Life Insurance – The Reality of Transition

The details are still a little hazy, but no-one can escape the fact that the life insurance industry is set for change. In her final feature as riskinfo’s Senior Journalist, Emily Saint-Smith examines some of the changes that will need to be made by key sectors of the life insurance industry to realise the goals of the new Life Insurance Framework…

Life Insurance Framework

On 25 June, 2015, Assistant Treasurer, Josh Frydenberg, released the details of a new Life Insurance Framework (LIF), designed to address the quality of life insurance advice.

The Framework set out the following:

Adviser and licensee remuneration

This proposal is not intended to limit the industry’s current ability to operate on a level commission or fee-for-service basis.

  • Maximum total upfront commission of 60% of the premium in the first year of the policy, from 1 July 2018.
  • Maximum ongoing commission of 20% of the premium in all subsequent years from 1 January 2016.
  • Three year retention (‘clawback’) period, to commence from 1 January 2016 to apply as follows:
    • In the first year of the policy, to 100% of the commission on the first year’s premium;
    • In the second year of the policy, to 60% of the commission on the first year’s premium;
    • In the third year of the policy, to 30% of the commission on the first year’s premium.
  • Ban on other volume-based payments from 1 July 2016, with appropriate grandfathering arrangements, consistent with the Future of Financial Advice (FoFA)
  • Life insurance companies to offer fee-for-service insurance products to support advisers who wish to operate on a fee-for-service basis.

Transitional arrangements

  • Maximum total upfront commission of 80% of the premium in the first year of the policy from 1 January 2016.
  • Maximum total upfront commission of 70% of the premium in the first year of the policy from 1 July 2017.
  • Maximum total upfront commission of 60% of the premium in the first year of the policy from 1 July 2018.

Quality of advice and insurer practices

  • Government to consider measures to widen Approved Product Lists by 1 July 2016.
  • Life Insurance Code of Conduct to be developed by the FSC by 1 July 2016. Similar to existing codes for Banking and General Insurance, the Code would set out best practice standards for insurers, including in relation to underwriting and claims management.

Better enforcement and monitoring

  • Ongoing reporting by life insurance companies of policy replacement data to ASIC to commence 1 January 2016.
  • Government to conduct a review of these measures by the end of 2018.

Industry efficiency

  • ASIC to review Statements of Advice, with a view to making disclosure simpler and more effective.
  • Government to consider developing a mechanism to rationalise life insurance legacy products, consistent with recommendation 43 of the Financial System Inquiry.

Introducing the LIF, Mr Frydenberg said:

“These proposals are intended to produce significant benefits for consumers. This will be achieved through improved quality of advice as a result of a better alignment of interests, more product choice and enhanced competition. The proposals have the potential to be the most significant reforms to the retail life insurance sector since the Wallis Inquiry recommendations were implemented in 2001.”

But in order for these intentions to be realised, the industry must undertake significant work over the coming months and years…

Regulators

Legislation and regulation

Some elements of the proposed LIF are likely to require legislative change. These include:

  • The cap on upfront commission
  • Clawbacks
  • Extension of FoFA ban on other conflicted remuneration to include life insurance

If the typical legislative process is followed, this means the Government will first have to issue draft legislation for consultation. Until this is done, the exact detail of the reforms continues to be unknown, making it difficult for all of industry to prepare.

Once the legislation consultation process is complete, a Bill must then be introduced to Parliament. Even though the Government has until 3 December (the last sitting day of 2015) to table a Bill, it’s highly unlikely that the legislation will be debated by the Lower House this year.

The other factor to be considered in the legislative process is the current make-up of the Australian Senate. While both sides of Parliament appear to support the reforms, there is no guarantee that the legislation will pass the Senate. Advisers who oppose the LIF have already begun a campaign to lobby local MPs and Senators with their demands. As the industry saw with FoFA, nothing is guaranteed when it comes to financial services law.

