Inside Money: On the level - insurance churn report takes the axe to commissions

A new Australian report proposes a complete overhaul of the life insurance commission system. Image: Thinkstock.

Across the Tasman last week another in the endless succession of reports into what's wrong with the financial services industry was published.

And the much-anticipated final Trowbridge 'Review of retail life insurance' didn't disappoint, recommending the now-standard range of sweeping, controversial reforms.

Primarily, Trowbridge, named after actuary John Trowbridge who conducted the review, proposes a complete overhaul of the life insurance commission system, which has been blamed for persistently-high 'churn' levels.

Churn - or the over-regular switching of client life policies by advisers in pursuit of higher commissions - is also a concern in New Zealand but has not yet reached task force phase.

But NZ regulators and government policy-makers will be reading the Trowbridge report closely.

Among other recommendations, Trowbridge proposes doing away with upfront life insurance commissions (the chief culprit in churn lore) and introducing a flat 20 per cent annual renewal payment.

In fact, the report doesn't quite remove the upfront incentive.

In lieu of upfront commissions, which in NZ can be above 200 per cent of annual premium, Trowbridge recommends an Initial Adviser Payment (IAP), capped at $1,200 per client (not per policy sold) that can be charged only once every five years.

The IAP, however, will apply only to clients with annual premiums below $2,000.

"Setting the IAP at $1,200 is intended to make a contribution to cost recovery for advisers while falling short of full cost recovery, which is variously estimated at between about $1,500 and $3,500 per client.

"It is aimed at delivering a balance between acknowledging the initial costs of advisers and eliminating any behavioural doubt as to whether the client's interests are being placed ahead of the adviser's own interests," the report says.

NZ life insurance industry consultant, Russell Hutchinson says while Trowbridge makes some fair points - and includes solid research - its focus on adviser remuneration overstates the problem.

Hutchinson says commission rates undoubtedly influence churn "but it doesn't make a big a difference as you'd think".

"Commission isn't the dominant factor in insurance churn," he says.

"It's part of a long-run consumerist shift where people are replacing things more often - whether that's phones, or TVs or life insurance."

According to Hutchinson, while the Trowbridge report will be "sitting on the desk of just about everybody" concerned with New Zealand's life insurance industry it probably won't exert any undue influence on policy here.

But with the Financial Adviser Act up for review this year, the Trowbridge anti-churn agenda may sneak its way into the process.

"We think that the review of the Financial Advisers Act will be shaped by the presence or absence of a significant customer view point," Hutchison said in a recent report.

"A miss-selling scandal of some kind, coupled with a media focus, would bring the Trowbridge report into the review and make legislative change much more likely."