Replacing a nine-year trauma policy for commission
Mere, 52, is a self-employed graphic designer in Hamilton with a nine-year-old level-premium trauma policy: $180,000 sum insured, premium waiver, and a $160 per fortnight premium. She has a 2019 history of melanoma in situ, treated by excision and annual dermatology checks. An adviser at a licensed financial advice provider recommends she cancel the existing policy and replace it with a new $400,000 trauma policy from another insurer. The new policy has broader heart and cancer definitions, but the adviser's firm would earn $4,800 upfront commission; the existing policy pays no ongoing commission because it was written by a previous employer. Mere earns $88,000, has a $420,000 mortgage, and says $200 per fortnight is her absolute limit. She wants 'the best cover' and is ready to sign today. The new insurer's application asks about melanoma in situ and dermatology follow-up.
1. Identify the conduct and disclosure issues in the proposed replacement and outline the process the adviser must follow before any cancellation.
Read the worked answer
The starting point is not the product comparison but the replacement advice. The Code of Professional Conduct requires the adviser to prioritise Mere's interests, act with integrity, and give advice that is suitable for her circumstances. The $4,800 upfront commission is a conflict of interest and must be disclosed clearly, in dollar terms, before she commits. The adviser should also explain that the existing policy has no commission incentive and has already passed nine years of underwriting.
Next, the adviser should obtain a pre-underwriting indication from the new insurer before recommending cancellation. The melanoma in situ and dermatology follow-up are likely to be excluded or loaded. If the new policy excludes skin cancer, the replacement may be worse for the risk that matters most. The adviser must compare definitions, exclusions, premium waiver, and the cost of $400,000 cover against her $200 per fortnight limit. A like-for-like comparison of $180,000 versus $400,000 is not valid unless affordability and underwriting outcomes are tested.
Finally, the adviser should not accept a same-day signature. Provide a written replacement analysis, disclose the commission and any other remuneration, record the client's reasons, and file-note the pre-existing condition discussion. If the new policy is not clearly better, recommend retaining the existing policy and perhaps adding a smaller top-up.
2. Mere insists on cancelling the old policy and signing the new application today. What should the adviser do, and what must be documented?
Read the worked answer
Client preference does not remove the suitability obligation. If the adviser's analysis shows the replacement is unsuitable - for example, because the new policy excludes melanoma or the premium exceeds her limit - the adviser should decline to implement it and explain why. The adviser can offer alternatives: retain the existing policy and increase cover only if affordable; seek a policy that covers melanoma with a loading; or keep the existing policy and use savings for additional cover.
If Mere still wants to proceed against advice, the adviser may implement only if it is not unlawful or clearly detrimental, and must document the advice given, the client's instructions, and the risks: loss of the existing policy's terms, new exclusions, a fresh non-disclosure period, and a possible gap in cover. The adviser should not cancel the old policy until the new one is issued and the free-look period has expired. A file note should record that the client was told the new insurer may exclude her melanoma history and that she chose to proceed. If the firm cannot act in her best interests, it should refer her to another adviser or decline the work. Escalation to the financial advice provider's compliance officer may also be appropriate.