A blanket industry response, such as banning upfront commissions, is not the answer to current life insurance advice issues, the Financial Planning Association has warned.
FPA CEO, Mark Rantall, said a careful and considered response was needed to address the life insurance advice concerns raised by the Australian Securities and Investments Commission (ASIC) review into retail life insurance and the Financial System Inquiry.
“It’s quite a complex matter,” he told media during a briefing last week. “My concern is that we have an underinsurance problem today, and to put a blanket approach over insurance and commissions on the basis that they’re ‘bad’ is probably inappropriate. Because in many circumstances they (commissions) work really effectively, particularly for lower income earners. We have to be careful with this one that we don’t throw the baby out with the bath water.”
Mr Rantall said in formulating its response to the ASIC review and FSI final report, the FPA was mindful of the complexity of issues surrounding the sustainability of the insurance system.
“It goes way beyond just upfront commissions,” he said.
“The missing piece around this is the client impact. You’ve only got to talk to a client who has had insurance and has gone through a major life trauma – the weight that comes off their shoulders if they’re adequately insured is just enormous. How an adviser is paid and whether there are commissions involved disappears into obscurity compared to the positive impact that financial support has at such a critical time.”
Whatever model you go to does need to consider the consumer outcome
“Whatever model you go to does need to consider the consumer outcome,” added Dante De Gori, FPA General Manager Policy and Conduct. “Is this going to correlate to better premium pricing for consumers? What’s going to happen with respect to product design? We’re also interested in other areas, in particular around underwriting and claims management, as well, and data-feed support for advisers as well. So there’s a full suite of things we’re looking into.”
Mr De Gori also highlighted that other countries had struggled to remove life insurance commissions:
“It’s interesting to note that internationally there isn’t a jurisdiction that has banned commissions for life insurance. I think that’s quite telling in itself.”
The debate around insurance commissions has been further fuelled by the release of the joint Life Insurance Advice Working Group’s (LIAWG) interim report just prior to Christmas (see: High Upfront Commissions to Go – Trowbridge). Established by the Financial Services Council and the Association of Financial Advisers to tackle the issues raised by the ASIC insurance review, the LIAWG is currently seeking input from the wider industry. The FPA elected not to participate in the working group, and Mr Rantall said the Association had yet to determine whether it would lodge a submission in response to the interim report, saying the deadlines were “very tight”.
“The most important thing is that Australians have adequate insurance; insurance that protects them, and their lives and their family. We haven’t even got that in Australia today. That’s what we really need to face into,” he said.
Well done FPA. Once again not being part of the solution, just being part of the problem. If you were genuinely concerned as you say, you would be taking part instead of just making nice fluffy statements.
I think the FPA is finally starting to realise that Life Insurance is a completely different Business model to Investment advice, has unique characteristics and needs to be looked at as such.
I have been critical of the FPA in the past, though I think maybe we are seeing some intelligent responses now from them, which is encouraging.
They still have a long way to go before they get a full grasp of how the Life Insurance Industry works but at least they are now listening and appear to want to learn.
Good Lord-the FPA has discovered risk, and more importantly, risk writers.
For now, I will take them at face value.
Interesting to note no country has successfully abolished risk commissions. Is there anyone listening over in ASIC !
Mr de Gori must finally be reading some risk industry blogs. He is starting to think about all of the unintended ( I hope ) consequences. He asks will premiums go down if upfronts go- we know the insurers better than him, and the answer is NO – they will just gouge and try to recover profits lost in the Great Group Life In Super fiasco.
Retail product design, which has been going downhill with more Capability Clauses & increasingly tight overseas travel restrictions, WILL GET WORSE, not better ! Retail contracts could look like the crap sold on TV
Real risk advisers, forced to charge fees, have been asking why should they offer a free claims service and admin service if they are not financially tied to a policy. Would “best interests ‘ force them to stay involved?. Do we have a moral obligation to keep policies on the books even if there was no commission ?
The FPA, and the AFA ( who think being inside the tent is preferable ) MUST start pointing out the elephant in the room – the ISA. This debate is egged on by the ISA because they have an agenda to nuke advisers because ISA believes advisers ( but strangely not accountants ) are the key to outflows to SMSFs.
All of this assisted by a friendly media and a biased lawyer-influenced regulator
The facts are there is no problem. About one percent of advisers regularly and systemically “churn ” their book, or a book they buy, with the full support of the dealer and a preferred insurer, who sweetens the deal with premium discounts and terms preferences. We know who they are and so do the dealers and insurers, but ASIC will not take action. We know when advisers move dealers the pressure is on if the dealer is owned by an insurer.
