To churn or not to churn

In the 1980s and 90s, universal policies and back-to-back investment plans were the flavour of the month. These life and savings products made sense in the high inflation environment that prevailed at the time, and insurers wrote volumes of new business in this space. But the value and benefit in legacy products was less certain in a low inflation environment.

Clients who found themselves locked into underperforming contracts were unable to move to more suitable alternatives due to the Life Office Association’s (LOA) restrictive Replacement Code. The LOA’s resultant decision to change its Code in the early 2000s significantly impacted sales patterns in the life and savings industry. The LOA has since merged into the Association for Savings and Investment South Africa (ASISA), but replacement – or churn – remains an industry concern more than a decade later.

From old to new

Innovative insurers capitalised on the relaxed Code by introducing new generation products. Life and savings products were separated, greater transparency was introduced and there was an immediate and natural migration from legacy to new generation products in both the life and savings disciplines.

Insurers, with help from the country’s risk and financial advisers, used the change to restructure their clients’ insurance portfolios, improving both the clients’ prospects and their business in the process.

The word churn soon became a buzzword to describe the process of moving any form of intermediated or broker-assisted business from one provider to another. There were no problems in the short-term and healthcare space as brokers who moved business would take over servicing the client and earn the on-going service fees for doing so.

Muddied by commissions

The situation was not as clear cut in the life and savings sectors. Commissions generated following the churn of a client’s portfolio became a tempting incentive to move from legacy to new generation products, especially in an environment where it was difficult to conclude that a move was of benefit to the client.

In the savings space, the broker could only churn his clients after considering the penalties imposed by insurers on the client for exiting the legacy product, the likely difference in performance of old and new product and difficulties in completing the required S14 transfer. And before advising a client to change to a new risk product, the broker had to fully understand the benefits of both the old and new product.

Is churn good or bad?

One way to determine whether churn is out of hand is to consider statistics on new and replacement business. If the latter is too high, then we can argue that this should be a cause for concern. It is also worth asking whether it is too easy to replace policies given the current administrative environment.

The industry must consider how to balance the responsibility that insurers and brokers have to offer clients the best solutions with the pressure to grow their respective businesses. We must also acknowledge that the great pressure brought to bear on intermediaries to meet insurer-set sales targets might contribute to unacceptable selling behaviour.

It is our hope that the principles espoused in Treating Customers Fairly (TCF) will assist the industry to create a culture where all decisions, including those to replace policies, put the client first. This requires that any decision to churn a policy is based on the client’s position only. Self-interest on the part of insurer or broker must be eliminated.

Reviewing the retail space

We believe that the Retail Distribution Review (RDR) process offers an opportunity for the industry to agree on the way forward, including relooking at replacement practices and remuneration at the same time.

Advice is a critical component in the financial services distribution process and the industry must create an environment where risk and financial advisers can run vibrant and profitable practices without harming the client.