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Any time an insurance product is replaced by an adviser with an alternative one someone complains about “insurance churn” or the “twisting of policies” and the immediate inference is that something unethical just occurred. Sometimes that is true of course, and there are undoubtedly bottom feeders in the industry who survive by replacing perfectly good policies for no real reason other than triggering a commission for themselves. However, what is more true in my experience is that this accusation gets levelled too often against good advisers doing good work for clients.
Insurance churn is not really the big adviser problem that some would have the world believe.
While doing some consulting work with an insurance company we were digging through some of the data and it transpired that there was a consistent natural attrition rate of about 5-6% of its customers, year after year. This was an insurer by the way that experienced very little in the way of policy replacement as leading on price was one of their competitive advantages. That attrition rate was verified with a couple of other company actuaries at other companies and it became apparent that there is a “normal” attrition rate for insurance which seems to sit somewhere between 5% and 9% p.a.
These are the customers who simply no longer needed the products. No complaints or problems or dissatisfaction with the provider – happy consumers whose needs have been met. The customers had just ceased their business, or moved overseas, or divorced, or whatever….it was just the normal rate of customers who no longer needed the policies that they had previously bought. So there is this natural proportion within any client base who will cancel policies in any given year. I have to say from a practioners perspective that it feels about right too; a good 5% of the clientele will have material changes in circumstances that trigger them to decide to cancel or change products in any given year.
But when an adviser is involved in the process of product replacement the default assumption is that they created the demand for change.
It seems that the typical adviser who is running an ethical business and working in the clients interests is doing reasonably well if they have a lapse rate of around 12% (as measured by the product suppliers). Anything beyond that level is deemed “bad” apparently.
If the typical adviser is working with about 400 clients that means there are about 24 clients who cancel or change products each year on average, no matter how good the adviser is, or good the product was. Then there are another 24 (on average) who changed for some other reason….
Isn’t it conceivable that perhaps the institutions, or product manufacturers themselves also contribute to lost business?
Poor service, adverse claims experience, nonsensical paperwork which clients cannot understand….perhaps poor pricing, contract wordings, poor performance and bad publicity…..I guess that these things alone would generally contribute another 3% to the attrition rate. With some suppliers in my experience the actual impact would be much higher.
So there go another 12 clients through no fault of the adviser.
hhhmmmmm…that apparently adviser-driven issue is starting to look like it might not be driven by the advisers so much as being driven by the consumers themselves….
…and now we have the overlay of regulated advice and the professional expectation that we shall begin each engagement – including reviewing existing customers business taking into account their current circumstances (as opposed to their circumstances when the insurance contract was put in place for them (say) 5 years ago)….and it turns out that another proportion have had material changes in their circumstances which warrant a change as it is absolutely in their interests to get the coverage right. To be blunt; the adviser at this point will be accused of protecting their own interests if they do not replace inappropriate contracts….
We are obligated professionally to sit down and review the existing business and plans of clients in light of all the circumstances at the time of review. A fund or a policy put in place (say) 5 years ago which was ideal for the client at the time could now be disastrous for them given changes in their circumstances, such as employment status, earnings or tax position, relationships or changes in health. Regulators expect the advisers to work in the client’s best interests, as do our own professional ethics, so we now find that of the 150 clients who have had a full review in the last year there are probably a further 22 or so (being 15% of remaining clients) whose circumstances have changed substantially enough to warrant considering alternative products. If the adviser doesn’t consider alternative product solutions they stand to be accused of ignoring the clients best interests, and are instead protecting either their own or the product manufacturers interests.
The end result of all of this in my view is that it is absolutely understandable that any professional adviser can experience a persistency loss of perhaps 14-15% in each and every year just because they are doing their work ethically and dealing with human beings whose lives change.
I would contend that “insurance churn” is not generally an adviser issue at all.
There will always be exceptions of course, but the reality is the majority of advisers have an enormous issue in servicing and satisfying clients to begin with and there is an inevitable loss of clients regardless of what the advisers do. There IS natural attrition. Beyond that, there is the professional requirement to re-consider past advice and recommendations and update the advice in light of changing client and market circumstances. To top it off, clients are consistently being marketed to by a huge number of alternative providers and advisers with the very real risk of being seduced away by something which may or may not actually be better than what they are doing currently. Clients are constantly being seduced by competitor products and offers and perpetually being promised cheaper premiums or better benefits by slick marketing coming at them dozens of times per day in multiple mediums.
Even “satisfied” consumers with good products are being continually disturbed and triggered to consider switching.
Again; I question how much of the business turnover in the insurance industry is really to be laid at the adviser population’s feet?
More importantly, could it be that “churn” is not actually an issue at all?
The advice business of 400 clients which we used as an example here is potentially down to something like 364 or so inside 12 months if these averages hold true. Of course we have better and worse years, so that can easily be 50 customers lost, or only 15 in reality. The point is, that is a lot of customers who took a lot of time and left anyway; and; the advice business now has to replace them.
Consumers shifting rapidly from product to product, oftentimes on a whim or a piece of slick marketing and for no logical or rational reason is in fact the new normal. It is how the world now works across multiple industries…not just insurance.
Perhaps it is time to move the discussion away from “insurance churn” and recognise what is actually a normal business model in these new consumer-led, and regulator-scrutinised, times.