Advisers play their part in replacement compliance
The member offices of the Association for Savings and Investment SA (ASISA) have agreed to a Standard on Replacement to govern instances where one member (the replacing insurer) has or intends to replace a policy or policies of another member office (the
A couple of decades ago it was not uncommon for an adviser to cancel a client’s risk policy and replace it with another for the sole purpose of earning additional commission. “When the original LOA standard was put in place it was absolutely about stopping churning,” says Peter Dempsey, deputy CEO of ASISA. It started as an agreement between members of the then Life Offices’ Association to restrict commission on so-called replacements. The early agreement contravened certain free trade conditions championed by government at the time and it was decided that an adviser should earn full commission on replacement policies subject to good advice being given.
Subsequently the LOA drafted a Code of Replacement to govern insurer and intermediary behaviour when replacing policies. This code was reconstituted by ASISA from 1 January 2012. “There is no major difference between the then LOA and current ASISA standard,” says Brad Frank, Policy Advisor at ASISA. However, in August 2012 the Standard on Replacement was tweaked to introduce a more comprehensive Replacement Policy Advice Record (RPAR) for all industry stakeholders. From 1 January 2013 both financial advisers and direct marketers will complete and submit the same questionnaire – on behalf of the client – to the insurer.
The nuts and bolts of the ASISIA standard
What does the ASISA standard require advisers to do? A good starting point is the definition of a replacement policy, provided by ASISA as: “Any new policy, or variation of an existing policy, where the policyholder or life assured was also the policyholder or life assured in respect of another policy, and where a termination event occurs in respect of the latter policy within a period of four months before or after the new policy or variation is effected, and where the said termination event occurs in anticipation of, or as a consequence of effecting the new policy or variation”.
It is your duty, when writing new business, to determine whether your client is replacing an existing policy. To “remind” advisers of this requirement the ASISA member companies (the insurers) include a prescribed replacement question on their new business application forms. “The ASISA Standard on Replacement requires that you (the adviser) ask your client whether the new policy replaces all or part of their existing policy,” says Dempsey. “If the answer is yes then you, with input from your client, must complete the RPAR”.
Information in this questionnaire includes policyholder and adviser details, whether the new policy is in the investment or risk space and whether the replaced policy is in the investment or risk space etc. The RPAR – a template is provided in annexures to the ASISA Standard on Replacement – must be completed, signed by both adviser and client, and then submitted to the insurer along with the new business application form. “The insurer does not have to judge whether a particular replacement is good or bad, but only whether it has taken place according to the process,” he says.
The A, B, C of “good” replacement advice...
You must make sure the process is followed from beginning to end, including bringing various “warnings” to your client’s attention. At the outset you should alert your client to the possibility that termination fees may be levied on the “old” policy in the event an investment product is replaced. Your discussion – guided by the RPAR – should cover the various pitfalls around replacement, including that the client may be paying charges and fees twice, paying higher premiums for the new product or paying lower initial premiums but higher premiums later on. Your client could also be subject to new exclusions, restriction and waiting periods or lose the tax advantages in the replaced product.
The latest “replacement policy” definition can create difficulties for advisers, particularly where the client cancels the old or replaced policy without informing them. However the standard “the client did not tell me” will not hold up in the event a replacement complaint is reviewed. “The ASISA tribunal panel members will make their decision in terms of whether the adviser could have foreseen – based on the facts at his or her disposal – that there would have been a replacement,” says Frank. An adviser should have a reasonable idea of the client’s financial position based on the financial needs analysis, for example.
One of the country’s largest life insurers suggest that advisers take additional steps when posing the prescribed replacement question to their clients. You should ensure that the client responds to the question not only from the perspective of policy owner, but also from the perspective of life assured on a policy held by someone else! They say you can only discharge you duties in terms of the ASISA standard by asking whether your client has cancelled or intends to cancel another own policy, or whether, to his knowledge, a policy on which his life is assured has been cancelled or is to be cancelled.
Number of complaints suggests widespread compliance
The ideal is for an industry where every replacement occurs to the clients’ ultimate benefit. Given that only 700 replacement cases (out of some four million new policies) are referred to the ASISA tribunal each year it appears advisers and insurers apply the standard rigorously. “If the process is correctly followed then there is no reason for the regulator to intervene or to suggest that the replacement should not have taken place,” says Dempsey. “By following the ASISA standards advisers can show that the replacement was handled on an informed basis”.
Editor’s thoughts: The life industry has often debated the replacement issue. While many blame advisers for commission-driven policy replacements the reality is that product providers encourage replacement by offering new product with significantly improved terms. Against this backdrop many advisers have no choice but to move their clients from “old” to “new” solutions. Are you satisfied with the current prescribed replacement questions and accompanying Replacement Policy Advice Record (RPAR) as stipulated by ASISA? Please add your comment below, or send it to [email protected]
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