There is a growing consensus that the industry needs to put on a united front in making the case that life insurance commissions remain. Any changes in this area need to have the support of the industry to ensure both that consumers are best served, and that advice businesses themselves remain able to offer this invaluable service to the community.
Strength in Unity
Advice and insurance industry members have taken their cue from the mortgage industry, who united to help overturn government support for the Hayne Royal Commission’s recommendation to ban trailing commissions paid by lenders. Industry representatives have been debating the approach to combat the Royal Commissions recommendation that commissions from the sale of life insurance should be reduced to zero unless an ASIC review, scheduled to take place in 2021, found “clear justification” for their continuation.
At a recent roundtable discussion Bernie Ripoll, who was central to the formation of the FoFA changes, said “while it has been too easy to lump together all commissions, it’s clear that policy makers also consider that not all commissions are bad or all conflicted.” He also stated that “blaming commissions for the problems in the sector is too often regarded as the simple remedy for poor practices, without clarifying how proper insurance advice is remunerated or how consumers want to pay for advice and products.”
Changes Risk Unintended Consequences
The simple fact is that Australians remain underinsured, but despite this, remain stubbornly unwilling to pay upfront what is required provide the service. The cost of providing a typical life insurance policy – and what the client would have to pay direct from their “hip-pocket” should commissions be removed is around $2000-$3000. If more people were not insured, in many cases it would fall on the government to assist people who would otherwise be supported by their insurance policies.
It is hoped that the government might see similarities to the franking credits debate, particularly the retrospective nature of proposed changes. Retirees had factored refundable franking credits into their income, and proposed changes by the opposition provided the opportunity for the government to attack the proposals, which it did so successfully in the leadup to the recent federal election. Similarly, life/risk advisers have factored in commission-based remuneration to the valuation of their businesses, and changes to this have the potential to wipe out the sustainability of many practices. Indeed, the experience in the UK where commissions have been phased out has resulted in the disappearance of quality stand-alone specialist insurance advice businesses.
A new whitepaper produced by ClearView chief actuary and risk officer, Greg Martin, explained that life/risk advisers should not be viewed in the same manner as those providing investment advice, and that if legislators continued on their current path, more than half of these advisers would stop providing standalone life insurance advice.
Recognition of Specialisation
The argument stands that the specialisation of these advisers and the differences in the services they offer (compared to investment advice) needs to be taken into account. In particular, the large amount of unique profiling work that is done before a policy can be issued (regardless of whether the client actually purchases the product), and the previously mentioned substantial upfront cost that would apply if commissions were removed. With insurance lacking the “capital sum” that can help pay for advice related to super or investment portfolios, removing commissions currently leaves an up-front fee for service as the most likely option for payment. History has shown that fee for service does not work for insurance, and if changes to commissions are to go ahead, the insurance industry must entertain and promote other remedies that can help solve the unique challenges that specialist insurance advisers face. Further levelling of commissions to remove the perception of conflicts of interest, as recommended by the Trowbridge Report, may be part of that.
The argument for recognition of the specialisation, and concomitant value of life/risk advice is one that “riskies” have been making for years. They maintain that their specialisation in insurance is invaluable in terms of their experience, the capacity to give appropriate advice, and in getting the claim paid properly.
If recent discussions are any indication, the wider industry may well give them the support and recognition they have been crying out for. Nothing galvanises like an unconsidered and mis-directed threat to remuneration that many conclude will have bad outcomes for consumers and advisers alike.