Life Insurance Framework Verdict

In March, the Senate Economics Legislation Committee released its report into the new Life Insurance Framework – the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016 [Provisions].
The report makes for interesting reading as the committee, which comprises Government and Opposition Senators, together with South Australian Independent Senator, Nick Xenophon delivered its verdict on many of the key issues and objections raised by industry stakeholders, including financial advisers, in relation to the proposed provisions contained in the new Life Insurance Framework.

The committee received 57 submissions from individuals and organisations, including a similar form letter from 209 stakeholders. It noted a number of reviews that were influential in the formation of the reform proposals captured in the bill, which included ASIC’s Review of Retail Life Insurance Advice (Report 413), the Financial System Inquiry and the work of the Life Insurance and Advice Working Group (also known as the Trowbridge Review).

While the report delivered an articulate summary of the background to the legislation, the more interesting section, Chapter 2, outlines the committee’s examination of the main aspects and effects of the bill, including:

  • Evidence supporting the intended reforms
  • The effect on consumers
  • The impact on the life insurance advice industry

Included in this chapter is consideration regarding comments made by stakeholders, especially advisers, who were concerned that the bill does not sufficiently address the problems identified in ASIC’s Report 413 into Retail Life Insurance Advice.

In acknowledging the life insurance sector is vital for our community, the Assistant Treasurer and Minister for Small Business, Kelly O’Dwyer, said “Life insurance advisers and product manufacturers help to provide essential financial security to Australians and their families.”

However, she added recent inquiries have shown that there is a clear need for change, with the stated purpose of the new Life Insurance Framework bill being to ‘…better align the interests of consumers and those providing advice.’

The government argues that, as a result of this alignment of interests, consumers will benefit through improved quality of advice, more product choice and enhanced competition.

The opening statement introducing Chapter 2 generally sets the tone for the committee’s analysis and overall position:

‘It is important that consumers can access appropriate, independent financial advice so as to protect themselves and their families in the event of the unexpected. At present, some consumers receive advice that does not comply with the law and which seems to be motivated by the high upfront commission the adviser will receive on the signing of a new policy.’

many suggested that bad advice, rather than churning specifically, is the real issue

Issues addressed in this Chapter include:

Preventing churning

Section 2.8 in Chapter 2 notes, ‘Some submitters expressed concern that the various reviews, and now the bill, may have been focused on the wrong issues. While many submitters agreed that the life insurance industry is in need of reform, many suggested that bad advice, rather than churning specifically, is the real issue.

…Verdict:

Considering the various arguments put forward by advisers and others, the committee’s conclusion on this issue stated:

‘The committee considers that the bill provides an effective mechanism for preventing churning, which will be supplemented by ASIC’s oversight functions. While the committee appreciates that further reform may be required to ensure that the industry operates fairly and sustainably, such an assessment will be made by ASIC in the scheduled 2018 review.’

Previous reviews and consultation on the bill

Another critical conclusion by the committee relates to the criticism levelled by many stakeholders in relation to the credibility of the findings outlined in ASIC’s Review of Retail Life Insurance Advice (Report 413). Criticisms outlined in submissions to the committee included:

  • ASIC’s conclusions regarding the risk of churning could not be justified on the basis of a sample of size of around 200 files
  • ASIC’s decision to only focus on the self-employed adviser sector, and that at least 10 per cent of advisers should have been surveyed to ensure accurate results
  • Criticism of the methodology underlying the ASIC report, refuting its conclusions that increased lapse rates indicated the prevalence of churning
  • Suggestions that any increase in lapse rates could be entirely to do with the way in which the industry reports lapses and nothing at all to do with increased lapses or ‘bad churn’
  • The argument that ASIC’s review was a targeted surveillance; not a random sample of advice from randomly selected AFS licensees

…Verdict:

‘The committee notes these concerns and, in relation to the size of ASIC’s data sample, considers that the data is broadly representative of the industry as a whole. While it accepts that a larger data sample may have added depth to the study, the committee is unaware of any alternative evidence that would suggest that ASIC’s analysis does not present an accurate picture of the industry.’