Well said Bill!
ASIC is so concerned with the wellbeing of the life companies – when are they going to be concerned with our financial wellbeing?
The Life companies are the biggest churners – whole books are churned on takeover terms at the BDM’s request.
Regarding Risk writers – its high time we separated the risk writers form the investment side of the industry. Separate compliance and licensing!
I agree that the conversation is complex and there are many areas that need to be considered beyond remuneration. And absolutely our clients and future clients should be at the forefront. I do disagree with the comment though that there isn’t a jurisdiction that has banned commissions. Commissions are banned in the Netherlands and other Scandavian countries. Ongoing discussion has been occurring in the EU, Canada, India and of course there is the UK experience. This isn’t an Australia conversation – this is a global conversation. http://www.covermagazine.co.uk/cover/feature/2333037/banning-protection-commissions-the-netherlands-experience
Melissa, the article clearly states “lenders require a life policy to be in place and assigned before they release mortgage funds.” and “non-mortgage sales make up only 10% of the market”. As you know, life insurance is not mandatory with mortgages in Australia and can you imagine the underinsurance gap size if we only had 10% of the market made up from other sources ! What a disastrous example !
I’ve been in the finance/insurance industry for 20+ years and a Financial Planner for more than 10 years. Banning commissions in insurance will see less advice in this area and effectively Middle class Australia will be the loser in our society yet again with even worsening levels of insurance coverage than we currently have. Who is actually pushing for the banning of commissions? ………. No other country in the world has done this? ……. Effectively you have to point the finger at industry super funds and their trade union owners who constantly belittle advisers. You ban commissions in insurance, there will be no advice in this area for middle class Australia and the consumer loses!
The FPA has one goal. Require their membership and education requirements to be mandatory so that their membership, fee income and power base goes up. Doesn’t matter that they represent planners and not insurance specialists. Doesn’t matter that their exams are not relevant to insurance advisers. They want everyone to be experts at super, investments and risk which is not possible today.
Well isn’t this a great day for the life companies. They will change the remuneration model and leave the pricing the same ! Anything but upfront will deliver a better I.R.R and mean better outcomes for the life office. How about we make life simple. Proper low cost Risk , with normal upfront commission and all other variables and allow the client and adviser to choose. Mark my words lower nil commission products are coming and for those advisers that still want upfront you had better encourage the Life Offices to develop their offering now so you can implement your marketing strategy for upfront sooner rather than later.
I don’t care how an Adviser chooses to have the client pay for his services, as long as the client can make a value judgement based on fact.
It truly amazes me that any Government department is able to dictate to an industry what they earn. The FPA have also finally in a very light weight manner come out in support of commissions. Mr Rantall view to me is not delivering a very strong message. He is sort of sitting on the fence with both legs each side of the barb wire.
The talk about commissions when I conduct business with clients, they are not interested. Clients are very happy though that I do not charge any fees on top of the premiums they pay. All this carry on about commissions does nothing but damage our industry, a great business that delivers guaranteed outcomes when needed. Even Financial investment advisers cannot guarantee an outcome for a client.
I urge you Mr Rantall to get behind the AFA in a very definate and concise manner to support leaving things exactly as they are right now. As you say it is for the client.
Other industries do not get lambasted like the Risk advisers have been over this. Last night I was with a young couple and the wife claimed work cover for injuries occurring at work.
The pay out was to be around $100k and the original solicitors bill was to be $20k
(advised in writing) at commencement of claim. after a couple of years the Lawyer has got close to a settlement and the payout was then $120k, the Lawyer then advised client every week that they had all this extra work to carry out. At time of settlement the client received exactly 50% of $120k. when she complained they said it is what it is. She sought advice, had the bill costed and there was no change.
That is one example of the situation away from our great industry.
@ John, (Jan 21 2015)
Your comment is not correct, you can be an expert in super, investments and risk. You just have to put the time in to be educated..
I was an insurance specialist and NSW Agency Manager for a major life company that’s still in existence.
I lectured on Income Protection Insurance to Life agents of all persuasions on behalf of the old LUA and I was a graduate of LIMRA
I went back to University to study tax law and complete my DFP via Deakin University.
I also hold a CFP designation and have run an insurance and Financial Planning business since 1990.
My ex partner was a specialist in SMSF’s and we in the 1990’s managed $50M in SMSF’s alone.
@Melissa
The Dutch also encouraged unrestrained Muslim immigration and free drug use. Look at the mess their model has provided to the rest of Europe. They are now trying to back peddle at 100 miles an hour to undo the stupid things they implemented.