Code of Conduct

The Financial Services Council has confirmed it has convened a sub-committee to develop a Life Insurance Code of Conduct. The exact form of the code has not been specified, but as Gary Dawson, CEO, Australian Food and Grocery Council, told attendees at the recent FSC Annual Conference, there are three key factors required of any code:

“It’s got to be effective – that is, a code that is relevant, meaningful and measurable. It’s got to be proportionate – it must pass the cost-benefit test. It’s got to withstand scrutiny. There’s no point doing it, especially if you’re in the consumer-facing space, if it doesn’t improve reputation and trust.”

Mr Dawson outlined some key factors that need to be established up front in order for a code to be meaningful:

  • Will the code be principals-based, or prescriptive? Will it set out specific activities that can/can’t be undertaken by signatories?
  • Who’s going to sign-up to the code? Will it be voluntary or mandatory?
  • Who’s going to be obligated under the code? Will it apply to life insurers, licensees, advisers?
  • What are the consequences of breaching the code? Who will enforce the code?

According to the LIF, the industry has until 1 July 2016 to answer these questions and publish a code.

ASIC

Advisers will be particularly interested in the measures ASIC will need to introduce to simplify Statements of Advice (SoAs). There is currently no deadline for this activity, and ASIC has yet to indicate when it will commence its review.

Regardless of the start date, the review of SoAs will no doubt take some time, because of the regulator’s consultative approach to regulation. Generally, ASIC first issues a draft of the regulatory guide for consultation, reviews those submissions and then issues an updated or new Regulatory Guide.

ASIC will also be responsible for monitoring policy replacement data, as provided by life insurers to the regulator. This reporting is due to commence from 1 January 2016. What ASIC will do with this data is not clear, but the regulator may use it to identify licensees and/or representatives with a high rate of switching, and conduct further investigation to determine whether the switches are in the best interests of the clients.

Insurers

Nil-commission products

The LIF requires that life insurance companies begin to offer fee-for-service products. There is no start-date specified for this requirement, or detail about how this product should be structured.

Currently, only BTFG offers a fee-for-advice remuneration option for retail life insurance. Using BT’s Protection Plans suite, advisers can dial commission down to zero, resulting in a discounted premium (up to 30%) for the client. Advisers can then elect to add a service fee (either percentage-based or a flat fee).

While at face value, the removal of commission from retail products would likely lead to a reduction in premiums for consumers, most life insurers will need to review and update their systems to be able to deliver a commission-free product. This may lead to premium increases, required to offset the expense of systems changes. The faster a change is required, the more it is likely to cost.

The other factor that will influence the speed at which nil-commission products are developed is market demand. Research by Elixir Consulting indicates that only a small number of advice firms are charging fees only for risk advice. Those advice firms generally rebate the commission (once paid by the insurer to their licensee) back to the client.

The only licensee to publicly announce it has mandated fee-for-service life insurance advice to date is Findex. While advisers in Centric Wealth and Financial Index Wealth Accountants are permitted to recommend a range of life insurance offers, BT is clearly the group’s preferred provider, because of the fee-for-advice feature.

“Over time we are confident that all major suppliers will be able to move to a commission free/fee for service model,” said Michael Wilkins, Chief, Adviser Services at Findex. “However, we will use our own collection model in the interim so as to ensure the best interests of our clients continue to be met.”

As the number of advisers who offer fee-only life insurance advice grows, more insurers are likely to respond to this demand with offers similar to BT.

Product innovation

Since the release of the Trowbridge Final Report in March 2015, advisers and licensees have been calling on insurers to look for new, more innovative products that better meet the changing needs of clients.