Consultation on the bill

The Committee said it had received a significant number of submissions from advisers which expressed the view that only the life insurers, mainly large institutions like banks, were adequately consulted throughout the reform process. It noted one representative submission declared that none of the smaller financial advisers had been consulted.

The Committee, however, also referred to the submission from the AFA that, as an adviser representative association, it had been consulted on the development of the Life Insurance Framework and that it supported the negotiated consensus positions reflected in the bill.

…Verdict:

‘The committee notes that the proposed reform of the life insurance advice industry has been the subject of discussion for many years. The industry has been on notice for some time now that reform was imminent and was invited to help design the new remuneration model. The committee considers that all stakeholders have had ample opportunity to contribute to the discussion and that the model to be implemented by the bill is a fair one.’

Effect on consumers

The report states the majority of submissions disputed the contention that the bill advances the interests of consumers.

The committee says the form letter submissions it received opened with the statement that the bill ‘…in its current form will have adverse outcomes for consumers and will exacerbate Australia’s chronic under-insurance crisis’.

In its submission, the Association of Independently Owned Financial Professionals considered the proposed reforms to be ‘…clearly all about increasing profits for Institutions, eliminating competition and reducing choice for consumers.’

By contrast, the committee said a number of submissions highlighted the benefits to the consumer of these reforms: ‘For example, CHOICE noted that the bill will improve the situation for consumers. They expressed the view that the bill represents the minimum change required to increase consumer confidence in the life insurance advice industry.’

Some submissions indicated that advisers would need to change their business model and charge a fee for advice

The committee said the FSC also considered that the bill will enhance consumer outcomes: ‘They argued that setting maximum caps of 60 per cent for upfront commissions and 20 per cent for ongoing commissions, in conjunction with an extended clawback period of two years, will improve consumer outcomes.’

…Verdict:

‘The committee is of the view that the provisions in the bill do in fact promote consumer choice and competition. In relation to an assertion that they must be able to prioritise the interests of the client, the committee concludes that the bill will not impede the ability of financial advisers to advance that interest. The committee further notes that the ability of clients to ‘shop around’ and choose the most suitable policy for the lowest price supports competition in the industry.’

Increased cost of life insurance?

The committee addressed the concern raised in some submissions (and in many other industry forums) that the bill will prompt life insurers to raise the cost of their premiums. It noted there were also a number of assertions that, given the net value of commissions will be greater over time (reflecting a higher ongoing commission), this would ultimately lead to insurers passing on the extra expense to the consumer.

Fees for advice – prospect

While the committee delivered no specific judgement on the issue of potentially increased costs of life insurance under the new Life Insurance Framework, it led neatly into a discussion on the prospect of charging fees for the delivery of life insurance advice and the impact this may have on the consumer. It noted:

Some submissions indicated that advisers would need to change their business model and charge a fee for advice, as opposed to providing free advice and collecting a commission on the product sold.’

The committee said the submission from the FSC anticipated the potential need to charge a fee for advice. ‘They noted that the amendments do not prevent advisers from pursuing other remuneration models, such as fees for advice or level commission models. The FSC proposed that, if the new remuneration arrangements are not viable for small businesses, they are open to advisers passing the cost on to consumers.’

Fees for advice – impact

The committee referenced some submissions in which it was suggested charging fees for risk advice ‘…would not be well received by consumers.’ It noted one submission in which the advice firm recounted how they had previously tried to implement a fee for advice for clients seeking life insurance products. ‘They contended that ‘NOBODY wants to pay us a fee for our advice and then pay their life insurance premiums.

The report said other submissions emphasised that consumers would be reluctant to pay a fee and may simply elect not to purchase life insurance. Quoting one submission in particular:

“…the reality is that a large portion of the clients we deal with resent paying fees, and would rather not take advice than paying the appropriate fees. I say appropriate fees because the fees charged would need to be high enough to make up for the substantial reduction in commission receivable, and in turn for the business to be viable.”

Elsewhere, other submissions predicted a decline in the number of consumers taking out life insurance as a result of such fees, if they will be required to be levied in order to maintain the viability of the advice business.

