The Retail Distribution Review (RDR) of 2014 contained several comments that expressed concern about the negative effects of “churning” which it described as “inappropriate or unnecessary replacement of policies driven by intermediary incentives”.
For example, Proposal NN contains the observation that “Analysis of the current distribution landscape has pointed to concerns about up-front commission on replacement policies contributing to incentive driven churn of life insurance risk policies. The risk of inappropriate churn is sometimes exacerbated by substantial recruitment incentives offered by long-term insurers for independent intermediaries (using current terminology) to become tied advisers, or for tied advisers to move between insurers.”
The latter concern, i.e. the substantial recruitment incentives offered by long-term insurers, was effectively addressed with the outlawing of sign-on bonuses.
A number of suggestions were made in terms of which replacement policy commission was to be impacted. However, after industry input, the December 2016 RDR Status Update advised that a commission prohibition – or any other change in the commission model for replacements – will be deferred until the overall final remuneration model for life risk policies is settled. As an interim measure, the method considered most effective for the prevention of churning is to impose replacement monitoring obligations on the insurers concerned.
The second draft of these amended Policyholder Protection Rules (PPRs) was released for comment on 1 September 2017 and contains specific provisions regarding replacing individual risk policies. Comment from interested parties has to be submitted before today, 2 October 2017.
New Insurer obligations
The new LTIA Policyholder Protection Rule 19 provides that, where an intermediary renders any services as intermediary in respect of any individual risk policy, the insurer, before entering into that policy, must obtain confirmation from that intermediary as to whether or not the policy to be entered into would constitute a replacement policy.
In this regard, the word “replacement” has been defined in the Rule and means the action or process of:
- substituting an individual risk policy (the “replaced policy”), wholly or in part, with another individual risk policy (the “replacement policy”);
- the termination or variation of an individual risk policy (the “replaced policy”) and the entering into or variation of another individual risk policy (the “replacement policy”);
with the purpose of achieving the same or similar needs or objectives of the policyholder or in anticipation of, or as a consequence of, effecting the substitution or variation, irrespective of the sequence of the occurrence of the transactions.
If an intermediary confirms that a policy to be entered into by the insurer would constitute a replacement policy, the insurer must obtain a copy of the record of advice that the intermediary is required to provide to the policyholder in accordance with section 9(1)(d) of the FAIS General Code of Conduct (the replacement advice record), unless the intermediary confirms that they did not provide advice.
Then, no later than 14 days after receiving the replacement advice record, the receiving insurer must provide the insurer of the replaced policy with a copy of the replacement advice record.
In addition, a managing executive of the insurer or a person of appropriate seniority to whom the managing executive has delegated the responsibility must, no later than 14 days after receipt of the replacement advice record, confirm in writing that the replacement advice record complies with the disclosure requirements contained in section 8(1)(d) of the General Code and that the replacement advice record contains sufficient information regarding the replacement policy and the replaced policy to indicate that the intermediary took reasonable steps to satisfy himself or herself that the replacement policy is more suitable to the policyholder’s needs than retaining or modifying the replaced policy.
This bears emphasis: the new insurer must be able to confirm in writing that the intermediary actually took reasonable steps to satisfy himself or herself that the replacement policy is more suitable to the policyholder’s needs than retaining or modifying the replaced policy.
The Rule does not provide any detail as to whom the written confirmation must be given to.
If at any time an insurer establishes that an intermediary has failed to disclose to the insurer that a policy is a replacement policy after the insurer request to the intermediary to provide such confirmation, the insurer must report such non-disclosure to the Registrar. The inclusion of this requirement in the Rule is an indication of just how serious the Regulator is about stamping out any possibility of churn.
In the event of such a failure by the intermediary, and if the non-disclosure is established within a period of 6 months from the date on which the insurer entered into the replacement policy, the insurer must inform the policyholder that the policyholder may cancel the replacement policy within a period of 31 days from the date on which the policyholder is so notified.
Interestingly, the Rule now provides that the Registrar may determine the format for a replacement advice record or other notification required by this rule.
The provisions of Rule 19 must also be read with the proposed new LTIA Regulation 3.9A which provides for commission payable under an individual risk policy. This Regulation states that an insurer may not pay any commission to any person in respect of a replacement risk policy unless and until the confirmation referred to in rule 19 of the Policyholder Protection Rules, where required by that Rule, has been provided.
Where the insurer has paid commission to a person in respect of a replacement risk policy and the confirmation referred to in Rule 19 is not provided within the specified timeframes, the insurer must reverse such payment and ensure that the payment is refunded.
It is strongly recommended that intermediaries who render services in respect of individual risk policies read this Rule and Regulation 3.9.
Please remember the old saying: Ignorance of the law excuses no one.