Churning an insurance policy – replacing an existing policy with a new one primarily to generate commissions or incentives — can be problematic, especially in New Zealand, where the Financial Markets Authority (FMA) and other regulators take consumer protection seriously.
Here are key reasons why churning insurance policies in New Zealand is discouraged or even unethical:
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Client Detriment
- Loss of Benefits: Older policies may have more favourable terms or benefits that may be lost when switching.
- Resetting Waiting Periods: New policies often come with waiting periods before cover becomes active.
- Premium Increases: The new policy may be more expensive due to age or a change in health status.
- Exclusions: The new insurer might exclude pre-existing conditions covered under the old policy.
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Regulatory and Legal Risks
The FMA expects insurance advisers to act in the best interests of their clients. Churning for commission can breach these obligations. Under the Financial Markets Conduct Act, there are consequences for misleading conduct or conflicts of interest not being managed.
Insurance providers monitor churn rates and may take action against advisers with high churn if it's not justifiably in the clients' interests.
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Loss of Client Trust
Clients may feel misled if they realise the switch was not in their best interest. It can damage long-term adviser-client relationships and reputation in the market.
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Ethical Obligations
Advisers must provide suitable, needs-based advice. Recommending a switch solely for commission violates professional integrity and fiduciary duty.
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Financial Impact on Clients
Surrendering a policy early can result in surrender fees or loss of value. Replacing policies can result in the client paying more over time without receiving additional benefits.
Churning insurance policies in New Zealand can be harmful to the client, unethical, and potentially unlawful. Advisers are expected to act in the client's best interest, and any policy replacement must be justifiable, documented, and beneficial to the client.
Here is an example of why advisers should not be churning the policy:
XYZ, 52, has had a life and trauma insurance policy with a significant New Zealand insurer for the past 15 years.
XYZ is in good health but has recently developed mild hypertension, managed with medication.
- Under Loss of Benefits
XYZ's existing policy includes a trauma benefit for early-stage cancers and a bereavement support payment that are no longer offered in the new product version being sold today. If XYZ cancels its existing policy and switches, it will permanently lose access to these legacy benefits.
- This will also reset waiting periods.
XYZ's current trauma policy has no active waiting period, as XYZ has met the original 90-day wait years ago. The new policy, however, imposes:
- 3-month waiting period for cancer, heart attack, and stroke benefits.
- 12-month wait for mental health-related claims.
If XYZ switches and is diagnosed with early-stage breast cancer within a few months, the claim would be denied under the new policy due to the waiting period.
- Premium Increases
Because XYZ is now older and has developed hypertension:
- XYZ's new base premium is 28% higher than the old policy.
- XYZ is also rated with a 25% loading due to the blood pressure.
- The older policy had no loadings and a lower entry age, making it more cost-effective.
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Exclusions
The new insurer issues a policy but excludes any claims related to cardiovascular events due to XYZ's medical disclosure of hypertension, even though the current policy still fully covers such events.
The writer is a licensed financial adviser at Mazda Financial Services Limited based out of Auckland. She can be contacted at +64211677822
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