This file is Bob's plain-language reference on replacing one insurance policy with another (replacement business) and the conduct risk known as churn. It is a known high-risk advice path in New Zealand, repeatedly flagged by the Financial Markets Authority (FMA), and it carries real consumer harm: fresh underwriting, new exclusions, reset waiting periods, and lost benefits. The hard rule for Bob runs through every section: Bob must flag a possible switch and surface the trade-offs, never encourage or arrange one, and any actual recommendation to replace cover must come from a licensed adviser with a documented suitability case. Written in our own words from public FMA reports and the public financial advice codes.
What replacement business and churn mean
"Replacement business" is when an existing policyholder changes insurance policy or providers: cancelling or reducing one policy and taking out another in its place, often moving from one insurer to another. The FMA describes it simply as where a client changes insurance policy or providers. It is extremely common in New Zealand life and health insurance: the FMA found that most "new" life insurance written in New Zealand is actually replacement insurance, not a person taking out cover for the first time.
"Churn" is the harmful subset of replacement business. The FMA defines churn as where a consumer is moved to a new policy based on the commission and incentives payable to an adviser, rather than because the switch is in the customer's best interest. Replacing a policy can genuinely be in a consumer's interest, but the FMA's concern is that replacement activity carries the highest risk of being driven by what the adviser earns rather than by a clear benefit to the client.
For Bob: treat any switch conversation as replacement business and assume churn risk is present until a licensed adviser has documented that the switch genuinely benefits the client. Bob never initiates or pushes a switch on its own.
Source: FMA, Replacing life insurance - who benefits? (https://www.fma.govt.nz/assets/Reports/Replacing-life-insurance-who-benefits.pdf) · retrieved 2026-06-18 · rights: public-govt-attribution · drives: information · status: draft
Why a switch is a high-risk transaction
The FMA's settled position is that replacing insurance policies is a high-risk transaction for customers, mainly because of the risk of claims being declined in the future and original policy benefits being lost. The danger is that the harm is invisible at the point of sale: a switch can look like an improvement (for example a lower premium) while quietly stripping out protections the client was relying on. Customers may never discover the loss until they try to claim, when it is too late to undo.
The FMA found that fewer than half of the large firms it reviewed told customers that replacing their life insurance could lead to worse cover or the potential loss of benefits. It also found that the "replacement business forms" firms used were mostly a risk-management tool for the insurer, presented at the end of the advice process, rather than something used to help the customer make the decision.
For Bob: the asymmetry (cheap-looking upside now, hidden downside at claim time) is exactly why Bob must not treat a switch as a routine optimisation. Bob's job is to make the downside visible early, in plain language, and route the decision to a licensed adviser.
Source: FMA, Customers not the focus of replacement business at large insurers (media release 2018-30) (https://www.fma.govt.nz/news/all-releases/media-releases/customers-not-the-focus-of-replacement-business-at-large-insurers/) · retrieved 2026-06-18 · rights: public-govt-attribution · drives: information · status: draft
Consumer risk: fresh underwriting, new exclusions and loadings
A replacement policy is almost always newly underwritten. The new insurer assesses the client's current age and health, which can be very different from when the original cover was taken out. The FMA's worked harms include "different policy exclusions" (a consumer could have a medical condition that is excluded from the new policy) and "differences in cover" (for example someone with a history of heart disease moving to a policy with less coronary cover).
In practice fresh underwriting can mean: new exclusions for conditions that have developed since the original policy started; premium loadings the client did not previously carry; or simply being declined for some cover. Income protection is especially sensitive here because health, occupation, and income can all have shifted since the policy began. None of this risk exists on a policy the client already holds and that is already in force.
For Bob: when a client raises switching, Bob should surface that the new cover would be re-underwritten on today's health, which can introduce exclusions or loadings the existing policy does not have. Bob states this as a risk to check with an adviser. It does not predict an underwriting outcome and never quotes a premium or loading.
Source: FMA, Replacing life insurance - who benefits? (https://www.fma.govt.nz/assets/Reports/Replacing-life-insurance-who-benefits.pdf) · retrieved 2026-06-18 · rights: public-govt-attribution · drives: information · status: draft
Consumer risk: reset waiting periods and restarted exclusion clocks
Switching to a new policy generally restarts time-based protections that the client had already "served out" on the old policy. The most important for income protection is the stand-down or waiting period: the gap between disability and when benefits start to pay. A new policy starts that clock fresh.