Impact on the life insurance advice sector

Introducing discussion on the impact of the legislation on the life insurance advice industry, the committee delivered this amazing statement:

‘The reform to life insurance remuneration arrangements is projected to have an adverse impact on the life insurance advice industry.’

The report does not make it clear whether this statement is the view of the committee itself or its summary of the views contained in the submissions it received. Either way, however, this statement does not paint a rosy picture for the future of advised life insurance solutions.

The reform to life insurance remuneration arrangements is projected to have an adverse impact on the life insurance advice industry

The committee noted submissions predicting a decline in the numbers of such advisers due to a lack of profitability. One submission read:

The proposed reductions in commission, along with an increase in responsibility period (clawback) will achieve one thing, and one thing only. That is the drastic reduction in the number of small, independent life insurance brokers.’

Balancing this summary view, the report noted that not all submissions reflected such a bleak outlook, referencing comments made by the AFA:

Contrary to the position adopted by other submitters, the AFA regarded the reform to commission structures as a positive development. The AFA accepted that the bill will bring about business model change to a significant number of financial advisers in Australia—especially for those that are life insurance specialists. They acknowledged the concerns expressed by advisers and they encouraged insurers to invest in technology, product innovation and process improvements to enable advisers to deliver most cost-effective advice. They noted their expectation that productivity improvements in these areas will flow through to premiums, client and adviser experience, and ultimately the sustainability of the sector.

The AFA also recorded its commitment to providing support, encouragement and business tools to help advisers during the transition and its resolve to encourage other industry participants to do the same.

…Verdict:

‘The committee acknowledges the concerns raised by some stakeholders about the viability of the life insurance advice industry. It notes that the ongoing commission received under existing arrangements will continue in accordance with the transitional provisions and commends the industry for considering alternative remuneration models that are not reliant on high upfront commissions.’

Market share realignment

Navigating its course along the path of change this legislation will generate, the committee turned its focus to ‘the big end of town’ and to the direct insurance channel. The report noted that as a result of the anticipated decline in the number of independent financial advisers, some submissions predicted that consumers would be drawn in increasing numbers to direct life insurer channels. The report quotes one submission that argues the bill will result in consumers:

  1. Paying higher prices
  2. Having worse underwriting terms
  3. Experiencing reduced customer service

While other submissions emphasised the risk to the consumer of purchasing life insurance direct from the insurer without first seeking financial advice, the committee has effectively deferred its judgement on this issue.

…Verdict:

‘The committee notes these concerns about changes to the market share in the life insurance advice industry. The committee considers that the proposed 2018 review by ASIC will be a valuable opportunity to assess the effect of the reforms on the industry and to balance that impact with the benefits to the consumer.’

ASIC’s 2018 review

ASIC’s mandated task of reviewing the impact of the legislated changes during the transition period and reporting back to the Government will be a critical moment for the future of the sector. That its report is due in 2018 is controversial in itself, as there are many in the industry, who have argued this timeframe is too tight to allow for the intended outcomes of the legislation to have taken full effect.

…Verdict:

‘The committee looks forward to the 2018 review to assess the effectiveness of these reforms and notes the government’s commitment to ensuring fairer outcomes for consumers accessing life insurance products.’

The other side of the coin

The report notes submissions from organisations such as Industry Super Australia and consumer group, CHOICE, who argue the proposed reforms don’t go far enough.

ISA submitted:

‘The Government’s stated rationale for the changes is to better align the interests of consumers and those providing advice, yet the conditions fall short of the recommendations of the Trowbridge review into Life Insurance Advice and the Final Report of the Financial System Inquiry.

We agree with the Government’s observation that ‘the evidence of poor quality of advice in insurance justifies further efforts by the Government and the industry to reform the remuneration arrangements in the life insurance industry.’ Yet, despite the extensive body of evidence documenting the ill effects of conflicted remuneration, the government has failed to seriously consider reform that phases out commissions in life insurance advice.’

In a similar vein, CHOICE submitted that ‘…commissions should be banned outright on the basis that they harm the consumer.’

