Irish playwright George Bernard Shaw is reported to have said “The United States and Great Britain are two countries separated by a common language” but if he had lived to see the Australian life insurance sector he may have quipped ‘it is one industry separated by a common piece of legislation’….
How it is separated is not as simply defined as it might appear with four distinct groups now preparing for the start of the Life Insurance Framework.
While they generally all appear to be pulling in the same direction, their preparations highlight where future areas of contention may arise.
The Associations: negotiations lead to education and assistance
For the two adviser associations, the Association of Financial Advisers (AFA) and the Financial Planning Association (FPA), the road to Canberra has become a well-worn path paved with plans, setbacks and mixed results.
Both groups recognised the efforts of the other following the recent announcement by the Assistant Treasurer, Kelly O’Dwyer, that clawback periods will be reduced from three years to two years, and for both groups it was the culmination of many weeks of lobbying, discussing and listening.
AFA National President Deborah Kent said the move from three years to two years was widely consistent with the views of its members and its board was a “a great relief for our members, particularly those that own and operate small businesses”.
Kent said the AFA would continue to assist members adapt to the LIF model before its start date of 1 July 2016, pointing to the mutual support network that has been built among the members of the association.
AFA chief executive Brad Fox said, in a statement to members following the changes, that the AFA was also looking forward to insurers changing their business models and increasing efficiencies in the advice, underwriting and claims process to offset the reduced upfront income advisers will receive.
Fox also called for feedback from AFA members, which given the depth of feeling the LIF model has created – particularly among risk-only advisers in small businesses – may be full and frank.
FPA chief executive Mark Rantall said his association was also looking at how best to support members in the transition to the LIF model stating that it was time to begin using the six-month extension to prepare for what appears to be the finalised model of the framework.
The industry does need to respond to the changes so when the Australian Securities and Investments Commissions (ASIC) reviews this space in two years, it won’t be forced into adopting level commissions.
“We understand the sensitivities of risk advisers around the changes to the framework but at the end of the day it was either the Financial Systems Inquiry model or what was negotiated,” Rantall said, pointing to a recent media release from the Financial Services Council (FSC) which called for fee for service only on risk advice.
“The six-month extension does give advisers some breathing space to account for the changes and we have released a Life Insurance Advice Guide which recommends best practice in the provision of life insurance,” Rantall said.
“The industry does need to respond to the changes so when the Australian Securities and Investments Commissions (ASIC) reviews this space in two years, it won’t be forced into adopting level commissions.”
Rantall said while the FPA will adopt an educative approach through webinars and promoting its Life Risk specialisation, some details that have been overshadowed by the discussions around remuneration will still need to be addressed.
He pointed to a better Statement of Advice to accommodate the commission changes as well as a life insurers code of practice and a regular reporting of lapse rates.
“We went looking for these changes, and they were included because we believed they will make the life insurance sector more effective and efficient,” Rantall said.
The Insurers: getting their house in order
Asteron Life, executive manager, Mark Vilo said while efficiency gains were expected they may not be immediately obvious in dollar terms, and it was looking at how it can improve adviser interaction.
“If we can improve the sustainability of the industry and our company we expect there will be a long term benefit for advisers. We also recognise there are some price changes in the market and have to ensure business remains viable for us as well,” Vilo said.
“We are looking at how we can make it easier for advisers to deal with us as well as their clients so advisers don’t have to spend time on the phone or online updating client details, for instance.”
Zurich, head of distribution, Kristine Brooks said conversations with advisers had also pointed to further product innovation with the insurer looking to implement all necessary changes for the transition period into the current preparations.
“We were already working towards the initial 1 January start date so the commission piece is well advanced but more comprehensive infrastructure is required to maintain existing products and so we can build out for the new LIF model,” Brooks said.
“It is the biggest change in recent years and all stakeholders will have significant work to do and we expect the scope of work will be similar for all parties.”
Brooks said Zurich was starting to work through the issue of grandfathering after it was included in latest LIF announcements, stating further clarity was needed on when grandfathering would apply and these details were being examined by working groups within the FSC.
