Self interest drives life insurance premiums up!

Churn continues to pester the life insurance industry. Insurance churning is the practice of cancelling an existing life insurance policy placed for a client with one Insurer and re-writing that some policy with another Insurer in order to generate a new commission from the account for the broker. Unfortunately due to high upfront commissions paid for life insurance products in New Zealand, churning is almost, dare I say it, incentivised.

This commission paid upfront to the broker is generally about 200% of the first year's premium, with a provision that should the policy fall over (lapse) within the first 24 months, the Insurer will have the right to claw back a proportion of the commissions paid. However once the policy has been in force for 2 years, if the insurance policy is then cancelled, the Insurance company will have no recourse on the commissions paid.

A motivated broker can possibly find a myriad of reasons why the policy should be moved; but the easy sell rests with;

• A new clause in another Insurer's policy makes it more attractive, or better suited for purpose
• Price changes have rendered the existing policy uncompetitive in today’s market

The broker will tell you hand on heart, they moved the business to another insurer in their clients best interests “I saved him some money” or “that policy did not cover disease XYZ”. While these reasons may be valid in some cases, in most instances the motive to change is the lure of a new commission.

Most people are in business to maximise revenue. Brokers are no different. If a broker can move their client's business say every 4 years, they stand to earn commissions multiple times on that same client. On the flip side, Insurers are continually paying commission to get that client onto their books (albeit temporarily).

The exacerbation of the problem is highlighted in the emergence of Partners Life. A new Insurance brand with substantial new business growth in a very short time. Not because Partners Life has embarked on a strong marketing campaign, (few members of the NZ public would even know who they are), but because they have embarked on getting the independent brokers on their side. How do they do that?

1. Pay top dollar commissions for new business
2. Design their premium structure in such a way that 55 to 65 year olds pay a little less than the market average. In this way brokers can move the business sighting the savings they provide their client

Interestingly, few brokers churn their policy to Pinnacle Life, who do have the lowest price across all age groups. Why? Well they don’t pay anything like the commissions available from other NZ insurers. Which makes you wonder about the broker’s justification? It’s more about self-interest than client-interest. And we all know who pays the price for churn in the end.