Several clauses also work on elapsed-time clocks that reset on replacement. Pre-existing condition exclusions typically run from the policy start date, so a new policy can re-expose the client to a condition the old policy would already have covered. Many life policies carry a suicide exclusion for an initial period from the policy start, which a switch restarts. [VERIFY] the exact reset behaviour (stand-down, pre-existing condition windows, suicide-exclusion period) against the specific old and new policy wordings, because terms vary by insurer and Bob must not state a universal rule as fact.
For Bob: flag that a switch can reset waiting periods and restart exclusion clocks the client had already passed, so there may be a window where the new policy will not pay for something the old one would have. Present this as a trade-off to verify with an adviser, not as a definitive statement about any one policy.
Source: FMA, Replacing life insurance - who benefits? (https://www.fma.govt.nz/assets/Reports/Replacing-life-insurance-who-benefits.pdf) · retrieved 2026-06-18 · rights: public-govt-attribution · drives: information · status: draft
Consumer risk: loss of accrued benefits and guaranteed insurability
A policy that has been in force for years can carry value that a brand-new policy does not. The FMA's core warning about replacement is the "potential loss of benefits" and "original policy benefits being lost". Older policies may have more favourable terms, definitions, or features than what is currently sold, and those are forfeited on cancellation.
Examples of what can be lost include: guaranteed or future insurability options (the right to increase cover later without fresh medical evidence); benefits or definitions that have improved or been grandfathered under the old wording; and continuous-cover credit built up over the life of the policy. Once the old policy is cancelled, these are gone and generally cannot be reinstated.
For Bob: when value may be tied up in the existing policy (length of time held, older wording, insurability options), Bob should name that this value can be lost on cancellation and that it is a reason to get an adviser to compare the two policies properly. Bob does not assert which policy is "better"; that comparison is the adviser's documented job.
Source: FMA, Replacing life insurance - who benefits? (https://www.fma.govt.nz/assets/Reports/Replacing-life-insurance-who-benefits.pdf) · retrieved 2026-06-18 · rights: public-govt-attribution · drives: information · status: draft
Consumer risk: claims-in-progress and gaps in cover
The sharpest harm the FMA identifies happens at claim time. In its words, if a consumer claims and the claim is denied, they are harmed if their old policy would have paid the claim and they were unaware of the change in risk when the policy was replaced. The harm to that individual can be high, even though it affects fewer people than the slow harms over the policy's life.
The FMA illustrates this with a scenario: a couple switched their life and health cover to new insurers for a lower premium; two years later one suffered a major heart attack and was unable to work, and the new insurers declined the claims. Replacing cover while a condition is developing, a symptom is unreported, or a claim is contemplated is especially dangerous, because the new insurer can decline on grounds the old insurer could not. There is also gap risk: cancelling the old policy before the new one is confirmed in force can leave the client with no cover at all.
For Bob: never let cover be cancelled before replacement cover is confirmed accepted and in force, and flag hard if there is any current or recent health issue, symptom, or potential claim. In that situation a switch can turn a payable claim into a declined one. This is an adviser decision, and Bob should be cautious to the point of discouraging action until an adviser has reviewed it.
Source: FMA, Replacing life insurance - who benefits? (https://www.fma.govt.nz/assets/Reports/Replacing-life-insurance-who-benefits.pdf) · retrieved 2026-06-18 · rights: public-govt-attribution · drives: information · status: draft
How adviser incentives create the churn conflict
The reason replacement business is high-risk is structural. Advisers can earn significant upfront commission on a new or replacement policy, and the FMA recorded upfront commission of up to around 230% of the first year's premium on a new or replacement policy, plus soft incentives such as qualifying for overseas trips. Because replacement business is generally paid more than keeping existing business, there is a built-in financial pull toward recommending a switch.
The FMA found this conflict was widely unrecognised: most advisers it reviewed and interviewed failed to recognise that these incentives create a conflict with their clients' interests. It also found the harm spreads beyond the switched client: higher replacement commissions are paid by providers and tend to be passed on to all consumers as higher premiums, so where churning happens, everyone pays.
For Bob: Bob has no commission and no incentive to move a client, and it must never act as if it does. Bob's design point is to neutralise the churn conflict, not reproduce it: it presents the case to keep existing cover as seriously as any case to switch, and it makes the adviser's conflict-of-interest and remuneration disclosures visible rather than burying them.
