Churning
What Does Churning Mean?
Churning in the insurance industry is used in various contexts. Insurance companies refer to “customer churn” or attrition as the rate at which customers stop doing business with them.
Churn can occur for various reasons, both natural and unnatural. For instance, customers may churn when they sell their homes and downsize, or when the insurance company raises rates to a level that becomes uncompetitive, prompting customers to seek insurance elsewhere. Insurers may also decline to renew policies for customers who show poor risk management.
Churning also refers to the practice of an insurance agent replacing a policyholder’s existing insurance policy with another, often without consulting the policyholder, and frequently without any change to the coverage itself. Agents engage in this practice to secure an additional commission from the new policy.
Churning for the purpose of boosting earnings is considered illegal when done without the customer’s consent and provides no real benefit to the insured.
Insuranceopedia Explains Churning
Insurance companies use the term churning to describe the rate at which customers leave, which can happen for reasons such as selling assets, seeking more competitive rates elsewhere, or voluntary churn, where insurers choose not to renew clients with poor loss ratios.
Churning also refers to a form of misconduct committed by insurance agents, where they intentionally replace a policy with another insurer’s policy without providing any benefit to the client, and often without notifying them of the change. This is typically done due to differences in commission rates between insurance companies or special incentives offered by insurers to attract an agent’s business.
Churning is primarily attributed to insurance agents, and most states have laws in place to punish those who engage in this practice. As fiduciaries, insurance agents are responsible for acting in the best interests of their clients and the insurance carriers they represent, placing their client’s interests above their own at all times.
To deter churning, most insurance companies require agents to inform the insured of any policy changes and provide clear and official documentation of any modifications to their policy.
While insurance agents are authorized to replace coverage on behalf of the insured, they must do so for the client’s benefit. Replacing coverage becomes illegal and constitutes churning when the sole purpose is to enrich the agent.
