Inside Money: Churn it up - a life-changing experience

Polly Nyman (10) of Lawrence plays in the sea-churned foam at Dunedin. Photo / Otago Daily Times

Why, all my friends and family ask me, are insurance advisers getting all worked up over a form?

Alright, you got me - my friends and family have never requested any information from me about insurance advisers; ever.

Except for today. This afternoon, or maybe it was the morning, a family member - whom I cannot name for legal reasons - explained how her insurance adviser switched her life policy to another company.

This, I immediately thought thanks to my conditioning in the trade, sounds like a clear case of 'churn'.

Churn, in the insurance business, occurs when advisers switch their clients to different providers merely to generate a new lump of commission.

Typically, life insurance advisers receive a large upfront commission at the time of initial sale - over 200 per cent of the first year's premium in some cases, which is high by world standards - and a much lower ongoing payment, also known as a trail, as long as the policy remains in force.

Insurers pay a high upfront commission to advisers to get the business but need to keep the client on their books for a number of years to make a profit.

Life companies, then, are worried about the 'churn' effect. The irony, of course, is that it is the insurers themselves who, for competitive reasons, create the temptation to churn by offering higher commissions.

A number of high-profile cases have revealed examples where 'churn' has left clients with a lesser degree of life cover after the change of insurers.

And this is the problem the Investment Savings and Insurance Association (ISI) has tried to counter with its new Business Replacement Rules - the form that has so enraged the advisory industry.

Advisers are angry because the proposed ISI policy would allow insurance companies to contact clients who have been switched to new firms - in effect allowing insurers to question the quality of their advice.

But there are many good reasons why advisers will switch clients to new companies - and good advisers will clearly explain the change and how that affects their clients' cover.

It's also up to clients to ask those questions of their advisers.

So I asked my family member, XXX XXXXXX, why her adviser had recommended the change.

"Oh God no," she said. "I asked him to find something cheaper - with the same cover. I was paying way too much."