The Office of the FAIS Ombud recently published details of a settled complaint regarding replacement of policies. In this matter the complainant acted in the capacity of an Executor for the deceased’s estate whose life insurance policy had been cancelled and replaced with a new policy with another insurer. A claim to the new insurer was declined as the insured passed away prior to inception of the replacement policy. According to the complainant, the Advisor instructed the insured to cancel his existing policy via written notice whilst the replacement policy had not yet incepted. As a consequence of the Advisors advice there was no policy in place at the time of the deceased’s passing.
Although this complaint was settled, there are some lessons which can be learnt from this case.
Lessons for FSPs:
- Advisors have a duty to always act with due skill, care and diligence and to consider the interests of clients in line with the principles of treating customers fairly. This particular case emphasizes how advisors must exercise caution and act dutifully in ensuring that the cover of the insured is at no stage interrupted in the submission of the notice of replacement to the existing insurer and new insurer. Notice of cancellation of the existing policy should only be submitted when the Advisor is certain of the inception of the replacement policy.
- FSPs should have a documented process which sets out the various steps to be followed when replacing a policy. The process should highlight important things to check and include additional controls for key risk areas. As illustrated in this case, advising a client to cancel a policy can result in a poor outcome for the client. An FSP could, for example, require that any instruction to a client to cancel a policy is approved by a Key Individual or that it is checked by more than one person. All staff should be trained on these processes so that ‘mistakes’ are avoided.
- The FSP’s specified process where replacement of policies is concerned, must include alerting clients to the implications of the replacement and provide clear information to the client about the new terms and conditions, exclusions, restrictions, penalties and waiting periods and how these differ from the existing product.
- Make sure that a replacement policy is to the clients benefit.
- Even when an FSP has robust processes and procedures in place, human error can still occur. To manage this risk, FSPs should regularly review the professional indemnity insurance which they have in place to ensure that it is enough and will protect their clients and their business if these types of situations arise.
Replacement of policies can be viewed as high risk and advisors must practice caution when proposing a replacement of a policy as there are various implications to consider. Having the right culture and controls in place will reduce the likelihood of client complaints.