As for the Scandanavian countries, well their socialist programs may suit them but they do not suit the average Australian.
So the FPA are “comtemplating” making a submission in response to the Trowbridge Interim report. Are they serious??
The Trowbridge report is arguably one of the most important life insurance industry papers made public since the introduction of FSR. It will impact the future of the Life Insurance Industry. The FPA had the opportunity to work with the FSC and AFA yet elected not to be involved. If I was an FPA member I would be asking questions.
Melissa, thank you for providing the link to the article regarding the life insurance industry in the Netherlands. Very interesting reading indeed! I do think however the article should be taken in context
A couple of points to consider:
Life insurance is mandatory when associated with a mortgage in the Netherlands, not so in Australia.
The market is driven by the mortgage market. (It would be interesting to determine how premiums are paid i.e are they paid via the mortgage account? If so, then a longer term claw-back period would be understandable as this would have a significant impact on lapse rates)
Mortgage protection sales account for 90% of the market, Would it be reasonable to assume mortgage life insurance cover relates specific to the mortgage taken out and may not incorporate strategic (comprehensive) life insurance advice?
The balance of the market (I assume this means the advice space) experienced a 30% decline in insurance protection sales.
In short, I agree with John’s comments, we need to compare apples with apples!
One final point, I would encourage Advisers to consider making a submission in response to the Trowbridge report. Whilst the closing date for submissions is 30th Jan, you may be able to get an extension (I have!). Contact the FSC and speak to their Policy Manager.
I don’t know which organisation does more damage to financial planning (yes Risk insurance is part of financial planning) the FPA or ASIC ?
If they were race horses you would not feed them !
Bottom line is that we all need to treat all customers of different demographics with respect if we want help fix the under insurance problem, no customers no business.
With the greatest respect M. Alleycat, you sir are an exemption. You had a grounding in risk before you went off to obtain qualifications and joined the dark side. There are not many advisers like you
Those joining advising now with a DFP or a useless degree in something or other are completely ignorant of risk. I am sure if I asked them to explain how the existence of a Capabilty clause could impact on a Partial Disability claim all I would get is a blank look. For Gods sake, a BDM from an insurer with a Capabilty Clause tried to tell me this week that ALL companies had such a clause, so I had to tell him only 5 retail insurers have such clauses – FOR NOW
There is NO specific RISK TRAINING available as we speak. The AFA, once the bastion of valuable courses, abandoned education a decade ago. Dealers avoid it. The FPAs risk DFP unit is laughable. Kaplan do not see risk training as their role . Insurers do not see a need, as long as BDMs hit targets, and we all know what that means. ASIC are not interested in proper risk training
Newbies to risk are as dangerous as a shark at Newcastle beach. Only they do not know enough to realize how bloody dangerous they are to their clients
Commissions aren’t the problem – appropriate industry education should be the priority
@BillB
You and I know that all “capability clause” are the same anyway.
Most require you either under a “Duties based” or an “Hours worked” definition that you have to lose 80.0% of your income (total disability) for that to take place.
Only one company (xyZ) has an income based definition where a loss of income of 20.0% enacts the “capability clause” which means that you don’t have to be totally disabled before a partial claim.
If you are on a “partial benefit” where you may be capable of working 4 days a WEEK but your illness/injury is unpredictable and unreliable and all of a sudden you can only work 2 days a week, it’s most likely that you will lose your job.
The xyZ company will pay you your full benefit (100.0%) even though you are capable of working 2 days a week, even if there is no work.
Most other “capability clause’s” will only pay you 60.0% of your benefit, and rely on the 80.0% income loss definition.
My understanding is some time ago this was always the case, then they modified it to reflect the same as the rest of the industry, but the old terms have been reinstated.
@ BillB
To the best of my knowledge there are two Companies who will pay under a partial claim fully even under a capability clause.
In other words, if you are on a partial IP claim and capable of working 4 days a week but you suffer from an unreliable and unpredictable illness and all of a sudden you can only work 2 days per week, the odds are, your employer would unfortunately say to you Bill we need you here at least 4 days a week and would probably terminate your employment.
Most life companies under a partial claim will only pay you 60.0% of your monthly benefit because you are capable of working 2 days a week.
To the best of my knowledge xyZ company will pay 100.0% of your monthly benefit even if there is no work.
As an income based product even under a partial claim, a claimant only has to lose 20.0% of their income to satisfy a partial claim. Compare that with most other products that require you to lose 80.0% of income to get a partial.
Unfortunately you need to contend with a user unfriendly admin with the xyZ company.
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