TRANSFERRING your motor insurance business to a different insurance, company is not an unusual occurance these day. Many brokers are often on the lookout for the best deal for their clients on both price and service, grounds. But the same sort of transfer should not be encouraged when it comes to life assurance cover.
Mr J. bought an indexed life assurance savings policy six years ago. He began paying £40 a week which has now risen to £70 as a result of the indexing. Back in 1990 there was no compunction on the part of the sales agent who sold him this policy to reveal that nearly the first two years of his contributions were going to be absorbed by up front commissions and costs or that every year the extra 10 per cent he paid in the form of the indexing would also be subject to a whole new set of commissions and charges. (The life industry justified this on the grounds that the indexed amount was, in effect, a new policy, rather than simply an enhanced payment on an existing one.)
Recently, the salesman who sold Mr J. his policy showed up at his place of employment and informed him he had moved companies and that his new firm had brought out a much better life assurance policy. All he needed to do was to encash his old one and make a single lump sum payment into the new one and then continue to pay the same regular amount in contributions each month. The ultimate value of his investment would be "enhanced", said the salesman by doing this.
Nothing, of course could be further from the truth. By encashing his policy which was designed as a long term savings vehicle - after just six years Mr J. will effectively lose his first two years worth of contributions which amount to just over £1,000. The remaining fund will probably not even be worth what he has contributed. The salesman on the other hand will have achieved another sale with which to impress his new company and receive yet another hefty commission for "churning" this customer's policy.
A spokesman for the Irish Insurance Federation told Family Money that "we take a dim view, of churning life policies because the policy holder is disadvantaged. It is perfectly fine for a financial adviser who moves to, another company to keep looking after old clients either by updating non life policies or by selling them new products. The problem arises when they try to move existing life policies."
The IIF spokesman said that salespeople who churn their clients "have no place in the industry and should be dismissed" but had no statistical evidence about the frequency of the problem or the numbers of dismissals each year for this reason. He said that clients who believe they have been churned, or where an attempt has been made to substitute one policy for another should contact the insurance companies concerned or the IIF Information Service, "and we will try to follow it up. The difficulty is that churning is a very hard thing to prove," even though he admitted that some salespeople actually recommend "the substitution in writing to their clients."
In Mr J's case, the churning was prevented when his original insurance company contacted him to ask why he had signed an order to encash his six year old policy. Had the company not followed up the order Mr J. would now be saving with a different insurer and would be worse off financially.
(To improve his fund's performance even further he should now cancel any further indexing of his contributions.)
Churning may be a difficult case to prove in some instances, but where blatant cases occur the agent concerned should not only be dismissed by the company but also struck off the IIF's register of intermediaries. Companies that harbour churners should be investigated and fined, as they are in Britain where statutes are in place to regulate the investment industry. Until such regulation is passed here, people like Mr J. will be vulnerable to a system in which salespeople are driven by commission and only kept in check by voluntary guidelines.
