….
I can just see the decline of Claims NOT BEING paid
I can see the enormous decline of under-insured Australians who are already struggling to make ends meet to not having adequate cover in place
At least we all agree that Insurance is never bought its always been sold by advisers.
Life companies have always sharpened their pencils to their products costing, terms and definitions to remain competetive for advisers to SELL the product to the consumer out there .. this will not help the consumer in any way ….
Interesting. I actually don’t think this has anything do do with what the insurance companies want. I am pretty sure its coming directly from Trowbrigde (not to forget pretty much every other recent report on the whole financial system).
“ASIC has expressly stated its concerns about high upfront commissions and the recently released Financial Services Inquiry report echoes those concerns and goes on to recommend a level commission structure”.
“At the same time, the report does dismiss the idea of continuing with the most common current practice of
upfront commissions, which typically are 100% to 130% of the first year’s premium. Equally, the report dismisses the idea of a nil commission model.”
RJL Financial, I don’t think your sources are accurate. Almost without fail, insurers do not like policies lapsing (from churn or other reasons). Insurers lose when lapse rates are high – you only need to look at any insurance companies profit announcements over the last 5 years to see the impact it has. I’ve heard the 7 year comment before, and basically it’s a myth. The only reason a 7 year sweet spot could exist is if premiums didn’t increase in line with claims costs, which they largely do (apart from level premium, but that’s another issue).
Des – is it in the clients best interest to have changes implemented that in the majority of situations will have clients paying more in future than the current premium they pay for advice, insurance implementation and ongoing reviews and claims service?
Yes I know that in future years that they may be better off overall, assuming of course that insurance premiums come down and don’t go up and that they don’t need any help, ongoing advice or claims help as you will need to factor in those service fees. I don’t believe that insurance rates will reduce at all, those dollars will just disappear into the insurance companies profits which is what this has always been about.
The loser here will be the client who will still be able to get upfront advice, ongoing review advice, missed premiums organised and claims help and advice from a fee for service adviser but it will all come with an hourly rate attached and ultimately this will cost the average client a lot more.
Wait till the insurance companies see the lapse rates when advisers stop chasing up unpaid premiums or stop ringing clients to remind them of why they took out the cover in the first place because not many clients are going to pay an hourly rate for that service.
This should be all about the client and their best interests but in reality it is not. The debate has been hijacked by the commission debate as it suits the insurance companies looking for greater profits not whether the average client will be better off.
Agree with you David and you Des, the BDM’s and underwriters know exactly who the churners are. Des you are also right to point out that the some of the insurance or bank owned Dealer groups actually encourage advisers to move their clients across.
I disagree. Look at the heart of your conversation I agree WE need to weed out that sort of behaviour, but unless we own the problem, it will always remain someone else’s problem, and that’s the real problem.
But is asking the lolly shop owner to stop selling lollies to a fat kid ever going to work (apologies for the politically incorrect example)?
I am happy to be a part of the solution, but it seems everything I read is always laying the blame elsewhere.
I think its a Dealer issue (oh no, the lolly shop again).
Dealers have the ability to tie in this sort of behaviour with no doubt, similar ‘habits’ across other platforms, AND report this to ASIC. Any new dealer that then takes these guys on is a fool and deserves the pain that will eventually follow.
Des – the insurers have it in their power to reject an application to replace an existing policy if the reason for the replacement is considered inappropriate. The insurers have a responsibility to weed out the ‘churners’, stop accepting business from those advisers, and terminate their agency agreements.
Correct me if I’m wrong, but I’ve been told that the insurers unofficially don’t mind a bit of churn as long as it not every year or two, as the ‘new business’ helps them get perks with their reinsurers from hitting targets.
I also recall reading somewhere that the most profitable time period for a policy to exist is around 7 years. Enough time to pay the upfront back, but short enough that the client doesn’t use it. Seems feasible, but who really knows if it’s true?
Exactly !
The insurers are NOT the ones churning, so lets not shift the blame to them. And Ray, we can set the terms for the commissions, which in turn affects the premiums. Its called Best Interest Duty (oh – its the clients Best interest, not ours!).
Good on you Ray. Nice to hear another voice telling the truth for a change.