The report is good analysis of relative hazard rates – and some of these should give us cause for concern. As a supporter of great financial advice it is slightly depressing to find that whether an insurer has an incentive travel programme running has such a strong correlation with increased risk of lapse. Let us be clear, the only way that can happen is through replacement activity.
The report does have limits - see below - and should be seen as a contribution to further research. It clearly identifies a direction for further research, and enforcement, and even some policy changes already under discussion in the FAA review get a further push.
It is vital, of course, not to do great harm to the cause of financial advice by eliminating any incentive to work as an adviser. Advice matters, and advisers must be paid to do the job. Consumers have told us (in some research conducted by MBIE as part of the FAA review) that they know commission is paid and are reasonably happy with it. We cannot overlook the fact that for a replacement to take place the client must have accepted the reasons for the proposed move. They will have only done so because they would gain from it.
To people that know the industry there are some expected but nonetheless useful to have stated features. Things like industry structure, and issues like time dependent factors. Although whether a policy is before or after claw-back period is significant, we can also expect that the longer it is since issue date the more likely a policy will lapse.
Some of the interesting findings of the research are:
- Membership of one group over another doesn’t matter much – groups are groups – and it seems the benefits must be pretty similar
- Product scores made no difference – although the measurement was a crude ‘high versus low.’ The inverse relationship was identified by one adviser reading the report as proof that a lot of lapse activity is clients with good products being hazardously replaced by direct or no-advice channels. It may also indicate that clients are lapsing good-but-expensive products in favour of cheaper versions. But we won’t know, because that isn’t examined in this report.
- The most material variable was the size of the renewal commission, where it is low it represents that there was probably a high upfront paid. So it is a proxy for higher upfront commission.
- However the amount of bonus commission was not found to be material on its own.
- The presence of overseas incentive trips is as significant as it is shown to be - and that is strongly significant.
- The amount of switching is concentrated among about 200 of more than 4,000 advisers.
Some analysis problems exist:
- The big factor absent is price. This is important because it could tell us about the causal factor. Did the client get sick of rate for age steps taking the premium up 10% to 14% a year and finally lapse it? Or did the adviser call them up and say ‘it’s time to shift.’ This is crucial, but the way the data was collected meant it was not possible for the FMA analysts to examine. We know that a lot of lapse activity by clients is substantially driven by cost (call centre staff report that as a major factor). Not having that factor in this research may mean we are only examining the variable dependent on that one. Or put simply – when the cost of cover rises too high people go and see their financial adviser. At that point the research shows that they are more likely to help you reduce the cover if you are out of responsibility period, and qualification for incentive travel is running... That may not actually be a problem at all, what happens after that might be the best advice possible, but the FMA may now want to check a few cases.
- The data is about lapse, not replacement – there is no direct measure of replacement. Make no mistake, some of these factors could not have an effect unless replacement is what is going on, so replacement is what we are hunting here, but, for example, actual replacement rates are still not known. We would benefit greatly from analysis that steps through: old product, cause of advice seeking, statement of advice, advice on replacement business, to new product. There is a world of difference between an engaged customer with an engaged adviser and a ‘set-and-forget’ customer who buys and holds cover. If we could just see how advice is being given we would learn a lot. The report title is 'life insurance replacement - who benefits?' but without an examination of actual replacements and the benefits to the customer, it cannot be answered.
- There is no account taken of non-adviser channel: from the executive summary: “Other types of advisers could still be mis-selling but because they only sell one brand, they are unlikely to be churning policies.” But this ignores real-world fact that they are cheerfully replacing the policies clients bought from another company, to the single brand available to such advisers. We know this because we mystery shop them frequently. In this sense the report follows in the footsteps of its predecessors by ignoring other channels. Advisers may feel that they are being unfairly singled out - are there no replacement issues with direct? Banks? or Employer group insurance? In fact, there are issues. All of the harms to consumers listed in the front of the FMA document can be created by a hazardous switch from an existing product purchased elsewhere into the single product offered by a vertical channel. Advisers might legitimately feel that the second point in the FMA's replacement advice for consumers unfairly targets them - all sellers of life insurance hope to enjoy a financial gain when they sell a new policy.
But still, there is comfort to be taken from this research.
Firstly, the problem isn’t that big. With a limited number of advisers (200 out of more than 3700 RFAs plus 760 AFAs) then this is something that is quite fixable.
Secondly, the actual advisers having been identified, the FMA now has a relatively simple job of talking with them. They can actually take a look at the cases and see what is happening. I expect results will vary: some where replacement is entirely justified, and some where it wasn't.
After that guidance could be issued to help advisers know with more certainty what kind of switching is expected – presumably that which places the client’s interest first, and could limit some incentives which are seen as exerting an undue influence.
MBIE might consider the finding that AFAs replace policies less often as a model for change.
Before this report those next steps were not possible. In particular the detailed investigation into the actual advice could not be done by anyone other than the regulator. So this represents good progress. It would be good if investigation into replacement activity included other channels as well, because that will reassure all market participants that they are being treated fairly. But I also know that the FMA finds this point frustrating. Everyone has limited resources and they will not forget to look hard at other replacement issues, they probably feel that given the different dynamics of each channel it is logical to treat them differently, and at different times.
FMA report home page - all the referenced documents can be reached from there.
Goodreturns article by Susan Edmunds is at this page.
Tamsyn Parker's article in the New Zealand Herald, which includes some useful comments by Rod Severn.