Source: FMA, Review of adviser conduct in life insurance (2018) (https://www.fma.govt.nz/news/all-releases/media-releases/fma-publishes-review-of-adviser-conduct-in-life-insurance/) · retrieved 2026-06-18 · rights: public-govt-attribution · drives: information · status: draft
Adviser duty: client-first and acting fairly (Code Standard 1)
The current Code of Professional Conduct for Financial Advice Services (2025, in force 1 November 2025) opens Part 1 with Standard 1: a person who gives financial advice must always treat clients fairly. Its commentary spells out conduct directly relevant to switching: listening to clients and responding to their concerns and preferences, not taking advantage of clients' lack of financial knowledge or other vulnerabilities, and not applying undue pressure. This sits alongside the FMC Act duty to give priority to the client's interests where a conflict (such as commission) exists.
A recommendation to replace cover that is driven by adviser remuneration rather than client benefit is the textbook breach of this duty: it puts the adviser's interest ahead of the client's and exploits the client's difficulty in comparing complex policies.
For Bob: every switch interaction must be steered toward what is fair to the client, with no pressure and no urgency manufactured to close a sale. Bob surfaces the option to keep cover, slows the decision down, and routes the recommendation to a licensed adviser whose remuneration conflict is disclosed. drives: advice because this shapes whether and how a switch is recommended.
Source: Financial Advice Code, Code of Professional Conduct for Financial Advice Services 2025, Standard 1 (https://financialadvicecode.govt.nz/wp-content/uploads/2025/08/code-2025-official-version.pdf) · retrieved 2026-06-18 · rights: industry-code-public · drives: advice · status: draft
Adviser duty: suitability and reasonable grounds (Code Standard 3)
Standard 3 of the 2025 Code requires that the financial advice is suitable for the client, having regard to its nature and scope, and that the adviser has reasonable grounds for it. The commentary is explicit that where the advice includes a comparison between two or more products, the advice should be based on an assessment of each product. A switch recommendation is precisely such a comparison: the existing policy versus the proposed one.
Reasonable grounds means assessing the client's relevant circumstances (financial situation, needs, goals, risk tolerance) and the products involved. The commentary also notes that some advice situations need competence beyond the minimum standard, for example knowledge of a legacy product, which directly covers comparing an older in-force policy against a new one.
For Bob: Bob cannot establish suitability and cannot recommend a switch. What Bob can do is gather the inputs an adviser needs (current cover, health context, what the client is trying to achieve) and hand them over so the adviser can do a documented like-for-like comparison. A switch without that documented suitability case is exactly what Bob must flag and hold, not progress.
Source: Financial Advice Code, Code of Professional Conduct for Financial Advice Services 2025, Standard 3 (https://financialadvicecode.govt.nz/wp-content/uploads/2025/08/code-2025-official-version.pdf) · retrieved 2026-06-18 · rights: industry-code-public · drives: advice · status: draft
Adviser duty: ensuring the client understands the trade-offs (Code Standard 4)
Standard 4 requires the adviser to take reasonable steps to ensure the client understands the financial advice, including its content, risks and consequences, so the client can make a timely and informed decision. For a replacement, "understanding the advice" means the client genuinely grasps the disadvantages of switching, not just the headline benefit.
The disclosure a client should receive before replacing cover therefore includes the trade-offs documented across this file: that the new policy is freshly underwritten and may carry new exclusions or loadings; that waiting periods and exclusion clocks reset; that accrued benefits and insurability options on the old policy are lost on cancellation; and that there is a real risk a future claim that the old policy would have paid is declined. The FMA criticised firms for presenting replacement warnings as a back-end form rather than using them to genuinely support the customer's decision.
For Bob: when a switch is on the table, Bob lays out these specific disadvantages in plain language up front (not as fine print at the end) and confirms the client has understood them before anything proceeds to an adviser. Bob's role is to make the trade-offs unmissable, not to talk the client past them. drives: advice.
Source: Financial Advice Code, Code of Professional Conduct for Financial Advice Services 2025, Standard 4 (https://financialadvicecode.govt.nz/wp-content/uploads/2025/08/code-2025-official-version.pdf) · retrieved 2026-06-18 · rights: industry-code-public · drives: advice · status: draft
FSC Code Standard 7: explaining the risk of replacing or retaining
The Financial Services Council (FSC) Code of Conduct, which binds FSC members and came into effect on 1 January 2019, addresses replacement business directly. Its Standard 7 requires members to maintain appropriate internal processes for explaining to a customer the risks of replacing or retaining an existing product or service. The framing is two-sided on purpose: a member must be able to explain the risk of switching and the risk of staying, so the customer sees both.
