The New Zealand Financial Markets Authority (FMA) has today released its report into apparent "churn" in the life insurance industry. Churn is where one life insurance policy is replaced with another where the change is motivated by what the adviser will earn in incentives and commission, and where there is no clear benefit to the policyholder.

I found the report particularly interesting because it is a clear instance of a discussion paper being strictly evidence based. The FMA reviewed four years of data from New Zealand's principal insurance providers, consisting of life, trauma, income protection and total permanent disability forms of cover. It focussed exclusively on replacement business.

The simple point made in the report is that consumers seem to be buying insurance they don't need. There are other concerns, however, including a risk a policyholder may have a claim rejected that might have been accepted under an earlier policy and consumers being either over or under-insured due to sub-standard advice.

The FMA's results make stark reading. Its analysis revealed, among other conclusions, that:

• The overall number of life insurance policies grew at under 2% each year during the review period. However, in each year life insurers described 11% to 13% of their policies as ‘new’. This shows that many ‘new’ policies were more likely to be replacement policies;
• There was a strong link between types of commissions, the end of the clawback period (the period within which an adviser must repay a portion of their commission if the policy is cancelled), and the likelihood of a policy being replaced. Policies with a high upfront commission were more likely to be replaced once the clawback period ended.
• The quality of a policy (known in the industry as a ‘product score’) was only a minor factor in whether a policy was replaced. This suggests that some advisers are acting in their own interest, rather than in consumers’ best
  interests.

(Bullet points quoted from page 5 of the report).

The FMA refers to take a number of actions, which appear to be consultative in nature. My own view is that some kind of legislative intervention may be expected.