The two major advice associations have called for greater consultation on the Financial System Inquiry’s recommendation to remove upfront commissions for life insurance, warning of a number of unintended consequences.
Association of Financial Advisers (AFA) COO, Phil Anderson, told riskinfo the recommendation to limit upfront life insurance commission payments to the same or less than ongoing commission rates was an unexpected development. He said he understood that the FSI report recommendation had been informed by the recent Australian Securities and Investments Commission (ASIC) Retail Life Insurance Review, but was concerned that the FSI had bypassed hybrid commissions as a solution to managing inappropriate advice.
“The ASIC report made it clear that they did not envisage a problem with hybrid commissions. It showed that whilst there was a 55% ‘pass rate’ for advice paid for via upfront commissions, there was a 93% pass rate for other forms of commissions. We certainly understand that there is a concern about upfronts, but we think that hybrid is still a viable model,” Mr Anderson said.
“We don’t want to go from having excess incentives to recommend a new product provider, to having a completely inadequate incentives to do the work and to get the right outcome for the client.
…to suggest that the remuneration should be flat just doesn’t reflect the underlying reality of life insurance advice
“There is significantly more work involved with the provision of initial insurance advice, and the placement of cover, and to suggest that the remuneration should be flat just doesn’t reflect the underlying reality of life insurance advice.”
If a level-only model were to be adopted, Mr Anderson said it would be particularly challenging for practices that rely on the cashflow that comes from providing life insurance advice.
“At the moment around 80% of advisers take an upfront commission, so they are paid well in the first year, and then the amount they are paid in subsequent years – for renewal and claims support – is significantly lower. If you move to level, inevitably the adviser is incurring a loss in year one.
“That has a fundamental impact on the viability of life insurance advice businesses. If we went to level, we would see a number of life insurance advice practices struggle, and potentially move into other areas.”
He also pointed to the fact the industry would need significant time to transition to a level-only commission model, as it would require a complete redesign of adviser business models.
The AFA is part of a joint working group with the Financial Services Council, established to address the findings of the ASIC report. Mr Anderson said the FSI’s recommendations would now form part of these discussions. An interim report from the working group is expected by the end of this year, with a final report due by the end of the first quarter of 2015.
Meanwhile, the Financial Planning Association (FPA) said the issue was a complex one, and required further debate by the industry.
“We’re pleased with the majority of recommendations made in the final Murray Report,” said FPA CEO, Mark Rantall. “Obviously there are some that need further work and discussion and debate, and the risk insurance commissions recommendation is one of those.
In determining how best to address the issue of poor advice in the retail life insurance sector, Mr Rantall said it was important that any solution be well thought through, with the maximum amount of input from all stakeholders, including consumers, to minimise unintended consequences.
He offered a rise in underinsurance as one example:
“You need to look at the extent of that consequence. It’s a very complex issue. If you’re looking at lower income earners, for example, there is the potential that some firms will no longer be able to provide advice at that level, because they can’t get adequately paid for the work that needs to be done. And certainly it’s not going to serve anyone in this country if the underinsurance problem is exacerbated.
…it’s not going to serve anyone in this country if the underinsurance problem is exacerbated
“That’s why insurance commissions were not banned through the Future of Financial Advice reforms. I think that was an appropriate decision.
“That said, if we’re continually seeing evidence of advice that is being given in this area which is not in the consumers’ best interests, then we do need to think about developing an appropriate response.”
He also pointed out that the restriction of upfront commissions was just one approach to the issues raised by the ASIC report: “Our code of professional conduct already deals with the advice issues in relation to insurance. Over the last three years we’ve only had one consumer complaint about insurance advice, and that’s across a base of over 8,000 practitioner members.”
Finally, Mr Rantall highlighted that the Murray Report findings are only recommendations at this stage and that it is a matter for Government to determine which of the recommendations are actually implemented.
“On this particular issue there has already been much debate, and I’m sure we’ll see many positions arise in the coming months. I expect the Government will work methodically through those and come up with their own determination by March 2015.
“The insurance commission recommendation has arisen as a result of the ASIC report into insurance advice, and the whole industry is currently looking to respond to that. I think that by incorporating those issues into the FSI report, it will escalate the timeliness of the industry’s response.”
