To lapse or not to lapse – that is the question
Before the Life Insurance Framework and the subsequent changes to policy lapse commission clawbacks take effect next year, now would be a good time to perform a diligent review and retention process in order to keep your business sustainable.
On 1 January 2018, the new Life Insurance Framework legislation effectively placed policy lapse responsibility on to advisers.
If less than twelve months’ premiums have been paid, the adviser will have to return 100 per cent of commissions to the insurer. If more than one, but less than two years’ premiums have been paid, 60 per cent of commissions must be returned.
Insurers already report to ASIC, every six months, practices that have a lapse rate of 20 per cent or more and have more than $200,000 of in-force premiums with one insurer.
Taken together, the ASIC scrutiny and policy lapse commission clawbacks may sound onerous, but I believe the changes should not unduly affect true risk advisers practicing around the country.
We must remember that the reforms are designed to stop the few advisers who deliberately oversell insurance to people who can’t afford the premiums beyond twelve months. If the reforms help stop this from occurring, they will be welcomed by all good risk advisers who have pride in their profession.
The reforms may also impact businesses with general or no-advice insurance arms who do not have a clear focus on their clients’ needs or have sub-standard compliance processes.
For good risk advisers who operate a sustainable business by providing quality risk advice tailored to their clients’ needs, a diligent review and retention process will overcome any need for concern.
Regularly reviewing your clients is good professional practice and, therefore, makes good business sense. It does not necessarily mean moving them from one product to another. It is about knowing your clients by asking the simple questions about what’s going on in their lives.
Advisers need to ask their clients with business insurance if there is any change in:
- Their business structure or ownership;
- Personal guarantees;
- Current or planned new business loans;
- The leasing of new equipment or premises;
- Employment of new people who are crucial to the business operation; and
- Their family situation.
For clients with personal insurance cover, advisers need to ask if there is any change in:
- Personal and home loans taken out;
- Addition of dependents;
- Income and employment;
- Health changes;
- Cost of insurance. There may be an opportunity to change from a stepped to a level premium basis to safeguard long-term affordability. There are now insurance funding options as well as partial roll-over, split benefits or an increase in waiting periods that may be appropriate;
- Current loadings and exclusions to the policy. There may be an opportunity to remove a loading or exclusion to the policy; and
- Binding nomination.
In addition to a robust review process, you should be looking at where, why and how insurance business is lapsing. Many adviser practices have adopted a system that classifies all lapses according to a cause, for example:
3. Not needed at client direction
4. Can’t afford
5. Dissatisfied with product
6. Dissatisfied with service
7. Replaced due to price
8. Replaced due to benefits
9. Replaced due to restructure
10. Client unable to be contacted
11. Client gave no reason
Over a 12-month period, this will also identify any deficiencies in your practice.
In summary, if you know your clients better you will know your business better and you won’t have any problems with the policy lapse reforms. If you don’t have these sorts of processes already in place, it is now a good time to implement them. You will not just be meeting your obligations, but will be in a better position to advise your clients and build a stronger, more sustainable life risk practice.
David Spiteri is a life insurance specialist at Centrepoint Alliance
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