…Verdict:

The committee’s response to this issue takes a deferred ‘bob each way’. It acknowledges perspectives that argue the bill’s provisions have gone too far, as well as those that argue the provisions haven’t gone far enough. In the end, it takes an almost Goldilocks approach to its verdict:

‘The committee acknowledges the views of some submitters that the government ‘has not gone far enough’. Given the concerns expressed by other stakeholders above, the committee understands that it is difficult to balance the interests of consumers, small business and larger institutions. The committee considers that this bill strikes an acceptable balance between these interests and reminds stakeholders that the 2018 review will provide an opportunity to assess these reforms.’

Final recommendation

Positioning the committee’s final recommendation, the report’s last three paragraphs address perhaps the two most critical factors in the entire process. The first factor is philosophical, namely the Government’s goal of aligning the interests of all stakeholders in the delivery of life insurance solutions. The second factor is practical, being the importance of the outcome of ASIC’s review, scheduled for delivery in 2018. The last three paragraphs in Chapter 2 of this report state:

2.72: The committee is of the view that the bill contains provisions designed to ensure that consumers can access unbiased and appropriate advice when considering purchasing life insurance.

2.73 The committee notes that advisers have thus far been allowed to provide advice in circumstances where their own interest in a significant commission is at odds with the interests of the consumer. This bill will effectively address unnecessary churning and will ensure that ASIC has greater regulatory oversight over the industry.

2.74 The committee notes the concerns of submitters in relation to consumer choice and the future of the industry, but believes that the bill contains mechanisms to address these risks. In particular, the powers conferred on ASIC ensure flexibility and responsiveness while the scheduled 2018 review provides an opportunity to correct any imbalances or pursue further reform.

The committee’s one and only recommendation stemming from its report is:

Recommendation 1

2.75 The committee recommends the bill be passed.

  • Dr A Andrews

    Insurers can easily prevent churn by applying level commission to the identified churners. Some already do. There is more to this that meet the eye ……….

    • Risky at Heart

      Bingo!

  • Greg Hayter

    Due to circumstances ( upcoming election ) beyond our control nothing will actually happen until around August ( at the earliest ). As an adviser who simply won’t give up the fight to try to stop these Draconian measures actually becoming ‘law’, I urge all other ‘riskies’ to continually voice your disapproval to your local federal member. I’ve seen mine twice in the last 9 months, and the message I’ve tried to hammer home is that ” is it in the nation’s best interests to amend legislation that will have a negative impact on the lives of thousands of small business people ( the adviser ), and at the same time only benefit the big end of town ( banks/insurers ) ?” . So far it seems that the big boys have the upper hand, but we are making some headway. Don’t Give Up !

    • WB

      You are absolutely right Greg, we cannot give up!
      Reading through the report though, it is astonishing that the Committee is listening to the ISA whose only aim is to see the independent adviser disappear and CHOICE, an organisation who have absolutely no idea how the retail life insurance industry works!
      It is also astonishing that the Committee believes 200 files audited by ASIC provides a true representation of what is happening industry wide! Anyone working in audit knows that if an auditor discovers a problem whilst conducting a check or an audit, then they increase the scope of the audit to ascertain the extent of the problem. Now if ASIC did discover a problem with a percentage of files audited, then can anyone please explain to me why they did not increase the scope of their audit to find out the extent of such problem? And can anyone also please explain how the Committee can accept 200 files audited as truly representative of this industry when tens of thousands of new life insurance policies are put into force every year in this country?
      Unfortunately the AFA and FPA have let the specialist risk insurance adviser down – big time. It really is now up to us individually to contact our local members as you say Greg, and lets hope that the LICG submissions are heard and taken seriously.

  • paulkate72

    Really all of this has been a costly ‘much ado about nothing’. The industry had been travelling along well for years but all of this change has been driven by the big life offices who simply want a larger slice of bottom line profits.

    Throughout all of this debate the life offices have still been making very good, if not record profits, but it isn’t enough. They’ve used the thought of ‘poor advice’ and ‘churn’ as a smokescreen for their lobbying government which in turn, has been willing tools in this duplicity.

  • Old Risky

    Thank you AFA-you sold out risk advisers BIG TIME ! Walked into a trap set by experts, played the game without knowing the rules, and left yourself under suspicion you were doing your sponsors bidding !
    I look forward to my next Board vote