For Vilo, pre-existing policies will continue to be a long term issue stating “we have old products that clients still hold and they are very good, and sometimes better than what’s on offer”.
We want to be pragmatic about what is actually a lapses and not just base it off a dollar value. Advisers move policies for the best interests of clients and we want to recognise that at an industry level.
While Asteron Life is working towards developing products that fit in with the new remuneration and clawback model Vilo believes that “legacy business will be the next frontier of change for the life insurance sector and will offer a challenge as to how to shift it to one platform”.
He said the new product developments are having to factor in the various payment issues as well as lapse reporting to ASIC which includes defining and measuring lapses under a common standard.
“We are working with other life insurers and ASIC because a lapse on an advised policy can appear significant in terms of a dollar value but less significant in terms of the number of policies from that adviser that go off the books,” Vilo said.
“We want to be pragmatic about what is actually a lapses and not just base it off a dollar value. Advisers move policies for the best interests of clients and we want to recognise that at an industry level. Risk advisers have an opinion on lapse rates and they have a right to ensure we are consistent.”
By contrast, Clearview, managing director, Simon Swanson said his group was still waiting for the release of the LIF legislation and regulations before taking drastic steps, confident that it could meet the 1 July 2016 deadline without having to make widespread changes.
He said Clearview did not carry as much legacy products and systems as other insurers having entered the market in its current form less than 10 years ago.
“Our systems are pretty flexible and we expect we can make changes in weeks not months as we don’t have legacy issues and we don’t pay rebates,” Swanson said pointing out the group did not pay volume bonuses either and so did not have to deal with that change either.
He did support an open Approved Product List (APL) model, stating that as a group which already had an open APL in its advice group, it was anti-competitive to leave it closed across the advice sector.
“The idea of a closed APL under the current model has the vestiges of the old tied agency model. An open APL deals with the conflicts within vertically integrated models and it is something the industry must do.”
The Licensees: who carries the clawback?
While it appears insurers will be required to make the widest ranging changes to their business, licensees have indicated the level of change required by them is not onerous or time consuming with a number having already completed their LIF transition work.
Rather, the work involves assisting advisers to restructure or redirect their practices to be able to survive under the reduced upfront commission payment LIF will introduce.
Centrepoint Alliance, managing director, John de Zwart said the largest hurdles for the group’s licensees and advisers was the ongoing uncertainty, despite the recent announcements around clawback. However, he said there had been sufficient information to date around the broad shape of what was required for the group to start work earlier in the year.
As such Centrepoint’s advisers were encouraged to adopt a hybrid commission model instead of relying solely on up-front commissions, as the former offered longer term stability around income.
“In the short term we have not seen anything traumatic and none of our advisers or practices are screaming about having to make the transition,” de Zwart said, acknowledging that some advisers would remain with up-front commissions and work with Centrepoint to manage lapse rates under the LIF model.
GPS Wealth, managing director, Grahame Evans said his group had also canvassed the shift to hybrids as well as extending advice in other areas such as investments with the main difficulty overcoming adviser concerns about the possibility and practicability of such a shift.
“We have told them to start shifting now but for some there is uncertainty around their belief in their own skills or even if they want to look at new advice areas,” Evans said.
“Most risk advisers can upskill as long as their practices have the infrastructure to support the change. Some of our advisers have preferred to hire a financial planner instead who will work with them to generate extra revenue.”
Shartru Wealth Management, chief executive, Rob Coyte said his group had a long established model of supporting advisers to develop more than one advice and income stream and had identified the need to move to a hybrid model when ASIC Report 413 was released.
“When that report came out, as a licensee, we built hybrid into our policies and our advisers can only choose hybrid unless there are strong commercial reasons not to. We felt it was a good way to go for clients. So far no-one has had an issue and it was quick change to make,” Coyte said.
The longer responsibility periods are an area of concern for licensees and advisers. While advisers will get upfront commissions initially, any clawbacks made against them will hit the licensee who will have to chase the adviser for funds
“It was easy to implement and the main issue we have to prepare for is the impact of clawback. As such we are looking at how our advisers can engage more widely with clients to minimise future problems because the days of being a single strand advice provider are over.”
