Churning Life Insurance Policy

A detailed survey by the Financial Markets Authority (FMA) indicates that there is a significant amount of churn in the life insurance industry, to the possible detriment of consumers.

Many people will be unsurprised by the finding, but will appreciate the research to back up their impressions. The empirical evidence provides a helpful measure of the extent of the problem, and should provide a solid foundation for future reforms.

Survey design

FMA surveyed the last four years of data from the 12 main life insurance providers in New Zealand. The period covered was April 2011 to March 2015 and included four types of cover: life, trauma, income protection, and total and permanent disability.

Particular interest was paid to registered financial advisers (RFAs) and Authorised Financial Advisers (AFAs) with more than 100 active life insurance policies on their books or who had a high rate of replacement business.

Key findings

• The number of policies grew at under 2% each year over the review timeframe but in those years, the survey group described 11% to 13% of their policies as “new”, suggesting they were probably replacement policies.
• The majority of advisers do not have high levels of replacement business. 200 out of 1,100 of advisers who currently have a book of more than 100 active life policies, have a high estimated rate of replacement business. Those 200 advisers earned almost 50% more from commissions compared to the others.
• Policies with a high upfront commission were more likely to be replaced once the commission clawback period ended (the period within which an adviser must repay a portion of their commission if the policy is cancelled).
• The quality of the new policy was only a minor factor in whether it was replaced, indicating that some advisers are putting their self-interest ahead of the consumer’s interest.
• Policies no longer subject to commission clawback were 2.2 times more likely to be replaced if the advisor was offered an overseas trip as an incentive.
• RFAs had higher rates of replacement business than AFAs, some replacing more than 35% of their life policies in one year.

Concern that adviser incentives are driving insurance policy churning have been openly discussed worldwide and have led to commission bans in some countries. Rightly, in our view, banning commissions is not government policy in New Zealand. But other responses to insurance policy churning will need to be developed.