‘Lapse’ and ‘churn’ are not the issue

The words lapse and churn in life insurance policies are not the issue but rather whether the advice given was in the client’s best interest and complies with the law, according to a panel.

A panel at Money Management’s Annual Risk Policy and Awards Breakfast this morning was asked if lapse had ever been formally defined.

The Australian Securities and Investments Commission (ASIC) senior executive leader of financial advisers, Joanna Bird, said lapse or churn was not the issue, but rather whether the advice given was appropriate.

“We don’t use the word churn, it is nowhere in 413. We talk about lapse because it is a risk indicator, along with other things, of poor advice,” Bird said.

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“There are different definitions of lapse, but for the purposes now I would use the definition that is in the regulations associated with the legislations, which basically doesn’t use lapse but basically says when clawback will apply and sets out when that will be, and that’s when the policy ends or [is] reduced.

“There are exceptions such as when a person dies that’s not treated as lapse, that’s clawback. When a person’s risk is reduced, that is not treated as a lapse, and that’s a good place to start if you need a good definition of lapse. The issue is the advice and whether it complies with the law.”

Bird said the word ‘churn’ was shorthand for a situation where a client’s policy was moved from one policy to another and the concern was not the move but if the advice given was poor.

Association of Financial Advisers (AFA) chief executive, Philip Kewin, said the problem was that ‘lapse’ and ‘churn’ were often meshed together.

“So, if you have a high lapse rate you’re considered as a churner and that’s the perception and that’s unfortunate because there are advisers that do great work,” he said.

TAL chief executive, Brett Clark, said the two terms generated emotion.

“We understand that from time to time a customer might be with company X and may be a better outcome if they should be with company Y. We accept that as an industry and we think it’s a good thing and to label some of these activities as lapse or churn, it creates unnecessary emotion of whether an adviser is doing their job,” he said.

“Often it comes down to whether the advice is good and appropriate or it isn’t. This is the point where we get caught up in the emotion of the word lapse and churn and the numbers. The numbers frankly for me are irrelevant; it is about whether the advice is good.”