Inside Money: Can they turn off the churn?

Churning - swapping clients into new life insurance policies to pocket a new commission. Photo / Thinkstock

Although he never utters the word in this story Sovereign chief, Charles Anderson, is having a moan about the practice colloquially known as churning.

The underlying presumption is that insurance advisers are inappropriately swapping clients into new life insurance policies merely to pocket another upfront commission.
Churning statistics, however, are very hard to come by, which is no surprise as the definition is rubbery: if I'm losing business to another life insurance company, that's churn; if I'm winning business from competitors that's because I offer superior products and services.

The latest statistics from the newly-named Financial Services Council (formerly the Investment Savings and Insurance Association) are of little use to the churn trend-spotters. The term life category, for example, shows about $23.4 million of new premium business was sold in the December 2011 quarter while $23.5 million was classed as "lapses, surrenders or cancellations".

Theoretically, most of that $23.5 million lapse money could have resurfaced as new business - most unlikely, though.

While the published industry statistics are vague, the individual insurance companies would have their own private measures of churn, which they won't tell you.

The ASB-owned Sovereign remains the life insurance king in New Zealand despite its market share declining a little - down to 27 per cent from its high point in the mid-30s.

So perhaps Sovereign's internal churn-o-meter has sounded a warning.

But has the overall churn factor increased?

According to Anderson, "more could be done to help stop the transfer of [life insurance] business that is not helpful for the consumer".

"New Zealand's model still rewards unhelpful behaviour which ultimately emerges as detrimental to the consumer."

However, if there is indeed a churning problem in the life insurance industry you can't pin it on an anonymous 'New Zealand model'. This 'model' after all was designed and implemented by insurance companies such as Sovereign.

If advisers are responding to commission incentives that's exactly what the companies intended to happen.

It's a bit foggy up there on the moral high ground.

No one insurance company, however, is likely to break ranks and remodel its commission structure.

Which is why the Australian version of the Financial Services Council (also called the Financial Services Council) has recently introduced proposals to limit the industry's propensity, again unquantified, to churn.

Most critically, the FSC has proposed that if a life policy is swapped on a 'like for like' basis within five years of being originally signed, the adviser will have to accept a lower 'level' commission - say 20 per cent for each year it's in force - rather than a high upfront commission that can reach 150 per cent or so in Australia (they're higher in New Zealand still).

Given that most of the same life insurance companies are operating here as in Australia, maybe the churn rules might be on the FSC (NZ) agenda soon.