Consumers set to benefit as FSC tackles ‘insurance churning’

The practice of insurance churning is not new. It has existed for decades.

Insurance churning is said to occur where a financial planner or insurance adviser moves clients from policy to policy purely to obtain higher commission payments.

To illustrate, say you have had a life insurance policy in place for 12 months. Your adviser, who accepted a commission from the insurance company when your policy was put in force, contacts you after the annual renewal and asks you to come in and review your policy. You do this and your adviser recommends you take out a new policy with a different insurer. Upon doing this, your adviser receives another commission payment from the new insurance company when you policy is accepted.

This situation immediately gives rise to a potential conflict of interest. Conflicts of interest are a direct consequence of Australia’s commission-based life insurance industry.

Unless your adviser can demonstrate they have ‘reasonable basis’ for recommending you change policies (i.e. you’ll be better off after the change), chances are they are making the recommendation only to receive another round of commission, which is usually up to 130% of your annual premium.

The issue for consumers is that applying for life insurance becomes more expensive with age, so changing policies regularly may result in you paying higher premiums over time. Then there is the cost to the life insurance industry to consider.

Fortunately however, the practice of insurance churning is finally being tackled, but not by the Government.

The Financial Services Council (FSC), an organisation representing life insurers and other product providers, recently released a Consultation Paper and submitted it to the Financial Planning Association (FPA) for review. The FPA invited all committee members (myself included) to provide input and formulate a view in response to the FSC’s proposals.

In summary, the Consultation Paper proposed that commissions on replacement insurance business be capped at 30% on polices up to 5 years old.

Broadly, this proposal was rejected by the FPA on the grounds that:

1) There is insufficient evidence to illustrate the extent of insurance churning and the detriment it is causing consumers

2) It would create an unnecessary charging regime, and

3) It would have an unfavourable impact on (the FPA’s) members who actually are acting in the best interests of their clients.

Whilst these points are valid, we are ignoring the simple reality. If commissions were abolished insurance churning would not be an issue.

 


This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial and tax advice prior to acting on this information.Opinions constitute our judgement at the time of issue and are subject to change. Financial Planning Expert Pty Ltd does not give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.
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    Financial Planning Expert is an independent financial planning business based in Melbourne. We provide genuinely independent and conflict free financial advice. We’re experts in self-managed superannuation fund (SMSFs) advice and strategy, retirement planning, property and share investment advice, life and income protection insurance, tax planning, asset protection, estate planning and advice for Australian expatriates.