The FSC Code is industry self-regulation that supports the law rather than replacing it. Breaches are assessed by an independent disciplinary committee, with sanctions ranging from a reprimand to fines up to $100,000 or expulsion from the FSC.
For Bob: this reinforces that a balanced, two-sided explanation (switch versus retain) is the expected standard, and that it is a process obligation, not an optional courtesy. Bob should present both sides and make the retain option a real, articulated choice. [VERIFIED-AI 2026-06-21: confirmed verbatim against the FSC Code of Conduct. Standard 7 reads: "Members must maintain appropriate internal processes for explaining the risks to a customer of replacing or retaining an existing product or service" (the replacement/retention standard). For contrast, the conflicts-of-interest standard is Standard 8, not 7. The FSC Code took effect 1 January 2019 and has nine Code Standards. Source: fsc.org.nz Code of Conduct.]
Source: FSC, Code of Conduct (https://www.fsc.org.nz/code-of-conduct) · retrieved 2026-06-18 · rights: industry-code-public · drives: advice · status: draft
FMA expectations and monitoring of replacement business
The FMA has treated replacement business and churn as a sustained supervisory priority. It gathered four years of policy data (April 2011 to March 2015) from the main insurers under its statutory information powers, published "Replacing life insurance - who benefits?" in 2016, reviewed adviser conduct in 2018 (issuing warnings to advisers for breaching the then-current duty to exercise care, diligence and skill), and ran a thematic review of large insurers' (QFEs') replacement practices, after which it considered regulatory action against three firms whose processes did not appear to meet their legal obligations.
The consistent expectation across that work: firms and advisers must identify replacement as a specific risk to the customer (not just a legal risk to themselves), have processes designed for good customer outcomes, actually tell customers a switch could mean worse cover or lost benefits, and keep proper records of the advice for the client's benefit (the FMA found advisers were poor at record-keeping). Poor processes, the FMA warned, set advisers up to fail their own obligations.
For Bob: Bob operates inside a regime where this transaction is actively monitored. That means every switch interaction should leave a clear, retainable record of the risks surfaced and the trade-offs disclosed, the existing cover should be treated as a serious option, and the bar for progressing a switch is a documented adviser suitability case. Bob is a control that reduces churn risk, not a sales channel that creates it.
Source: FMA, Customers not the focus of replacement business at large insurers (media release 2018-30) (https://www.fma.govt.nz/news/all-releases/media-releases/customers-not-the-focus-of-replacement-business-at-large-insurers/) · retrieved 2026-06-18 · rights: public-govt-attribution · drives: information · status: draft Source: FMA, Review of adviser conduct in life insurance (2018) (https://www.fma.govt.nz/news/all-releases/media-releases/fma-publishes-review-of-adviser-conduct-in-life-insurance/) · retrieved 2026-06-18 · rights: public-govt-attribution · drives: information · status: draft
Bob's operating rule on replacement business
Pulling the conduct rules into one operating instruction: Bob must flag replacement, never encourage it, and never let it proceed without a documented adviser suitability case. Concretely:
- Bob does not initiate, suggest, or push a switch to win or move a client. It has no commission and must not behave as though it does.
- When a client raises switching (or it becomes relevant), Bob surfaces the trade-offs in plain language up front: fresh underwriting and possible new exclusions or loadings, reset waiting periods and restarted exclusion clocks, loss of accrued benefits and insurability options, and the risk that a future claim the old policy would have paid is declined.
- Bob presents keeping existing cover as a genuine, articulated option (the two-sided "replace or retain" framing), and never manufactures urgency.
- Bob never cancels or implies cancelling existing cover before replacement cover is confirmed in force, and flags hard on any current or recent health issue, symptom, or possible claim.
- Bob routes any actual recommendation to a licensed adviser, gathers the inputs the adviser needs for a documented suitability comparison, and records the risks it surfaced.
- Bob never quotes premiums, rates, loadings, or underwriting outcomes; pricing and underwriting are not Bob's to predict.
For Bob: when in doubt on a switch, slow down and escalate to a human adviser. The safe default is to inform and flag, not to advise or arrange.
Source: own summary of FMA replacement-business guidance and the Financial Advice Code (https://www.fma.govt.nz/assets/Reports/Replacing-life-insurance-who-benefits.pdf) · retrieved 2026-06-18 · rights: own-summary · drives: advice · status: draft