Some of the ideas that have been raised across various forums over the past few months include:

  • Wholesale premium pricing (ie: excluding commission) to allow advisers to set their own fees
  • A guarantee from insurers that premiums will not increase (beyond CPI) for the first three years of the client taking out a policy
  • Insurers to pass back all product upgrades to existing clients
  • Limited term policies (eg: 3, 5, 7 years) with fixed premiums for the duration
  • Fixed-premium pricing for set terms (eg: 3 years) which step up over the life of the policy
  • Simpler, direct-style products that can be combined with advice for lower net-worth clients
  • Adviser remuneration that rewards persistency (eg: bonus payments for maintaining low lapse rates)
  • Simpler compliance requirements/fulfilment for advisers who charge fees-for-advice

Not content to wait for product providers to innovate, dealer groups are also taking the lead on product innovation, pitching wish lists to their insurance partners.

Efficiency drivers

A recent survey of advisers conducted by Zurich found that nearly one in four advisers are seeking business efficiencies to help them deliver advice under the LIF. Zurich held a national series of roundtables to find out what initiatives could help advisers with transition.

“In conjunction with attendees we identified four areas where innovation could drive the most value: product solutions, efficiency and business management, customer engagement and retention and value proposition,” said Zurich General Manager, Retail, Philip Kewin, who said these areas would become Zurich’s primary focus in helping its distribution partners adapt to and capitalise on the LIF changes.

Rationalisation

One of the most overlooked elements of the LIF is the final point, which points to the rationalisation of legacy insurance products.

The proposal was originally put forward as a recommendation in the Financial System Inquiry. According to the final FSI report, between 2007 and 2010, the government worked with industry to develop a mechanism to facilitate product rationalisations. However, the government of the time did not implement the proposals.

The FSI report argues that such rationalisation would reduce costs to product providers, and is worthy of pursuing. However, the FSI also noted that there would be a high cost of implementing such a mechanism, and that an application fee should be introduced to offset process administration costs.

It is unlikely that any action will be taken on this area of the LIF until the Government releases its response to the FSI report.

Advisers

When reforms to financial advice were first proposed in 2010, industry consultants and analysts were quick to recognise that advisers would need to change their traditional, product-focused approach to financial advice. This led to a raft of transition programs being rolled-out by licensees, wealth managers and other sector participants.

These programs generally focused on helping advisers:

    • Develop a client value proposition
    • Price their advice services
    • Implement their new fee-for-service offer with existing and new clients

Risk specialist businesses were arguably outside the scope of these transition programs, because risk commissions were not banned under FoFA. But the LIF may lead to a similar transformation process among ‘riskies’.

Pricing analysis

While some advice providers have begun the transition to using hybrid commissions, the majority of advisers providing risk advice still take upfronts. With these set to reduce from an average 120% down to 60% (which is lower than most current hybrid rates), almost all risk advisers can expect a change in their revenue.

If advisers want to retain their current level of revenue under the LIF, they will more than likely need to make changes to their current business model. This could be to offer more services (such as cashflow monitoring, estate planning and holistic advice), reduce operational costs (by outsourcing or implementing robo-advice solutions) and/or add a fee to offset the reduction in commissions.

Elixir Consulting’s Sue Viskovic recommends practice owners conduct a comprehensive analysis of their advice process, to determine exactly how much it costs to provide their business’ particular service.

“In conducting our most recent round of advice pricing research, one thing that stood out was, regardless of the pricing model implemented, those businesses that had a robust process for determining pricing were able to charge more,” Ms Viskovic told attendees at the Association of Financial Advisers’ recent Life Insurance Roadshow.

“If you don’t have a robust process, you will underestimate your costs, leaving you at a disadvantage. You will also likely struggle to implement the new model, and sell the changes to your customers.”

Value proposition

If advice businesses decide to go down the path of charging fees for life insurance advice, they will need to overcome the widely-held industry view that consumers will not pay for life insurance advice. This view has likely evolved because consumers have seemingly never had to pay for life insurance advice before, given that any remuneration paid to the adviser has been taken from the premium.

