The Financial Services Council’s (FSC) paper on “churning” of life insurance business provides an opportunity to address chronic levels of underinsurance, the Association of Financial Advisers (AFA) says.

AFA CEO Richard Klipin says that while churning exists, there is no evidence that it is widespread or systemic.

His comments echo those of other industry figures who say churning is not a major problem.

“Churning is rare and limited to a few isolated advisers,” he said. “While it’s important to stop the practice, action should be focused upon those advisers who churn, rather than the whole financial advice industry.”

But he says the FSC’s consultation paper on replacement business framework does provide the industry with an opportunity to open up discussion on sustainable insurance.

“The elephant in the room really is the fact that not enough people have life insurance, have the right kind of insurance and/or have enough insurance,” he said.

The AFA proposes that life insurance application forms be updated to include a declaration from the adviser that the replacement policy represents a net and material benefit for the client.

It suggests the insurer could be responsible for asking the adviser for more evidence of that benefit.

The AFA also proposes that insurers be allowed to share information so they can identify and create a watch list of churners.

It also proposes the industry codes of ethics be updated to give advisers an obligation to demonstrate and explain in any advice document the delivery to the client of a net and material benefit.

The Future of Financial Advice reforms propose a substantial repayment of the upfront commission if a client terminates the policy within two years, and flat commissions for advisers if they move a client within five years.