Coyte said while Shartru could work to minimise lapses and clawback there was still some concern about how it would be administered in the event an adviser was no longer with the group and had left the industry.
Evans had also identified this problem and said under clawback there was a real possibility a licensee would become ‘the banker’ to its advisers in dealing with clawbacks and having to hold or recoup funds during the first two years of a policy.
“The longer responsibility periods are an area of concern for licensees and advisers. While advisers will get upfront commissions initially, any clawbacks made against them will hit the licensee who will have to chase the adviser for funds if there are no other commissions coming in to the licensee for that adviser,” Evans said.
“There is the potential for a licensee to become ‘banks’ for financial advisers around clawback or even to lose funds if the adviser has retired or left the industry.”
This issue will not be made simpler with the uncertainty around what defines a lapse, and therefore what triggers a clawback according to Evans, who is calling for a consistent determination across the life insurance sector.
“The qualification and quantification of lapses should be the same so licensees can better manage them with their advisers, and an open, measurable and fair definition is a good compliance tool for licensees who can know they are comparing apples with apples.”
De Zwart said the concerns about the lack of a sector wide lapse definition were timely given recent premium rate rises before the introduction of the LIF model, and at a time when insurers have posted strong profits.
“There seems to be a strategy to offer low up front premiums to attract new clients and then up prices in the future. Even though insurers have been picking up experienced profits, prices are down and we will likely see advisers looking at replacing policies because of this,” de Zwart said.
“This will put advisers in a conflicted position as they will breach best interest duties if they don’t recommend a more suitable product but will trigger clawbacks if they do recommend moving a policy. This is a product manufacturer’s issue and they are looking down the line to make up losses.”
The Advisers: still yet to be convinced
Coyte adds that planners will come under pressure due to the Government’s plan to create a legislative instrument to set caps on commissions, describing this step as an ‘absolute disgrace’ and contrary to a free market economy.
“I am all for best industry duties and fulfilling obligations under the Future of Financial Advice legislation but advisers should be free to negotiate how they charge for services and what the level of those charges will be,” Coyte said.
“The free market will regulate what can be charged and a legislative instrument will distort the market. John Trowbridge said the cost of advice should not be covered by these measures and the UK experience has shown that capping income will not work.”
“This will all fall apart and we will have these same conversations in a few years because there was too much reliance on a flawed ASIC report.”
However, for some advisers a few years may be too long. Depending on who you talk to and how their business has been positioned the transition to LIF ranges from a relatively easy readjustment to a massive business altering event.
Both the AFA and FPA have claimed feedback from members guided their efforts and shaped the outcomes achieved, while other less-formal adviser groups have pointed to under representation in the LIF negotiation process and a willingness to carry on the push for further changes.
For Paul Underwood, an adviser working at the coal-face, LIF has left too much up in the air and he has yet to be convinced there is any useful or beneficial outcomes for consumers.
Underwood, who is the owner of Risk Insurance Specialist in Melbourne’s eastern suburbs is upset as well as pragmatic, stating he will continue to work off hybrid commissions but may change if the circumstances require it.
I am upset and disappointed with what is taking place because for years we have helped build insurers and they are now not supporting advisers. We have kept business on their books despite their efforts to get it off through regular premium increases.
“Like most risk advisers I don’t see how the changes benefit consumers rather than life insurers but I will do what I have always done and look after my clients,” Underwood said.
“What will happen after 1 July depends on what I find but if we truly wanted to deal with up-front commissions then we could have moved to hybrids for three to four years first instead of the new LIF model.”
Underwood said he did not consider himself a dinosaur at age 51 and said while he had built a good business and had no plans to stop, advisers had also helped build the businesses of life insurers, even when they have worked against advisers.
“I am upset and disappointed with what is taking place because for years we have helped build insurers and they are now not supporting advisers. We have kept business on their books despite their efforts to get it off through regular premium increases.”
“Policies will fall over if not supported by advisers and we want certainty about next year, and we have not had certainty for some time which is not good for the longevity of the advice sector.”
Jason Spits is riskinfo’s Senior Journalist.