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Life insurance – who benefits?

In June 2016 we published a report on how financial advisers sell replacement life insurance in New Zealand.

Replacing one insurance policy with another can be in a consumer’s best interest. However if it’s driven solely by what the adviser will earn, it is known as ‘churn’.

We’re concerned about insurance churn and the harm it can cause New Zealanders.

Why would an adviser ‘churn’ insurance?

When an adviser sells a new policy, they are paid by the insurance company. This can be through commission and other incentives, such as overseas trips. Typically, ‘upfront’ commission paid on the initial sale is much higher than ongoing ‘trail’ commission paid for every year the policy remains in force. Upfront commission can be as high as 200% (three times the value) of the annual premium, compared to 5 to 7% for ‘trail’ commission.

There is also usually a ‘claw-back’ period, during which an adviser must repay a portion of their commission if the policy is cancelled. Once the claw-back period has ended, the adviser is able to change your policy and receive a new upfront commission without financial penalty.

This could make it very tempting to change a client’s insurance every few years.

What we found

We requested four years of data about four types of insurance (life, trauma, income protection, and total and permanent disability) from the 12 main insurance providers in New Zealand. We then reviewed this data, with a focus on replacement business.

While some advisers may be doing a great job for consumers, we did find that:

  • Policies were much more likely to be replaced when the claw-back period has ended
  • If the original policy was sold with a high upfront commission and a lower ongoing commission, it was 1.6 times more likely to be replaced after the claw-back period ended
  • Policies with low trail commission were more likely to be replaced if the adviser was offered an overseas trip as a sales incentive
  • Advisers were 2.2 times more likely to replace insurance after the claw-back period if multiple overseas trips were offered as an incentive compared to none.

Why should you care?

What this means for you

Personal insurance products can be complex and getting advice is a good idea to help you work out what’s best for you. Of the 3,700 advisers with active life insurance policies for their clients, we are interested in the replacement activities of about 200 of them. This group receive higher commissions but it’s a small number and some of these advisers may still be acting in their clients’ best interests.

Don’t be put off getting advice but do make sure you understand the basics before buying personal insurance.   

Actions we’re taking

We’ve already met with life insurers and adviser associations to discuss our findings, and we’ll work with them to find ways to address the potential risk to consumers. We will also:

  • Visit advisers with high rates of replacement business to review their practices and make sure they’re acting in their customers’ best interests
  • Produce further guidance for financial advisers on how to ensure they’re putting their customers’ needs at the heart of what they do
  • Take action where we believe a financial adviser has breached statutory duties of due care, skill and diligence.

You can read the full report here.

You may also be interested in the review of laws around financial advice being run by the Ministry of Business, Innovation and Employment (MBIE). Learn more here.