Definition - What does Churning mean?
Churning in the insurance industry is used in a variety of contexts. Insurance companies use it to refer to the “customer churn” or attrition rate of customers who stop doing business with them.
Churn can happen for a variety of reasons, natural and unnatural. For example, customers can churn when they sell their homes and downsize, or when the insurance company charges rates that are no longer competitive so customers go elsewhere for their insurance. Insurers can also choose to decline renewals to an insured that shows poor risk management.
Churning also occurs when an insurance agent replaces a policyholder's insurance policy for another insurance policy, usually without consulting the policyholder and often with no changes to the coverage itself. Agents who engage in churning do so in order to secure an additional commission for the new policy they swap in.
Churning in order to beef up earnings is an illegal practice when you do it without the customer’s consent and it brings no benefit for the insured.
Insuranceopedia explains Churning
Insurance companies use churning to describe the rate at which their customers leave due to reasons like selling assets, going elsewhere for more competitive rates, or voluntary churn where insurers choose to not renew clients with poor loss ratios.
It is also a term for a particular form of misconduct performed by insurance agents where they intentionally place the policy with another insurer without any benefit to the client and oftentimes without even notifying them of the change. This is usually done because of some difference in commission rates between insurance companies or special incentives created by insurance companies in order to win an agent’s business.
Churning is mostly attributed to insurance agents, and most states have laws that will punish those who engage in the practice. As a general principle, insurance agents are fiduciaries responsible for acting on behalf of their clients and the insurance carriers they represent and placing their interests above their own in all situations.
Requiring agents to inform the insured of any policy changes and providing them with clear and official documentation of any modifications to their policy is one measure that most insurance companies have in place to deter agents from churning policies.
Insurance agents are authorized to replace coverage on behalf of the insured. However, they must do so for their benefit. Replacing coverage becomes illegal and qualifies as churning when the sole purpose of replacing the benefit is to enrich the agent.
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