As with the move to fee-for-advice in the investment and superannuation sectors, advisers will have to place a value on the ‘advice’ component of their service, not just the ‘implementation’. If consumers perceive that the only service that is offered by risk advisers is lodging an insurance application on their behalf, they will quickly look to other service providers (aggregator sites, direct insurers) to meet their needs. This is because implementation is a relatively cheap service to deliver if there is no requirement for a Statement of Advice (and other compliance requirements).

Retention

Feedback from advisers to date indicates the clawback proposal is by far the most concerning element of the LIF. Advisers are worried about having to retain additional capital, and being punished for customer lapses outside their control. Even if lobbyists are able to secure some concessions on clawbacks, retaining clients will need to be a focus for advice businesses.

In 2014, a report from CoreData pointed to the key triggers that cause consumers to leave their current advice provider. The report found that one in three advice clients were at risk of leaving their adviser, and those most at risk were identified as clients who had not received any contact from their financial adviser or met with them in person in the last 12 months.

Well-respected industry veteran, Russell Collins, delivered the following retention tips for advisers at the AFA’s recent Life Insurance roadshows:

  • Before presenting your recommendations to a client, first present your ideas – involve them in the creation of their own advice strategy
  • Ask the client how much they are prepared to pay before you present them with a premium quote
  • When delivering the SoA, include a premium forecast for the next few years, so there are no surprises when the client receives their renewal notice
  • Conduct a client review every 12 months, where the purpose is to reassure the client that their policies still meet the original needs identified in your first meetings

Above all, Mr Collins believes the key to retention is building and maintaining relationships with clients.

“Clients don’t come to review meetings looking for more cover or a new policy – they’re looking for reassurance. A strong relationship should be enough to withstand three years,” he said.

Support from insurers

Whatever form transition support takes, it is clear there is an expectation from advisers, and Government, that Australia’s life insurers will need to play a role.

Speaking at the FSC Annual Conference in August this year, Mr Frydenberg said: “If there is a message I can provide the life insurers in this room, it is that advisers are looking to you to help them transition and navigate these significant reforms.”

Some of the initiatives already undertaken are listed below:

  • In May, Asteron Life launched a Remuneration Modeller to help advice practices compare what the business looks like now, against what it would like under an alternative remuneration model
  • Zurich has been conducting roundtable events designed to give advisers a say in what innovations and efficiency drivers are needed to make the transition to the new Framework easier
  • The TAL’s Commitment website provides an opportunity for advisers to rate some of the insurer’s ideas for support tools, or to submit their own ideas

Consumers

Often overlooked in the reform debate, the consumer should be at the heart of any change. To date, consumer groups have expressed concerns that the proposed reforms do not go far enough, and the only way to address poor life insurance advice is to remove commissions completely.

“While life insurance advisers are still getting commissions, regardless of the size of those commissions, advisers will not be truly independent,” said Gerard Brody, CEO of the Consumer Action Law Centre.

“This model perpetuates disincentives for advisers to provide strategic advice, or advise consumers to take out group life cover through superannuation. In a commission based system, an adviser must work for free when giving that kind of advice.”

If the reforms are to succeed, consumers need to be informed about the changes and how they will improve the quality of advice they receive. However, there is very little precedent to suggest the Government will undertake a wide-ranging consumer campaign. It may be left to advisers, licensees and insurers to spread the word.

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Emily Saint-Smith is riskinfo’s Senior Journalist.

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  • paulkate72

    We really have been left with a mess all round. The reason all of these changes have been mooted is that the life offices want to regain the control they once had when tied agents and/or multi-agents operated. Of course, that includes the profitability they want to increase. All of the grandstanding from them about upgrading the quality of life insurance advice is a smokescreen to deflect scrutiny from the real issues I’ve just outlined.
    Advisers have no control over any of this new LIF. Even though they have as much stake as anyone in it they have no power to veto parts of it if their own businesses’ profitability will be seriously compromised either. No part of the LIF will benefit the consumer except those at the big end of town. Families will be the most disaffected. It’s a tragedy in the making.