by Tony Vidler
Replacing insurance – or “Churning” as it is often called – is a topic guaranteed to generated heated debate within the industry. At one extreme there are advisers whose entire business seems to exist by churning anything and everything that they can get their hands on…regardless of consequences to the consumer. At the other extreme are advisers who refuse to replace any business for fear of being labelled unethical.
Both extremes are ridiculous as both are self-serving positions which are not aligned with consumer expectations or good advice practices.
The “adviser” who does not advise appropriate replacement for fear of competitors or peers criticising them is not working in the interests of the client. They are protecting their own reputation and interests. Furthermore, they are valuing their reputation amongst their peers on a higher level than their reputation with consumers – the very people who actually pay them.
The businesses who exist simply by replacing anything they can find are parasites in reality. They are advisory practices which exist for arbitrage…they create nothing, but exploit price differentials for their own gain.
I would hold that every adviser should, at every engagement, ask themself whether an existing insurance policy should be replaced. The ongoing question from an advisory perspective should be “is this still fit for purpose?”
There are a number of key words in there: “still”….”fit”….”purpose”
The objective should surely be to determine whether the clients circumstances and requirements are still best served by what they currently have, or whether there are more optimal choices for them…other products which will serve them better? Failing to ask that question is failing to advise appropriately, surely? Failing to act upon the professional opinion that the consumers interests would be better served by replacing the contract is an even greater failing isn’t it?
To be clear: I do not advocate for wholesale insurance replacment. I do not even advocate for individual contract replacement in the majority of situations. I do advocate for asking the question though as to whether the existing product remains fit for putpose, taking into account the clients current circumstances and future needs together with the produuct solutions which are now available to them.
The labelling of this professional assessment of what is best for the client as “churn” is something which undermines consumer trust in the advice process. Automatically labelling replacement business discussions as something unethical serves the interests of those trying to retain products which are NOT in the interests of the client. THAT is unethical.
When an adviser (or insurer for that matter) replaces one existing insurance policy with a new insurance policy without there being any discernible benefit to the consumer, that is “churn”. That is replacing business for nobody’s benefit other than your own. THAT is unethical.
Moving a client from one insurer or product to another which provides them with better coverage, better definitions, better premiums…THAT is ethical. In fact I argue that it is an advisers obligation to do so. Knowing what the best thing for the client is and failing to advise them of such, or to act to improve their situation if it is within your power to do so, is definitely unethical.
The ethical questions matter because they define whether we are doing what is right for the adviser or insurer while the other is focussed on what is right for the client.
Churning insurance business is a sales-orientated focus. The entire objective is generate new revenue in the form of commission paid to the salesperson for successfully moving the contract to a different provider. The insurance company may benefit – and that is arguable. The salesperson definitely benefits. The consumer may or may not benefit marginally.
Typically the sales pitch for churning involves “saving the consumer some cost”. The amount saved is often negligible…and I have seen ridiculous situations where a consumer is supposed to be substantially better off because they saved a couple of dollars a month in premiums, yet had to invest many many hours to do so (and frankly their time is worth more than what was saved). More importantly however, additional risk is often introduced for the client in goijg through a re-underwritten process again, and those additional risks are rarely worth a nominal premium reduction.
Additional risks imposed upon the consumer – and they are often imposed – include mandatory stand-down periods on risk benefits, additional exclusions, different benefit types and reduced levels of cover in key areas. All in the name of saving maybe $5 a month. The risks do not generate appropriate rewards in many cases. However, the real point here is that it is the advisers job to determine whether the rewards are indeed there for the client and whether the risks are worth serious consideration.
We should not be swayed by the fact that insurers and other industry stakeholders do not discriminate between churn and replacement business. They are quite different things, and while it is wrong that vested interests who sometimes wish to preserve inferior products label proper advice-focussed insurance replacement as “churn”, professional advisers who value the reputation they have with clients should not be swayed by the name-calling. Continue doing the right thing for the client, regardless of the noise created by the various competing interests within the industry.
I firmly hold the view that a professional adviser has a moral obligation to begin every engagement with a client with essentially a clean slate. The advice offered 3 years ago may no longer be relevant. The product used 3 years ago may no longer be fit for purpose. The changes in just 3 years in product development may well throw up options the client didn’t have back then. The point is that a professional should test and challenge their own previous advice and assumptions when reviewing existing business, and should give consideration to whether there is a better solution available to the client.
IF there is a better solution for the client, and IF the benefits of such a shift in business result in the client having discernible and tangible benefits being added to their financial planning, then the professional adviser has an obligation to recommend changing products. To not recommend that is not meeting the professional obligation to place the clients interests first.
Any adviser who considers themselves a professional and is working in the clients interests must consider at every initial engagement and at every subsequent review the question “is this solution fit for purpose?” If it is, then all is well enough. But the secondary question should be: “is this solution the best fit?” If it is not the best fit possible, then surely there is an obligation on the part of the adviser to try and get the best fit possible in product solutions for the client if the rewards for doing so are greater than the risks for that client? Getting better results for a client is always right.
If there is an appropriate solution in place however, and there is no discernible benefit to the client in replacing that solution, then it is simply churn for the benefit of someone other than the client. That is always wrong.