When insurance agents jump ship, clients may suffer

Crossover agents may illegally access their previous clients' data or mis-sell policies to meet targets

In recent weeks, the sudden mass exodus of about 300 agents from Great Eastern's agency unit Advisors Alliance Group, to new kid on the block AIA Financial Advisers, has created a buzz in the insurance sector.

While poaching of rival agents is not new, the recent mass resignations at GE have overshadowed earlier recruitment exercises by a number of crossover agents and a mind-blowing $100 million offer that AIA was said to have dangled to the GE agents.

It exceeded last year's mass resignation of 250 agents at Prudential Singapore's agency unit - Peter Tan Organisation - to join rival insurer Aviva. The latest episode is likely the biggest one-off act of poaching seen in the insurance sector here.

The mass resignation has also caught the attention of the regulator and the man in the street who are concerned about the risk of mis-selling by departing agents to meet sales targets at the new firm.

The Sunday Times takes a closer look at the impact of poaching and what customers should know to protect their interests.

Why poach rival agents

The practice of poaching agents has been around for several years as insurers race to drive growth by expanding their agency forces amid intense rivalry.

It typically involves insurers and financial advisory firms trying to outbid one another in wooing top performers and their teams by offering better and more tempting sign-on deals with upfront lump-sum payments and bonuses.

  • Know the safeguards protecting consumers

  • Financial experts advise customers to be aware of the rules and best practices that have been put in place to protect their interests.

    For instance, the Financial Advisers Act and Insurance Act regulate financial institutions and their representatives.

    They provide safeguards to consumers on investment products or accident and health policies sold to them.

    Financial institutions are required to have robust controls to guard against improper conduct of representatives, such as unnecessary churning or switching of policies. Here are some things to look out for.

    ASSESSING PRODUCT SUITABILITY

    Representatives must have a reasonable basis for any recommendation made with respect to any investment, life insurance product as well as accident and health policies. This means that they must understand and analyse the customer's objectives, financial situation and particular needs, before making a recommendation that suits the customer's needs and circumstances.

    So if an agent recommends a product, it is prudent to ask what is his basis for doing so.

    Firms have to put in place systems and processes to effectively detect and minimise improper switching. This includes putting in place procedures to ensure that each switch recommended by a representative is reviewed by a supervisor for appropriateness, and to track the volume of switches to identify representatives with an unusually high volume of switching transactions.

    Great Eastern (GE) advised consumers to be aware that switching policies - terminating a policy in order to use the funds to buy a similar plan - could mean that they may need to undergo re-underwriting which may result in premium increases, benefit exclusions or a reduction in their coverage.

    A Prudential spokesman said: "As part of our policy, we require our financial consultants to always ascertain if the product purchased by their customers is intended to replace another product.

    "They must also disclose the detriments of a switch to their customers and document the reasons for the switch as part of the consultation and sales process."

    INFORMATION DISCLOSURE

    Representatives must disclose to customers material information on a product, in particular, the potential risks and benefits, and all applicable fees and charges.

    BOARD AND SENIOR MANAGEMENT - FAIR DEALING

    The board and senior management should review the policies, systems and processes to ensure that its market and business conduct practices achieve the fair dealing outcomes set out in the guidelines.

    One such guideline is that customers receive clear, relevant and timely information to make informed financial decisions.

    The Monetary Authority of Singapore also holds the board and senior management to account for setting the culture and direction to align business practices with fair dealing outcomes.

    FITNESS AND PROPRIETY OF REPRESENTATIVES

    Firms should have in place recruitment policies and internal controls to ensure that they recruit and retain only representatives who are competent, honest and have integrity, among other criteria. This includes conducting rigorous and independent due diligence checks on their representatives' past records.

    NON-SALES KEY PERFORMANCE INDICATORS

    Under the Balanced Scorecard Framework, representatives (and their supervisors) will need to meet key performance indicators (KPIs) that are not related to sales, such as providing suitable product recommendations and making proper disclosure of material information to customers.

