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In 2024, 8.2 million risk policies lapsed, triggering clawbacks that cost some financial advice practices tens of thousands of rands. The result? Severe financial pressure that pushed many into dangerous debt spirals. Kobus Wentzel, Executive Head of Sales and Distribution at 1Life Insurance, shares practical tips on how advisers can minimise and manage clawbacks effectively.
Clawbacks in practice
Clawbacks occur when a policy lapses or is cancelled, and commission received for the policy has to be paid back. According to regulations, the percentage of commission that needs to be repaid is based on various factors, such as time in force. For example, if a policy lapses within the first six months, 100% of the commission received must be paid back to the insurer. Exceptions may apply in cases of non-disclosure, material misrepresentation or lapses due to ill health.
Preventing and managing clawbacks
The quick answer to avoiding clawbacks is to prevent lapses and cancellations by writing quality business. There are ways advisers can achieve this, but because lapses are a reality, it is equally important to have a plan to manage them. Here are some steps advisers can take to prevent and manage clawbacks.
Know your clients
Know who your clients are and how they manage their finances, for example whether they stick to a budget and save or invest regularly.
Clients who manage money responsibly and have a reliable income should be more likely to pay premiums when due, which means lower lapse rates. Clients who don’t have a track record of good money management may be more likely to lapse. Consider opting for as and when commission for these clients, and also work with them to help them develop good money habits.
Always conduct due diligence and needs analysis with clients to determine whether they have sufficient funds and to understand their financial requirements. Pay particular attention to this step if you source prospects from lists rather than referrals from existing clients.
A further point to consider when getting to know your clients is their financial literacy. Clients often have preconceived ideas of products that may not be accurate. For example, a client may believe a life insurance product is similar to a savings or investment product and may want to withdraw funds at some stage. When they find they cannot, they may lapse or cancel their policies. To avoid cancellations, spend some time with these clients to help them understand the basics of the products they own.
Finally, identify your ideal client by looking at demographic factors such as age, earnings and net worth, occupation and life stage, as well as their approach to managing their money, such as what debt they have and how they manage it.
You want to work with clients who are close to this ideal, or share similar characteristics, to continue writing quality business with low lapse rates. Your product provider may conduct studies or have access to studies on ideal clients, so always ask your broker consultant for assistance with this step.
Maintain client relationships
When you are closer to your clients you have a better understanding of their finances, as well as if they are happy with their products and are likely to continue paying premiums. You will also be able to pick up if they are being approached or swayed by competitor products and if they are in financial difficulty. Clients you don’t stay in touch with are more likely to let their policies lapse than those you engage with consistently.
Monitor unpaids and take action
Check unpaid premium reports every month to pick up on potential lapses. Ask your broker consultant for these reports. You can then work with these clients to minimise unpaids.
Read more: This article has an interesting take on how to normalise lapses so clients are more willing to talk about difficult financial matters and take action.
Monitor lapses
According to the 2021 Life Insurance Industry Experience, long-term insurance lapse rates are around 15 to 20%. Ask your product providers what their lapse rates are, and monitor yours, so you can benchmark your performance. Low lapse rates are ideal, so go through lapse reports closely, identifying which policies lapse and when. You can also find out from clients or product providers why policies lapsed, such as affordability, competitor products or dissatisfaction. Raise these concerns proactively with both new and existing clients to prevent future lapses.
Manage your cash flow
Managing day-to-day cash flows is all about managing income and expenses so you can meet obligations when they are due. Keep up to date with your business accounts, and consider structuring your commission to suit your business’ cash flow needs. Your broker consultant can assist with this, and explain which commission structures are available.
Cash flow management also requires you to estimate how much, if any, you may need to repay in clawbacks so you have cash on hand if needed. Estimating potential clawbacks doesn’t have to be guesswork. Use your previous clawback history as a reference point, and consult your broker consultant for insights based on their experience, so you can plan ahead and keep sufficient cash on hand.
Don’t let lapses put you out of business
Lapses will happen. Know your clients, monitor unpaid premiums and you can prevent lapses and clawbacks from putting you into debt and out of business.