The star agent, the replacement spree and a branch bonus
Sujatha has been the top adviser at Sanhinda Life's Kandy branch for eleven years and wrote LKR 62 million of annualised new premium last year, 28% of the branch total. In the last quarter she wrote 42 policies; 31 of them replaced existing Sanhinda policies. Clients were told their old policies 'were not performing' and that the new plan was 'government approved'. The surrendered policies carried LKR 8.6 million in surrender charges, and Sujatha earned LKR 4.1 million in first-year commission on the replacements. Nine policyholders have now complained; one is 68 years old and was sold a 20-year premium payment term. The branch manager's annual bonus is 40% linked to new business volume, and he has asked you, the compliance officer, to 'handle it quietly before the IRCSL regional visit'. The insurer's code of conduct requires a completed replacement disclosure form and a 48-hour branch review, but the forms on file were signed blank and no review took place.
1. Identify the conduct and professional breaches and the conflicts involved, and set out what you must do, including escalation.
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Identify the breaches, not just the behaviour.
- Misrepresentation: telling policyholders their old policies 'were not performing' and that the new plan was 'government approved' is a false or misleading statement about a financial product. Nothing in a life policy is government-approved.
- Twisting/churning: 31 replacements in one quarter, with LKR 8.6m of surrender charges borne by clients while the adviser earned LKR 4.1m, is the classic signature of replacement driven by commission. Selling a 20-year premium term to a 68-year-old raises a separate suitability and vulnerability issue.
- Breach of the code and internal controls: blank replacement forms were signed and the 48-hour branch review did not happen, so the control existed only on paper.
The conflicts. The branch manager's bonus is 40% volume-linked, and he is asking for silence ahead of a regulatory visit. That is precisely the conflict that allowed the conduct to continue.
What I must do as compliance officer:
- Escalate in writing to the board or chief compliance officer today, recording the manager's instruction; do not accept 'quiet' handling.
- Suspend Sujatha's new business pending review and freeze replacement-related commission.
- Preserve all 42 files plus call recordings and messages.
- Report to the IRCSL as the conduct rules require, and notify professional indemnity insurers if claims are foreseeable.
- Refer the 68-year-old's case for urgent remediation.
2. Design a remediation plan for the affected policyholders. Explain the principle that should govern each remedy.
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Principle. Remediation aims to put each policyholder where they would have been had the replacement never been made. It is restitution, not a goodwill gesture. The insurer bears part of the responsibility because its incentives and controls produced the conduct.
Steps:
- Triage by harm. Priority to those who lost most: surrender charges, lost accrued bonuses, lost guaranteed rates on the old policy, and anyone who has since developed a medical condition and cannot now be re-underwritten.
- Reinstatement where possible. If the original policy is within the insurer's reinstatement window, reinstate it on original terms, refund the surrender charge, unwind the replacement, refund the new premiums net of the risk cover actually provided, and cancel the new policy without penalty.
- Where reinstatement is impossible. Quantify the loss (surrender charge, difference in projected maturity value) and compensate it, offering a suitable alternative product with an indemnity for any shortfall.
- Vulnerable customers. For the 68-year-old, replace the 20-year term with a paid-up or shorter arrangement; involve a family member only with consent.
- Communicate individually, in writing, in the language used at the point of sale, with a clear route to the insurer's complaints process and to the IRCSL.
- Recover from the agent where the agency contract permits, through commission clawback.
Key judgement. Do not force everyone into the same remedy. The correct remedy is the one that leaves each client no worse off, and the cost of that is the true cost of the conduct - not the cheapest settlement the branch can negotiate.
3. Recommend controls to prevent recurrence and explain how each addresses the root cause.
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Root causes, each with a matching control.
- Commission design: high first-year commission with no clawback rewards replacement. Introduce a 24–36 month clawback on lapses and replacements, and cap first-year commission on replacement business.
- Incentives: remove volume-only weighting from branch bonuses; use 13-month persistency, complaint rate and replacement ratio. A branch manager paid on volume cannot credibly police replacement.
- Mandatory replacement disclosure: no blank forms; digitally captured, adviser-declared, client-signed, with a scripted 'what you are giving up' comparison, and automatic block on policy issue until the review is complete.
- Suitability rules: age and term limits, affordability checks, and a second signature for applicants over 65 or terms beyond 15 years.
- Monitoring analytics: flag advisers with replacement ratios above, say, 25%, persistency below 80%, or spikes in surrenders; review monthly, not annually.
- Speak-up: a confidential whistleblowing channel and a compliance officer with a direct reporting line to the board risk committee, so a manager cannot suppress a report before a regulatory visit.
- Tone at the top: the board must state that replacement is a red flag, not a sales achievement.
Test of effectiveness. Measure replacement ratio, persistency and complaints twelve months later. A control that is not measured is decoration, and the same conduct will recur under a different adviser's name.