    An independent sales audit unit will perform post-transaction checks on a sample of transactions to review the quality of financial advisory services provided by the representatives.

    Financial institutions and financial advisory firms have to claw back a portion of a representative's variable income if the representative fails to meet the KPIs, such as not conducting a sufficient fact-find or recommending an unsuitable investment product to a customer.

    NON-SOLICITATION OF POLICYHOLDERS

    To avoid mis-selling to customers, most insurance agency agreements contain strict clauses to protect the interests of policyholders.

    For instance, at GE, the agency agreement's clause stated that within two years of the termination of the agreement, the agent is not permitted "to solicit or induce, whether directly or indirectly, any policyholder of the company to cancel, amend or reduce the benefits payable under any policy, supplementary contract or endorsement".

    In addition, insurers typically impose personal data governance which strictly prohibits departing representatives from using the data for solicitation purposes.

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Those who practise this style of large-scale recruiting believe it is a faster and more effective way to hire experienced agents without having to spend money and many hours training them.

"The company which acquired the rival agents via poaching instantly has a pool of experienced agents with high motivation to perform, thus increasing its revenue and shareholder value," said Mr Roland Yeo, president of the Insurance and Financial Practitioners Association of Singapore (Ifpas).

He pointed out that when a company buys over insurance agents or even entire agency units (within an insurer), the valuation of such acquisitions should be based on the competency of the sales force alone, without the client base this sales force would have built up over the years.

"This is because the client base remains the asset of the original company, not the agents, because the rights to the personal data belong to the company, not agents," he said.

The crossover agents would have to build the business from scratch again, but faced with the pressure of meeting the targets tied to the attractive packages, problems like infringing the Personal Data Protection Act (PDPA) by accessing their previous clients' data, mis-selling or churning could arise, added Mr Yeo.

Churning happens when customers surrender their policies - to their detriment - and the proceeds are used to buy new plans from the agents' new employer.

Impact of poaching rival agents

POTENTIAL MIS-SELLING OF POLICIES

Financial experts worry that poaching may result in potential mis-selling and churning/switching by agents under pressure from their new outfit to meet sales targets. In this particular case, AIA's offer to departing GE agents included sign-on bonuses and a five-year "bond" period during which the monetary incentives could be clawed back if sales quotas are not met.

Insurers may also increase premiums or reduce cash values to recoup the costs related to such poaching activities - and consumers will get the short end of the stick.

Mr Christopher Tan, chief executive of Providend, said: "For exiting agents, because they have been paid a huge payout package which usually comes with conditions such as meeting sales targets, there is always a potential risk of getting existing clients to switch out of their old policies in exchange for new policies now sold by the exiting agents.

"Of course, whether this will actually happen depends on individual agents but such a risk is present."

Ifpas' Mr Yeo said: "Poached agents in the new company have to find new sales to keep their packages. Faced with the risk of losing their compensation, they could fall prey to (the temptation to engage in) mis-selling and churning."

Mr Tan Chuan How, chief executive of AIA Financial Advisers, said it has put measures in place to protect its customers, including ensuring that its representatives sell policies which meet the customers' individual needs.

Its agents are evaluated and subsequently paid based on criteria set in its balanced scorecard assessment, in which AIA looks at both their sales performance as well as the quality of financial advice and service rendered to customers.

AIA also strongly advocates a full financial review of a customer's financial position before recommending suitable financial products to meet the customer's needs, AIA's Mr Tan added.

In the aftermath of the resignation of the 300 or so GE agents, the Monetary Authority of Singapore issued a statement to say it recognises that large-scale movements of representatives from one financial institution to another could give rise to risks of improper switching of insurance policies and cause disruption to business operations.

The offering of high sign-on bonuses and other financial incentives may also drive up costs in the industry, it warned.

