Churning: Insurer explains clawback extension

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Speaking at the recent Investorfirst Securities Wealth Management Conference, TAL CEO Jim Minto explained that changing customer behaviour is radically altering the way in which life insurance is purchased and priced.

“I think the lens of the consumer has to be brought into the life market, because the consumer is treating channels with great disrespect, and is prepared to move across channels very freely,” he said.

“So my insight on this is that traditional methods of assessing this market aren’t really valid. Consumers are moving freely across channels. We have consumer activism. Consumers are driving activity in the advice market, in the group market.”

“Consumers acting of their own volition directly that’s driving a lot of activity.”

He added that the thrift-chasing consumers are increasingly choosing to shop around online before purchasing insurance through their super fund – where they can potentially get a far better price and easier underwriting.

“So that’s what’s happening. It’s driving greater customer movement, churn activity and so on,” he said.

“On the Financial Services Council side, we’re saying we’re designing these products in quite a traditional way to stay on the books for seven years and so on, and we’ve priced them that way, but suddenly this is all changing – and these products are mispriced if that’s the long-term assumption.

“So we’re trying to change the remuneration basis. I think it’s very much work in progress, and the changes that are being proposed certainly won’t be the end of the changes that are required.

“The life industry said to advisers, very painfully, it said we’ll only keep doing business this way if you change the commission rules. And if a policy goes off you’ll lose 100% of your commission in year one, 75% in year two, 50 in year three. So if a policy’s not on the books in year three, you could lose half.

“When you’re paying 120% or something close to it to acquire business, you just need to get above the water if you’re a life insurer.”

He added that advisers are already struggling in the life market, as gaining customers can be a tricky proposition when customer needs are being met by alternative channels “and it’s so easy for them to pay for it and fund it elsewhere”.

“The market’s realised that it’s unsustainable, and people will rationally play into fewer spaces where they can make money.

“If you can offer enough value you’ll succeed. But it has to be through the eyes of the customer in my view. And in the case of advisers the customer has to see more value than going through the other models.”

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  • Selling Advice on 14/12/2012 3:40:02 PM

    By not working on commission, my clients know that I will try and find the most suitable product/premium arrangement that suits them. They seem to get that concept, why don’t financial services professionals?

    Commission incentivises a lot of people to sell more than the client needs, or worse, go the easy option with limited underwriting ending in under-insurance. I've seen it in over half of the people I've worked with/around over the last 12 years. It’s all about the commission. Biggest reward for the least effort. I’ve tidied up many client files with inappropriate/incorrectly structured policies written by huge writers of risk, you know those league ladder topping guys, after they “resigned” from the firm suddenly without notice.

    My take on commission – too many snouts in the trough, not enough looking after a clients best interests.

    Fee for service advisers do a better job at explaining the cost/benefit/nature of products because the clients value their service and time enough to pay for it.

    But I'm all for choice, I'll happily work for the niche market of well-informed clients.

  • Pat on 13/12/2012 8:50:34 PM

    @Alleycat, your absolutely illinformed assumptions are tiresome. Give it a rest pal and go back to counting your commissions.

  • Alleycat on 12/12/2012 9:29:34 AM

    @Pat/BJ, sorry it was my mistake.
    Let me pre-empt the content of this post as an illumination.
    I don't believe that there's anyone out there who used to receive commission on anything who has taken the "holier than thou" approach and charges a fee for service receives less than they did before.
    It might be a wild guess but I suspect that they receive more under the guise of in the client interest.
    I didn't take into to account that as a commission adviser I receive 10.0% of the second and subsequent year renewal premiums to cover my annual reviews and settlement of claims.
    I take it that you guys initially discount your fee for service substantially in the first year because even @$100 hour you cannot cover the amount of time it takes to put the average policy on the books under 7-9 hours. In reality your fee should be around $900 but the client gets a 30.0% discount.
    In year 2 I don't care what you charge but it's unlikely you will do a review of any sort under $200- $300 each time.
    If you've ever had to deal with a claim of any sort, it must make you feel really good when things are really tough for clients that you hit them for another $1,000 for your fee for service or do you buck pass that onto the Insurance company to resolve.
    There is an acronym for what you guys promote and I'll help you Commission Rebates Are Positive (for clients) I can't spell it out for you any easier.
    @ Stephen Catterall, This is not bickering when you have "opiates" putting out this stuff and they actually believe it

  • BJ on 11/12/2012 11:41:28 AM

    Sorry @alleycat but Pat is correct. The discount with many life insurance companies does continue for the life of the policy at around 30%. He may have been around for longer than 5 mins after all...

