Replacement business in protection: getting it right

Why customers replace cover

A customer might replace an existing policy because they can get the same cover for less, because their needs have changed, because they want features their current policy lacks, or because they want to consolidate several policies into one. In each case, a new policy is taken out and the old one is cancelled.

Done well, replacement can leave a customer with better cover at a fairer price. Done poorly, it can leave them worse off, paying twice or without cover at all.

The risks for customers

The new policy is underwritten on the customer's current age and health, so terms may be worse than on the old policy if their health has changed. Pre-existing conditions that were covered may now be excluded. Some benefits, such as guaranteed premiums or particular definitions, may be lost. And the new policy will have fresh exclusion periods, such as the suicide exclusion in the first year of many life policies.

The practical risks are just as important. If the old policy is cancelled before the new one starts, there is a gap in cover. If it is never cancelled, the customer pays for both.

The risks for distributors

Replacement business has long attracted regulatory attention, because of the risk of customers being moved between policies to generate fresh commission rather than for their benefit. Under the Consumer Duty, firms need to be able to show that replacements deliver good outcomes and fair value. Replacements that go wrong after the sale are also a common source of complaints and early cancellations, with the clawback that follows.

Advice standards

Good replacement advice compares the existing and proposed policies feature by feature, explains clearly what the customer will gain and lose, considers whether the existing policy could be adjusted instead, and records the reasons for the recommendation. The customer should understand that the old policy should not be cancelled until the new one is in force.

The post-sale check that matters most

For every replacement, ask the customer after the new policy starts whether the old one has been cancelled, and whether they have stopped paying for it. Ask whether the new policy details match what they expected. In our experience, this single question often surfaces issues that would otherwise go unnoticed for months, by which point the customer may have paid for two policies or found they have none.

Routing and resolution

If the old policy is still running, the adviser should contact the customer promptly to confirm their wishes and help them cancel it. If the customer is unsure, the adviser can check with the old insurer, with consent. If there has been a gap in cover, the firm needs to understand how it happened and whether the customer has been affected.

Monitoring replacement outcomes

Track replacement business separately: the proportion of new business that replaces existing cover, the reasons given, the share of replacement customers who confirm their old policy was cancelled correctly, early cancellation rates and complaints. Compare these by adviser and lead source. Patterns in this data are some of the most useful evidence a firm can produce that its replacement advice is sound.

Bringing it together

Replacement is not inherently a problem. The risk lies in poor advice and poor handover. A clear advice process, a specific post-sale check for every replacement customer and regular monitoring of outcomes let a firm offer replacement advice with confidence, and evidence that it is in customers' interests.

Questions to ask of your own book

What share of new business replaces existing cover, and is it rising? How many replacement customers confirm their old policy was cancelled correctly? Are early cancellations and complaints higher for replacements than for new cover? Do any advisers or lead sources stand out? The answers show whether replacement advice is serving customers well and where closer review would help.

Communicating with the customer

Customers often assume the old policy will be cancelled automatically. A clear message at the point of sale, repeated in a short post-sale contact, explaining exactly what they need to do and when, removes much of the risk. Where the firm handles the cancellation on the customer's behalf, confirming that it has been done closes the loop.