Unplanned consequences of proposed LIF legislation

I have had it confirmed by one major risk insurer that any policy going off their books for the following reasons are automatically reported as ‘lapses’ against the authorised representative:

• Any policy cancelled by a client irrespective of the underlying reason for the cancellation and irrespective of how long it has been in force with that company;
• Any option removed from the policy – e.g. TPD, other than upon reaching a policy expiry age and no matter how long it has been in force; and
• Any reduction in the sum insured or benefits that result in a reduction in the overall API creating a net lapse position. Also, time on the books is irrelevant.

At least one major life office is counting longstanding policies, ones cancelled with no fault or input from the servicing adviser, as 100 per cent lapses on their books. 

This was not the intent of LIF or ASIC.

Yet, curiously, several life offices still encourage advisers to replace existing policies by paying them full commissions and entitlements when they are replacing an existing policy that has been in force for 10 years or more. 

Do I sense a slight double standard here?

The true intent of the LIF legislation was not to penalise an adviser with over 20-year-old policies on their books, when one or more are cancelled, not at the behest of the adviser. It was to, supposedly, address the ‘churners’ in our industry.

Another fascinating side to the particular issue of churning is the fact that apparently only advisers with a book of business in excess of $200,000 API, with any one insurer, are viewed as potential churners should they suffer a greater than 20 per cent lapse rate.

Curiously, those with less than $200,000, with any one life office, are not required to be reported to ASIC. Is this still so if they have a 30, 40 or 50 per cent lapse rate with one insurer?

Going forward, life offices should start exercising their moral compasses and devise acceptable lapse reporting systems that are fair and equitable for all concerned. 

They should, in consultation with AFS licensees and their advisers, take suggestions/recommendations to ASIC to explain why a 10- or 20-year-old life policy, cancelled by a client and not rewritten by the adviser, should not be reported as a lapse, something that could impact on a legitimate and professional authorised representative, especially those who have been in the industry for decades and have naturally ageing books of business.

As Don Trapnell, director of Synchron, said, “The reality is that every book of business will eventually have a 100 per cent lapse rate as every client will eventually cease their policies.”

Again, this simply wasn’t the intended consequence of LIF and everything that came before it.

A personal issue I have to face is a client I wrote in 1993, who in 2016, has finally decided he no longer has a need for risk protection insurance. And the reality is he does not, the major problem being his renewal premiums this year totalled to $105,000.

Do I have in writing from the life office in question that they will not be reporting this $105,000 of API as a lapse to ASIC?

No, I do not.

It is my understanding my client of 28 years in total will have his lapsing API policy reported as just that, a lapse.

Just to make it even more bewildering is the fact that, in 1993, the API amounted to $6,000 and I was paid 80 per cent of that amount at policy inception. Yes, even in 1993 I was opting for hybrid commissions.

And the said policy is now a ‘legacy’ contract which has travelled through to a different life office. The current life office has in point of fact never paid me any initial commission, only renewal commissions.

Does ASIC understand this? Will the life office explain this to ASIC ... any of it?

If it was ASIC’s intent to identify the lapsing of a 23-year-old life policy, why did they not want to introduce, say, a 25-year clawback provision? Ridiculous! Of course it would be, just as it is to report a 23-year-old policy as a lapse, other than if it were intentionally rewritten purely for remunerative benefits by the same adviser.

I can live with a 66 per cent eventual hybrid commission and a two-year clawback. But I can’t live with an unjust lapse reporting system that simply doesn't equate to the commercial realities of running a longstanding and successful advice practice.

What I am seeking is full and total accountability from all sides. 

If we can have a 100 per cent clawback in year one and 60 per cent in year two, why can’t we have a sliding lapse scale?

It’s not exactly rocket science. And obviously, if a policy was rewritten by the same adviser purely for reasons other than in the client’s best interests, it would remain a 100 per cent lapse irrespective of how many years it had been in force.

The above would require not only common sense but a sense of fairness which, to be frank, has not been a strong point displayed too often by the FSC.

And I reiterate for probably the umpteenth time – a client cancelling a 23-year-old policy due to them no longer having a genuine need for risk insurance protection is simply just not a lapse.

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Phil Smith is director of Dawes Smith & Partners