In today’s Straits Times entitled “Insurer fumes over policy’s high lapse rate” dated 24 July 2010 by Ms Lorna Tan, it was reported that Finexis offered first year premium free for AXA’s FutureProtector – a term insurance. The first year is free because Finexis rebated majority of its commission to its clients. After 1 year, the policy lapse rate increased significantly to the extend that AXA is now demanding a clawback of commissions amounting to more than S$7 million from Finexis. Not only is AXA Life seeing red over the matter but more remarkably even Monetary Authority of Singapore has given a comment:
“They should not unduly influence the financial decisions of customers by offering rebates,” said an MAS spokesman.
To make things worse, the CEO of AXA Life resigned immediately due to ‘personal reasons’.
The center of the problem isn’t about the rebate per se but whether the recommendations were made on the reasonable basis and whether were there inducement.
The question is this: Why is rebating commission the same as inducement? And why is inducement wrong?
Why is rebating of commission the same as inducement?
In this Finexis-AXA Life fiasco, it is obvious that many clients purchased the AXA Life FutureProtector product because of the steep discount and just wanting the free coverage. The reason for purchase is unlikely due to needs-based basis. In the financial industry, needs-based selling is the only legal method of selling a financial product. All other methods of selling financial products – including inducement – are illegal.
Why is inducement wrong?
Inducement is wrong because it always cause harm to at least one party.
Financial products are normally meant for long-term usage. AXA FutureProtector is a term insurance normally for 20 to 30 years of coverage. The premium and commission is priced to reflect the coverage period. If a person buys a 20 years term insurance but only to terminate it after just one year, than the insurer would make a lost. In this case, it made a significant lost due to overpaying the commissions which unfortunately was used by Finexis to pay for the first year premiums. For those who are not in the industry may like to know that commissions tend to be larger for longer coverage period. In this case, the rebates caused the insurer to suffer major losses.
For clients who decided to continue with the AXA FutureProtector are in no better position. According to the newspaper report, AXA FutureProtector is quite an expensive term insurance compared to its competitors. Hence, clients who would like to continue with the term insurance ends up with a raw deal.
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