Advisers can't solve an industry's problem

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Adjusting the remuneration of advisers is not the only answer to fixing the policy lapse issue currently dominating the market.

In its 13th annual CEO Report, the Financial Services Council said that current remuneration structures of risk advisers are exacerbating the ‘churn’ problem.

Suggestions made to improve this included placing time limits on policies so that there is some fee claw-back if policies are exited earlier than this time limit. Another was to have retention KPIs for sales staff, as well as new policy sales targets.

However, Jordan Hawke, head of Asteron Life, says that Australia is suffering from high lapse rates rather than excessive churning, and that adviser remuneration is not the only facet that should be addressed.

“We’re looking solely to the adviser to solve the problem of the industry, rather than thinking about all the players responsible in the industry to solve this problem,” says Hawke. “To reduce commission rates or provide longer responsible periods will certainly help in some instances, but it won’t fix the underlying problems of the industry.”

Hawke says that the lack of a deep relationship between clients and insurers is a contributing factor to clients cancelling or changing their policy when times are tough and they can’t afford it.

“The reason they can’t afford it is that they don’t see value in the product they have.”

It is the adviser’s job to find the client the best deal for what they can afford, says Hawke, but insurance companies constantly  “leapfrogging” each other to get competitive advantage is making the industry unsustainable.

“We need to have a deep relationship with the customer that buys our product, to give them confidence that the insurance they have in place is sustainable; that premiums are sustainable. I also think as a manufacturer, we need to look at the way products are structured from a premium point of view to stop this ridiculous J-curving of step premiums as you get older and people cancelling their products at the time they need to keep them.”

  • PETER CORRIE on 5/08/2013 6:53:57 PM

    It would seem that management in Life companies are trying to abrogate their responsibility by transfering the blame for their problems to the adviser re sustainability lapse rates etc.
    Lapse rates and administration are a management problem and always have been in a very competitive market, so please try and work out solutions that will benefit all stakeholders without disadvantaging your main revenue producers -- advisers .

  • Craig Yates on 1/08/2013 12:24:18 PM

    With the current lack of meaningful data of what is actually deemed to be the "churning" of insurance policies,the embracing of the direct insurance market by insurers in order to gain market share and maximise profits is beginning to implode with the statistics of the incredible lapse rate in the first policy year of 40% !!.The commoditisation of the risk insurance market via the direct channels that has bneen gaining momentum over the last few years is resulting in a model where only the volume of new business is outweighing the incredible lapse rate of direct business in the first year.If this business model was being operated by advisers,would this lapse rate be considered "churning" by the industry ?
    If a consumer who purchases a direct product then cancels the product 3 months later and takes an alternative direct product, or in fact, seeks the advice of a professional adviser who then recommends a replacement contract that provides significant and meaningful advantage to that consumer and is in their best interest, is that considered a lapse or is it termed "churning"?
    The risk in the direct model where no adviser is involved or no relationship exists other than the purchase decision of the consumer and the issue of a policy,is that future claim statistics and the subsequent litigation that will escalate, will contribute to industry cost when the consumer is advised that the policy they have purchased doe not in fact include a certain condition,contains a pre-existing condition clause (because no medical information was requested at the time of implementation),or the they were34 not advised to include a Buy Back Option or similar to protect their future position.
    These issues will begin to unfold as the time frame from the purchase of the direct business to claim increases.
    These consumers will also be left to address and process their claim without the assistance of an adviser at a time when they are suffering medically and possibly financially and do not have the knowledge or resources to manage the process.
    Would a current insurer be willing to accept the new business of an adviser whose first year lapse rate was 40% ?
    If so, would the insurer continue to accept the advisers business as long as large volumes of new business were outweighing the lapse rate?
    Would they be concerned if the new business was coming from their closest competitor in order to increase market share and maximise profits for shareholders ?
    They have in the past.The 1980's and early 1990's were rife with this practice.
    When the consumer perceives that their purchase is cheap, quick and immediate and where there is no commitment to the process,the perception of value, longevity and meaning and understanding of the process is eroded.The virtually non-existent relationship is temporary at best and the business is at a high risk of cancellation based on a lack of value of the product they have purchased.
    This business is exceptionally vulnerable.
    The result will be an ever increasing movement of this business on a short term basis.When you cheapen the quality and delivery of a product,remove the depth of relationship and concentrate on expendable volume,you need to be prepared for a resultant lack of customer commitment and satisfaction.
    If the insurers concentrated their efforts on supporting high quality advisers and ceased accepting the business of advisers who deliberately and regularly switch large volumes of their business with no measurable or meaningful benefit to the client, the so called, "churning" issue would begin to rapidly decline.
    Punishing quality advisers business models, in order to be able to still continue to generate business under a different model from advisers of lesser quality and dubious practice is simply greed.
    Here's a suggestion to the insurers who keep whinging about this matter.
    Don't continue to deal with the advisers who you know have a documented and identified history of doing the wrong thing and your business, based on supportive and respected relationships with quality people will flourish.
    The recipe is simple, but at the moment there are too many ingredients and too many fingers in the pie.

  • Andrew Dudman on 1/08/2013 11:44:59 AM

    Thank you Kathleen for reminding us that relationships are critical. To back this up some recent stats released by the industry show the highest lapse rates are with direct sales channels - where it could be argued there is only a transactional relationship. Adviser driven business is, on the whole, sticker because clients understand better what they are buying.

    I raise again a misunderstanding by those who think lower or level commissions or Fee for Service is the answer. I looked at this issue last year and calculated that my median risk client required about 18 hours of time to achieve a result. this included meeting preparation, at least 2 client meetings, research, Advice production, implementation and follow through to completion. At the time my median client risk premiums were $2600 pa and at 110% upfront it meant my hourly rate was $158, and only if the business completed. I also examined my top 10 risk clients and whilst I made substantially more income they were all more complex cases requiring more time so the hourly rate didn't improve noticeably.
    Fee based revenue? well it would reduce my average client premium to about $2100 for the same products but I would need to bill at least $3,000 for the advice & implementation - I may be a holier than thou adviser but I wont write much business with that kind of offer.If you haven't yet done so I encourage you to look at your own practices and run the numbers.

    I know of few practices who could survive on this level of charge out and my review provided an opportunity to rethink my market and further build efficiency. Risk is a good business to be in but its not the honey pot its purport to be - most of us earn those dollars the hard way.

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