  • Stephen Catterall on 10/12/2012 8:21:54 AM

    #Pat/Alleycat, can we stop the squabling and petty pointscoring now please.....

  • wow!! but i wont defend the banks and planners on 7/12/2012 7:39:36 PM

    average policy last 7 years? why? lack of service from advisor and change to new advisor? etc I dont know? i dont understand average, Im not going to be average!
    picture this...average is where the best of the worst meets the worst of the best....Im thinking average means your "cream of the Crap". we dont do average in my business. I still have term policies 20 years old. wrote level premium, no quick sale. cant churn them, client cant get a better deal. Hopefully they get a few upgrades. MLC dont grandfather. how really can we churn a life cover policy to make it so much better? maybe it will pay a financial planning fee of $2,000. whoopy! if they are level premium, they dont leave you and unfortunately you cant churn them without retaining integrity. 90% of my business is level premium and I am now in my 24th year. It works and the BDM's are the ones who want to churn, they look at my book with each company and walk away seeing very few prospects that I could acknowledge as benefiting to change insurers. i love this industry and there is so much work not done, no need to churn please, get a new client and really help them than trying to justify a marginal improvemnt for a insured.

  • MH on 7/12/2012 4:52:09 PM

    Jim, you forgot to mention that TAL regards non-acceptance of CPI increases as lapses. And I like TAL as a carrier!

  • Pat on 7/12/2012 3:02:08 PM

    @Alleycat. Well, sport, explain to me why my own cover, and that of my clients, is 30% lower than the same cover by the same insurer where commissions are rebated. And my clients have had their cover in place for 5 minu...wait on, 7 years. You like to make such unfounded assumptions don't you. Just makes you look more a fool, sport.

    And you are only a fraction right on your answer to underinsurance. The commission based adviser will rather sell a $500k policy that doesn't require medicals, clip the ticket for the life of the policy and pick up their little commissions rather than undertake a thorough needs analysis and advise the clients, charging accordingly.

    You don't need to get so defensive about your conflicted model, mate.

  • Paul on 7/12/2012 2:49:57 PM

    Like most advisers, I am sick of insurance companies who want to have multiple slices of the same pie and have no qualms about bagging advisers or the way we operate when it suits their needs.

    Just as my TAL Business Development Manager has been trying to build a relationship with me they show their true colors and it would appear that Adviser distribution is not a priority for them. The reality is that many of these companies will change their spiel depending on which business avenue they wish to push or punish. Be that Adviser, Direct or Group sourced insurance. I agree with you Michael that advisers also have a choice regarding insurance companies and I suggest we exercise it.

    If a client does not see the value in professional tailored advice regarding their insurance needs at implementation stage, ongoing reviews and claims, then I suppose the overpriced and under serviced Direct channel will boom. And Group cover whilst a relatively basic offer still requires personal advice and ongoing service by someone to ensure it is appropriate for the client.

    If you believe Jim Minto CEO of TAL the current adviser model is not profitable for them anymore and as one of the larger Direct and Group insurers it is obvious what their future plans are.

    Contrary to Jim's thoughts on advisers "struggling" I will continue to provide professional and personal service to my growing client base who definitely see value in an insurance specialist who will service them through implementation, ongoing reviews and claims as they occur. Quality advice and service will always be appreciated by those clients who receive it.

    The other insurance channels really don't offer much competition in reality.

  • Alleycat on 7/12/2012 1:24:43 PM

    Dear Pat,
    You haven't been in the business beyond 5 minutes have you.
    If someone takes Nil commission and charges a fee, the 30.0% discount not commission does not continue infinitum.
    Life Companies are not that generous.
    The same is if you take level commission instead of upfront, it appears as a discount to the client but in essence it's deferred payments to an adviser who has decided to manufacturer a bigger revenue stream over the longer term.
    Why do you think Life companies offer around 10.0% plus GST on renewal?
    It takes a life company generally about 8 years to break even with costs associated with the cost of putting business on the books.
    As far as under insurance goes the question is very easy.
    Many advisers do not cater advice to the client needs. They cater to price first and last. That's not advice, that's a cop out for advisers who don't understand that a client with a $500K mortgage, a dependent wife and two dependent kids needs somewhere in the vicinity of $1.5m of death cover.
    The bank adviser and mortgage broker types involved in this process promote the cheap option and settle for the cheap sale.
    If you're one of those, your future in the business is not destined to last long.

    Sport, you keep charging a fee and find out that either you or the client will lose out, eventually.

