LIF By The Numbers

Given the long period of time it took for the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2017, commonly known as the Life Insurance Framework (LIF), to become law, financial advisers would be well aware of the headline changes the new system has ushered in.

From 1 January 2018, upfront commissions have been reduced from levels in excess of 100 per cent to 80 per cent and will continue to be reduced – to 70 per cent in 2019 and 60 per cent in 2020, while ongoing hybrid commissions have been retained at 20 per cent, excluding GST.

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Clawback periods for hybrid commissions have been set at two years. In the first year an adviser stands to lose 100 per cent of commission when a policy lapses, is cancelled, or the premium is reduced, and 60 per cent in the second year for the same reasons.

Exemptions have been factored into the Framework and clawback will not take place when repricing by an insurer results in a premium reduction, nor when a change in risk factors of the insured does the same, or suicide or self-harm by the insured.

All of this has been known for some time, after having been announced by the Minister for Financial Services, Kelly O’Dwyer, as far back as November 2015, and incorporated into the legislation and regulation that creates the LIF regime.

What is not included in those documents is the common practice by life insurers to continue to hold the current servicing licensee or adviser responsible for clawback.

While ASIC, in Regulatory Guide 246, only outlined when clawback would take place and at what level, but not who would be responsible, it appears life insurers adopted the position advocated by the AFA in late 2016 that transferred adviser remuneration included any related risks and liabilities related.

Another area which has not been the subject of the LIF reforms is level commissions. Many insurers have retained pre-existing arrangements on level commissions, including the clawback period, clawback rate and the amount of level commission on offer.

Drawing on information from life insurers made publicly available to financial advisers in the lead up to 1 January 2018, the table above shows the clawback period and rate are the same across the all life insurers listed, at 100 per cent and one year, respectively.

Variation, however, occurs in the amount of level commission being paid, with the following insurers choosing to retain their old rates:

• AIA Australia
• Asteron
• AMP
• CommInsure
• MLC Life Insurance
• TAL
• Zurich

The following, however, have opted to reduce their level commissions from those previously offered prior to 1 January 2018

• BT: from 33 per cent to 30.25 per cent
• ClearView: currently at 30 per cent but will reduce to 27.5 by 2020
• OnePath: from 32 per cent to 30 per cent

Advisers will also be particularly interested in the variation around commissionable premiums demonstrated by life insurers with four companies – AIA Australia, Asteron, ClearView and TAL including only base premium rates in these calculations.

Those insurers that have also included policy fees are:

• AMP
• BT
• CommInsure
• OnePath

and those that have also included frequency loading are

• BT
• MLC Life Insurance
• Zurich

It is worth noting here that life insurers are not obligated to pay commission on policy fees and frequency loadings under the LIF regulations, even though they are listed in the legislation as part of the ‘policy cost’. When the final form of the changes were made known, Minister O’Dwyer indicated “the premium on which the commission caps are calculated can include the base premium, frequency loading and the policy fee but cannot include stamp duty” (emphasis added) but mandatory instructions along these lines are not included in the final regulations (see: Corporations Act Section 963B-3B,3C).

Of particular note is OnePath as the only insurer to include stamp duty under commissionable premium, stating in an FAQ provided to advisers that “treatment of stamp duty is dependent on whether it can be considered as part of the premium or not. Our view is that it can be included for life insurance stamp duty but not for general insurance stamp duty where a state-based loading is applied to the premium”.

What these variations will mean for advisers depends on which insurer they are dealing with but the impact may be considerable, particularly when commissions are reduced to 60 per cent plus GST from 2020 onwards.

The AFA has indicated that members have raised this as a concern and AFA General Manager, Policy and Professionalism, Phil Anderson, said the Association preferred to see life insurers including policy fees and frequency loadings in commissionable premiums in 2018.

“We understand the price pressures in 2018, but will continue to push for these items to be included in 2019 when initial commissions are reduced to 70 per cent,” he said.

“There is a level of complexity for advisers in ensuring their own disclosures are correct and a definite advantage exists for them if life insurers can reach a consistent application in this area,” Anderson added.