13.2 Twisting, Churning and Misleading Sales

Study Focus

Unnecessary replacement can reduce value and restart contractual restrictions. Churning uses internal replacement or alterations to generate commission at the customer’s expense.

4. Prohibited Market Conduct Practices

To safeguard consumers against predatory sales behavior, Bank Negara Malaysia and LIAM strictly prohibit three egregious market conduct abuses: Twisting, Churning, and Rebating.

1. Twisting: Mechanics and Detrimental Consumer Impacts

Twisting is the unethical practice where an agent induces or attempts to induce a policyholder to lapse, forfeit, surrender, borrow against, or alter an existing in-force policy in order to purchase a replacement policy (either with the same insurer or another insurer), where such replacement results in financial or contractual detriment to the policyholder.

Twisting is typically driven by an agent's desire to capture lucrative first-year acquisition commissions on a new policy, disregarding the substantial harm inflicted on the client.

Why Twisting Severely Harms the Policyholder

1. Forfeiture of Accumulated Cash Values: Life insurance front-loads distribution and administrative costs into the first several policy years. Surrender pays the available surrender value rather than the full death benefit. It can reduce or eliminate future bonus entitlements and crystallise early termination costs.
2. Permanently Higher Premiums Due to Advanced Age: Premium rates increase with age. Buying a replacement policy at an older entry age means the client must pay permanently higher annual premiums for equivalent coverage.
3. Restart of the Two-Year Incontestability Period: Under Schedule 9, Paragraph 13 of the FSA 2013, a life policy becomes incontestable after remaining in force for two years during the life of the insured. When a policy is twisted, the client receives a brand new contract, resetting the two-year incontestability clock to zero. If the insured dies during the initial two years of the new policy, the insurer may investigate and contest the claim on grounds of non-disclosure or misstatement.
4. Restart of the Suicide Exclusion Clause: The standard one-year contractual suicide exclusion restarts upon issuance of the new policy.
5. Re-imposition of Medical Waiting Periods: Critical illness riders and medical and health policies incorporate contractual waiting periods (typically 30 days for general illnesses and 120 days for specified illnesses such as hypertension, cardiovascular disease, and cancer). Replacing a policy leaves the insured completely unprotected during these reset waiting windows.
6. Risk of Uninsurability or Medical Rating: Any health complications, adverse laboratory readings, or injuries contracted since the inception of the original policy will be scrutinized under fresh underwriting on the replacement policy. The client faces possible premium loadings, specific disease exclusions, or outright rejection.

Regulatory Safeguard: The Replacement of Policy (ROP) Form

To deter twisting, LIAM mandates that whenever a proposed life application involves the termination, surrender, paid-up conversion, or substantial borrowing against an existing policy within 12 months before or after the new application date, a mandatory Replacement of Policy (ROP) Form must be executed:

• The agent must formally declare the replacement on the proposal form.
• The client must complete and sign the ROP disclosure statement confirming they understand the financial detriments.
• The new insurer must notify the existing insurer and verify whether the replacement is genuinely in the client's financial interest.

2. Churning

Churning refers to the practice of executing excessive, unnecessary policy replacements or policy alterations within the same insurance company. An agent persuades existing clients to convert mature policies, cash out accumulated bonuses, or take automated policy loans to fund new policies within the same insurer. While the insurer remains the same, churning depletes the policyholder's accumulated net asset reserves solely to generate fresh first-year commission streams for the intermediary.

3. Rebates, Gifts and Approved Pricing

An agent must use the insurer's authorised premiums, illustrations and promotional terms. An unauthorised promise to fund premiums or refund commission can distract from suitability, conceal the true cost or breach the agency agreement. It must be referred to the insurer's compliance function rather than presented as an extra contractual benefit.

Misleading inducements require examination of the actual facts under FSA section 124/Schedule 7 and, where applicable, Schedule 9 paragraph 11. Personal rebates, gifts and insurer-approved discounts must be assessed under the actual conduct rules and agency agreement. An approved insurer discount is assessed on its own terms; a salesperson cannot label a personal promise as an insurer guarantee.

For example, an agent promises to pay a customer's premium each year without the insurer's approval. The customer may choose unaffordable cover on that basis. Correct the representation, explain the actual premium obligation, report the incident and document the customer's informed choice. Do not invent a prison term as a substitute for identifying the breached duty.

4. Misleading Representations and Concealment

Agents are strictly prohibited from making false, incomplete, or misleading representations to prospects. Typical violations include:

• Misrepresenting Non-Guaranteed Benefits as Guaranteed: Promising that illustrative dividends or investment returns are guaranteed payouts.
• Concealing Material Exclusions: Downplaying policy waiting periods, pre-existing condition exclusions, or suicide restrictions.
• Blank Proposal Forms ("Clean Forms"): Inducing a client to sign a blank or incomplete application form with the promise that the agent will fill in the medical answers later. If the agent omits material health disclosures, the contract is tainted by misrepresentation, leading to claim repudiation and policy rescission under Schedule 9 of the FSA 2013.

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5. Comparative Analysis: Market Practices