  • Pat on 7/12/2012 11:49:36 AM

    @Alleycat. Something you fail to realise: that 30% commission continues each year the client holds the policy. That $300 saving in year 1 will be $300 (plus indexation plus stepped increases) in year 2 and so on. In year 2, the client is no $100 better off. I assume you can do the maths from then on.

    Explain, in simple terms, why someone who charges a fee for the work they do, will starve to death, compared to someone who receives remuneration for a sale.

    Now, you say it has worked for 100 years. Please explain why we have a chronic underinsurance issue? Didn't think you could.

  • Alleycat on 7/12/2012 10:23:49 AM

    Dear Advance,
    So that I understand you correctly, you charge a fee and you keep it.
    In that scenario,do you rebate 100.0% of the commission, or do you discount the cost of the life insurance by the maximum allowed which for most compapanies is about 30.0% where there's Nil commission.
    Let's look at the practicality of that because there are plenty of naive people who want to overturn what has worked for more than 100 years.
    If you rebate 100.0% of the commission and you charge a fee, the client gets his first years insurance for free. Sounds like a good way to attract someone for 1 year.
    I don't know what your fee is but assuming you charged $500 for your efforts, seeing a client and getting their information can take 1 hour. A risk SOA can take up to 1.5 hours, explaining the content of your SOA and getting them to complete an application can take another 2 hours.I've assumed they've come to your office rather than you drive to see them otherwise you can add another 2 hours to your cost for travelling time. Time with underwriters getting the case on the books can cost you another hour of your time. So you will spend between 5.5 and 7.5 hours at a minimum for $500.

    Lets go down the other road where you operate on Nil commission and the client gets a maximum rebate of 30.0% on their first yeats' premium.
    On say an annual premium of $1000 your client pays $700 and you still get them to write a second cheque for $500 making their total cost $1200.
    Now those same people can buy an identical policy from me for $1000, I will be paid $1100 (110%) commission.
    Here's the benefit in case you haven't figured it out yet, the client is better off by $200, I'm certainly better off but here's the point you need to realise, I will be still around next year and the year after because I'd been compensated for the 40 years of knowledge and advice I provide to my clients and they know that if there's a claim I don't charge them any extra.
    You on the other hand my friend will starve to death and by your own admission do not write much.
    If you haven't figured it out yet, you never will.

  • stevo on 6/12/2012 6:15:06 PM

    Unfortunately due to the blinkered view of Mr Minto i will have to review my book of TAL insurance before it gets "churned" by the direct lines.
    How TAL got company of the year is beyond me, however the Adviser backlash on this will be a lot more than i think he has bargained for.

  • Jeffo on 6/12/2012 4:36:19 PM

    Direct sales are a great idea; they let their client "churn: as freely as he or she likes - with no underwiting and no comeback...who thought that one up?
    Clas act, Jim. I just started using TAL but at this rate, our relationship might have ended already.

  • Mark Thompson on 6/12/2012 3:51:20 PM

    Hey Jim, try getting your pricing right on Group Insurance before you preach to advisers.

  • In Advance on 6/12/2012 3:46:42 PM

    As an adviser, I charge a fee for recommending insurance to clients. That fee compensates me for the work that I do at the time. I probably don't get to write as much business that way as compared to someone who gets paid via commission, however what I write, I keep.

  • Alleycat on 6/12/2012 3:21:29 PM

    Dear Jim,
    You either live in some fantasy world where you think risk insurance is bought.
    Here's a newsflash, ever since Eve asked Adam to take a bite out of the apple she was holding so he might reap the benefits, insurance has been sold.
    You and you're like cronies through direct marketing like the banks etc offer cheap premiums to those who want a cheap price. This is neither providing advice nor client loyalty. It's a form of prostitution that attracts a customer for the wrong reasons.
    Rather than buying on need, you perpetuate a cheap price in direct conflict with your standard retail offering.
    You, like most other companies when you have an existing client do not alter your premiums when my twin brother approaches you for exactly the same amount of cover but it's discounted sometimes by 30.0% to what you charge me.
    Like all companies that behave this way,... you have no integrity in this process and yet you want to shaft the bulk of the very people who have helped keep you and others in a job.
    Why would we want to support that any more.

  • Michael Ord on 6/12/2012 1:03:57 PM

    Thanks Jim, we also have a thing called adviser activism. So the real story is out and it is called direct marketing, changing consumer habits, not churning at all. I have a cancellation letter on my desk for a client of mine for some product called "Bill Relief". Hmm I wonder who sells that? It was sold to them via direct marketing, The PDS was a great read. No consideration of what the customer had or what was relevant to their needs, but I suppose in your world that is Churning too? So will you apply a callback to your direct marketing in-house team? I don't think so. Claw-backs will only affect those of us not owned by a bank or an insurer. Jim maybe, just maybe this activism you mention will also affect those insurers who think it is such a great idea to screw over the honest advisers (also clients) out there doing the best by their clients. So if you don't want to play in my space Jim that is fine with me. See you latter. Our business grew 50% last year, how much will TAL be getting?