"Representatives must ensure that their product recommendations are suitable, given their customers' needs, risk profile and financial circumstances. In addition, financial incentives offered by an insurer to recruit existing representatives from another firm to join the insurer or its related financial advisory firm, cannot be charged to the insurance funds. If the insurer disburses financial incentives, the amount must be borne by the insurer's shareholders," MAS added.

HEALTH AND LIFE INSURANCE POLICIES

Industry observers say that the first policies that are likely to be "churned/switched" are the term life, health and accident plans, as these do not have cash values.

Be on the alert when you are asked to surrender your hospitalisation and healthcare plans, and buy new ones from another insurer. It is prudent to find out if you have any pre-existing conditions, and check if such switching is to your detriment or your benefit.

There have been policyholders who were persuaded to switch their policies only to find themselves out of cover as the next insurer declined their cover due to pre-existing medical conditions.

Generally, buying a life insurance policy is a long-term commitment. Do note that if you surrender or terminate your policy before its maturity, you may incur penalties for early termination. This is because there are high costs involved in early surrender of policies.

If you own a life insurance policy with cash values, ask for the updated guaranteed and non-guaranteed surrender values so as to ensure you do not suffer any loss.

ORPHAN POLICIES

When large numbers of agents leave en masse, a huge number of policies will be left "orphaned" (without servicing agents) in their wake.

"A large number of clients will be left in the lurch, and agents in the original company will face increased workload servicing these clients with or without compensation," said Mr Yeo.

Providend's Mr Tan said that theoretically, new agents will be assigned to take over and service the affected clients.

"However, the practical truth is that because the new agents do not have a relationship with these clients and also might not be compensated for these policies sold, these clients might be of a lower priority to them.

"Theoretically, if the new agents serve these 'orphan' clients well, they might get new businesses from these clients. Practically, most of these clients will still maintain the relationship with exited agents and might continue to buy from the exited agents. As such, the new agents might not have the interest to invest in the relationship," he said.

POTENTIAL BENEFITS FROM WIDER PRODUCT RANGE

On a positive note, Providend's Mr Tan said that departing agents may move to a firm which offers a wider product range. If that happens, they would be able to provide a more comprehensive service to customers.

KNOW WHAT FA FIRMS OFFER

Not all customers are savvy enough to distinguish which financial advisory (FA) firm offers a wider range of products and which firms can really claim to be "independent", said Mr David Choo, managing director of PromiseLand Independent.

Over the years, the lines have blurred between the independent financial advisory firms and the tied agencies of the life insurers who only distribute the products of their principals.

Mr Choo said: "Unfortunately, the FA channel today is a motley group of firms wearing the same FA clothes but, in reality, are quite different entities.

"Given this motley group, how will potential clients be able to tell who they are really dealing with or what the standards of care and unbiased and fair advice and recommendation of products are for each of these entities?"

Mr Choo noted that there are four types of FA firms.

• The truly independent FA firm with no obligation to any life insurer, and able to provide fair and objective advice, and unbiased selection of products.

• The licensed FA firm that does not claim to be independent or is silent on it in its publicity and marketing promotions.

• The FA firm which is majority or wholly owned by a life insurer - where the representatives can distribute only the insurer's products but are free to distribute investment products of many fund managers.

• The FA firm which is majority or wholly owned by a life insurer - where the representatives are allowed to distribute the products of a number of insurers, and the investment products of the many fund managers, but with subtle or not so subtle pressure or incentives to promote the products of its principal.

As such, Mr Choo advises customers to be more discerning and seek more disclosure of who they are dealing with, and know their rights vis-a-vis the respective distributor or adviser.

"Do clients know that contractually, agents represent their principals (the life insurers), licensed advisers represent the interest of their clients, and bank staff represent the interests of their employers?

"Wouldn't it be better if we just have tied agents and independent financial advisers like most countries, instead of the confusion that we see today?" he asked.

A version of this article appeared in the print edition of The Sunday Times on September 24, 2017, with the headline 'When insurance agents jump ship, clients may suffer'. Print Edition | Subscribe