As you get older, you come to the realisation that the best way for uneducated, uninformed or blatant self interest parties to get their message across, is to voice their uneducated, uninformed opinions and wait to see the response, then if the opposing parties are weak, or present a weak response, then what they proposed, must be correct.
However, if the response is reasoned, intelligent and articulates solutions that do not match up with their thinking, or agenda, then do the quick, side step shuffle, retreat, regroup and come at it again later with another strategy and see what happens.
We are back at the next strategy stage and once again, the FSI and all the previous reports and suggestions, which had no bearing on the real world, are being rehashed and sold again.
I can only hope that eventually, all the GP’s who are trying to sell us their vision of their surgery, will maybe start to listen to the specialists and then we may start to fix the problem.
Once again people with no idea of what it costs to run a succesful advisor practice think they know whats best ? It only stands to reason that clients will not or cannot pay for risk advise to a degree that adequatley supports the work required to do the job correctly. It is easier cheaper and unfortunatly riskier to ring an online insurer and get a price { information not advice} Not only will the underinsurance rates rise dramatically { as shown in the UK when commissions were “axed”} only to be quickly re instated when the outcome of this action became apparent but complaints to FOS that what they bought over the phone was not what they wanted or thought it was is a “TIME BOMB” waiting to go off.
Lets assume that a level Commission structure is involved after say 3 years the advisor has his upfront commission and received 35% each year from then on How long before the insurers say they cannot afford to pay 35% each year { considering most pay around 10% now}.
What cahnges will be implimented outside of the guidlines. Some already have strict guidlines on when they will pay commission again on a client that has been re introduced { Look at Comminsures commission structure on like for like replacement}.
If the shoe was on the other foot would not this be a breach of the trade practices act “Restriction of Trade” ? How would the oppostion react if it was effecting there Union Members quick violently i would think
I trust that the powers that be look long and hard at these recommendations many are full of merrit many ae not !!
Ten years ago I started writing hybrid commission (where practical) and it was the best decision that I have made in this business. I would have done it sooner, but I was a feeder for cash flow for others in the enterprise. Once I gave them the flick, hybrid was the norm. Now I only will consider swapping a client to another insurer or policy if the insurer’s claims process start to concern me or the product does not enjoy an upgrade to better definitions. Some difficult applications can be unprofitable for me in the first year of a hybrid form or remuneration. Try asking a client to tip in more money as a fee for service for more work. Level commission is OK when applications are clean skins, but that is a rare event in my world. Hybrid removes the risk of a prolonged application process or the policy falling over in a couple of years. When it comes to business partners/equity insurance etc. level commission would be a disaster unless you could charge a hefty fee. Traditionally business insurance has a bad record for longevity and it would take too long to recoup time spent with level commission.
Zurich reports business operating profit of USD 3.8 billion for the first nine months of 2014, really wow? its not about sustainability.
Advisers run around and say, the poor insurance companies are going down, you idiot, its about more of this that’s all, it is nothing else its not about churning what ever that means.
Are we in the financial services industry going to allow, terms to be dictated to us? Simple if you are concerned about what the Commbank has just done, stop writing business with them for 2 months, they will come running with gifts showering us.
Statutory net profit after tax (NPAT) of $8,631 million – up 13 per cent on prior year Commbank.
CommInsure’s total operating income was $707 million, up 7%. This delivered a 15% rise in net profit before tax to $393 million, while net profit after tax was up 17% to $374 million.
Hong Kong-based AIA Group has reported an 89% increase in profit to $US3.02 billion ($2.93 billion) for the year to November 30, and says its Australian business performed strongly.
TAL increased its underlying profit by six per cent to $131 million and its premium and other revenue by 24 per cent to $2.3 billion.
New business for the year grew by 128 per cent to $728 million while TAL’s embedded value grew $195 million to $1.957 billion in the period.
Suncorp profit rises 49 per cent to $730 million, far exceeding analysts’ expectations.
Thats just the beginning SUN CORPS CEO got paid 9 Million dollars last year who the who is ripping what?
Grow up all of you
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