  • Guy Mankey on 6/12/2012 1:01:37 PM

    Let me get this straight, and remember, ALL of this is supposedly about stopping churning.

    Under the proposal I can write good new business on a client who is then approached a year later by an 'adviser' (who is already known to the industry as a serial churner) saying, 'stop that policy, come with me and I'll rebate you $1,000 cash for each of the next 3 years".

    1) Yes, the new company will accept the app even though it will clearly identify it is replacing business written only 12 months before.

    2) The new 'adviser' will be paid in full (even though everyone knows in 3 years it will move again so he can continue to 'pay' the client).

    3) I'm the one who is penalised, even though I am the only entity who has acted (according to the industry 'standards' this is supposed to be helping) honestly and honourably.

    4) The Execs of the company that accept the new business from the churner will be rewarded if their company accepts lots of this business.

    The facts are simple. This isn't and never has been about stopping churning. The instos could do that overnight under the current system if they had the will.

    This is about reducing our incomes to increase profit. But this way they get to blame the greedy advisers us as the reason for doing so!

    Unless there is a substantial increase on the upfronts to compensate for the additional responsibility there will be 2 major consequences. Firstly, no-one new will come into the industry. Why would they, it's hard enough now. Secondly, those who do survive will, almost by necessity, adopt a 'move it after 3 years' mentality, having had that period of time officially endorsed by the providers as being a suitable period for a policy to last.

    The short term thinking and gains will cause considerable long term pain.

    A big question is whether the current batch of execs care about the industry's future. The fact that none of the people currently running these businesses were doing the same thing a decade ago leads me to believe they simply don't care what the future holds because by the time it arrives, they'll be somewhere else.

  • Insider on 6/12/2012 12:47:48 PM

    The real reason for the 'churning policy' is to change the untenable business model that the big insurers have built. What better way to address this issue than to hide it under a 'consumer protection' measure. Full credit to them for running such a clever campaign, even the Government fell for it!

  • Gavin on 6/12/2012 11:54:49 AM

    I agree, if Tal and others are actively chasing the direct market, and pricing accordingly and this is the market that consumers are willing to move around within, shouldn't it be this market that is repriced and not the adviser market where it is less common for business to be churned. After speaking to Insurance BDM's recently they know who the people doing the churning in the market are if they want to reduce the churning target those people instead of welcoming the business with open arms. Why not simply ask an additional question if the business is replacing other business to validate the purpose of replacement. Why not provide a loyalty premium bonus for maintaining the policy, this has the potential to reduce the desire of a client to change as the new policy premiums would be higher. End of the day there are a number of way to reduce churning if it is such a big problem. Which certainly in the circles that I move in it is not and Jim did not convince me with his comments.

  • andrew on 6/12/2012 11:32:02 AM

    Interesting propositions from senior executives of listed businesses.
    I have long been intrigued by these executives that are remunerated in very generous terms for often delivering little to no shareholder value.In fact this industry is littered with excessivley paid executives with demonstrable track records in eroding shareholder value.
    Are these executives that now propose these clawback provisions also going to have the same clawbacks apply to their remneration.If you make poor decisions , cost shareholders returns , fail to meet your stated goals and financial outcomes, will you forgo your total bonus , plus reimburse the company half your salary.
    Is that silence !!

  • Stephen Catterall on 6/12/2012 10:47:08 AM

    Very poor commentary on this subject by Jim. Now the advisers are being penalized for the changing habits of consumers? Surely you saw this coming ESPECIALLY when TAL are one of the leaders in direct insurance who is taking away our source of revenue, My view is that if the heads of Insurance companies had in fact actually ran an insurance business then they would know the stresses we are under daily, obviously they do not, and this article clearly underlines and represents that view. I also find it difficult to ascertain where the 7 year ruling has came from, the companies are making profit from year 2 onward, especially with automated systems in place. Their thinking, i feel, is clearly years behind.

  • Anthony Kane on 6/12/2012 10:17:50 AM

    So Jim, you have recognised that in fact the insurance companies have 'mispriced' the risk as a result of trying to chase volumne and now you want the distribution channel to pay for the downside risk that you are responsible for. Poor thinking Jim, poor thinking. Bye bye TAL.

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