Trowbridge Report – In Detail

Released with the aim of aligning the interests of insurers, advisers and licensees with the end-customer, the Trowbridge Report recommends extensive reform to the life insurance industry.

In this article, we have summarised the key recommendations, and included further detail as provided by Mr Trowbridge at the launch of the Report last week…

Background

In the introduction to his Report, Mr Trowbridge said his review had followed five years of discussions on life insurance advice practice and regulation, saying the time had come to act.

‘The industry needs some transformational change and the recommendations in this report will deliver such change,’ the Report said.

Launching the Report at the Financial Services Council’s Life Insurance Conference, Mr Trowbridge pointed out that the recommendations were to be viewed as a package, rather than standalone reforms.

With this in mind, the changes to adviser remuneration should be considered alongside the requirement for insurers to reduce the cost to implement insurance advice.

Adviser measures

Policy Recommendation 1: That the Reform Model for adviser remuneration, being a system of level commissions supplemented by a client-based Initial Advice Payment available at a client’s first policy inception and then no more often than once every five years, be adopted by the life insurance industry with progressive application through a transition period.

The Reform Model proposed is:

• Commissions payable on risk advice be limited to a maximum of 20% of premiums, for both upfront and trail payments (ie: a level commission model)
• An Initial Advice Payment (IAP) to supplement the commission, paid by the insurer to the adviser on a per client basis

In relation to the IAP, Mr Trowbridge has recommended that:

• The IAP is only available to the adviser when a client first takes out a life insurance policy, and then no more often than every five years (this is known as ‘the five year rule’)
• The IAP be capped at $1,200 per client, or for those customers with an annual premium that is less than $2,000, the IAP be restricted to no more than 60% of the first year’s premiums
• The IAP is only available on advised business, and will not be payable for direct insurance sales or on group life policies inside superannuation
• Any existing clawback arrangements put in place by the insurer will apply to both the first year’s commission and the IAP

In addition, Mr Trowbridge has called for all payments (commissions, IAP, etc) made from the insurer to the adviser to be fully transparent to the client. The adviser will be required to disclose clearly whether any insurer payments represent full, partial or nil commissions.

Policy Recommendation 2: That there be a three year transition period where the five year rule is applied on a best endeavours basis immediately and, from a suitable date in 2016 for a period of 2 years, the industry operate according to the current hybrid commission arrangements with a cap on initial commissions.

Phase one of the transition to the new Reform Model, as recommended by Mr Trowbridge, is for insurers to apply the ‘five year rule’ on a best endeavours basis as soon as possible, preferably by 20 June 2015.

Phase two, which will require some form of regulation, should begin from a suitable date in 2016, and will see:

• The maximum commission payable to be reduced to current hybrid commission levels (usually 80%), with a cap of $8,000 initial commission and maximum renewal commission of 20%

In order to apply the five year rule to phase two, initial commission is to be treated as a recurring component of 20% and an IAP of 60% of premiums.

Phase three, being the full implementation of the Reform Model, should commence two years later. At the end of the transition period, all business written in the preceding two years will have a 20% renewal commission and will, said Mr Trowbridge, already be well adapted for the Reform Model.

Why $1,200?

Mr Trowbridge explained that the IAP will be capped at $1,200 because it is intended to provide advisers with a contribution towards the implementation costs associated with risk advice. When combined with a 20% commission, the figure deliberately falls short of the estimated cost to implement, between $1,500 and $3,000, because it is aimed at ‘…delivering a balance between acknowledging the initial costs of advisers and eliminating any behavioural doubt as to whether the client’s interests are being placed ahead of the adviser’s own interests’.

Mr Trowbridge explained that if there were no initial payment to advisers beyond renewal commission there would be a substantial mismatch between initial advice costs and initial adviser revenue.

Move to Fee for Service

Mr Trowbridge acknowledged that it was not currently feasible to operate a life insurance advice business exclusively on a fee for service basis. But he said he believed the Reform Model ‘…should give ample encouragement for more advisers to introduce fees for service for their clients, especially those with larger policies’.

Licensee measures

Policy Recommendation 3: That licensees be prohibited from receiving benefits from insurers that might influence recommended product choices or the advice given by the licensees’ advisers.

In his report, Mr Trowbridge lists the following examples of non-commission benefits commonly available to licensees:

• Volume-based payments
• Free or subsidised business equipment and services
• Hospitality-related benefits
• Shares or other interests in a product issuer or dealer group
• Marketing assistance
• Some ‘buyer of last resort’ arrangements

Benefits which create a conflict of interest for licensees are banned under FoFA for investment products, but life insurance was exempt. Mr Trowbridge has recommended the element of the FoFA legislation that deals with these same licensee conflicts for investment products to be applied also to insurance products.

However, to contribute to the viability of independent licensees, a Licensee Support Payment (LSP) of a maximum of 2% of inforce premiums can be paid by the insurer to the licensee. Mr Trowbridge said the purpose of this payment would be to provide services to advisers, and that it could not be passed on to advisers in the form of extra commissions.

Policy Recommendation 4: Ensure competitive access and choice for all advisers and their clients to available life insurance products by means of every licensee including on its Approved Product List (APL) at least half of the authorised retail life insurance providers.

There are currently 13 providers that service the retail life insurance market, so it is likely that licensees will be required to have a minimum of 6 providers on their APL. Mr Trowbridge said this recommendation was aimed at improving access to life insurance products for all advisers whose licensees currently have a narrow APL and encouraging all licensees to review their insurance APLs regularly.

Policy Recommendation 5: That all licensees, in conjunction with their advisers, re-examine their culture, behaviours and practices regarding the advice process with the aim of raising consumer understanding of life insurance, ensuring informed consent from clients and reducing the administrative burden on advisers.

Developed in response to ASIC’s concerns that consumers are not receiving appropriate levels of strategic advice, this recommendation is to be carried out by licensees and their advisers, in consultation with the regulator and other relevant stakeholders.

Mr Trowbridge said he expected the outcome would be a best practice advice process, supported by proven or well-researched approaches to client engagement, education and advice delivery. This may include enhanced adviser training, high standards of client engagement and education, shorter Statements of Advice (SoAs) and clearer regulatory guidance from ASIC.

Insurer measures

Policy Recommendation 6: That a Life Insurance Code of Practice be developed that is modelled on the General Insurance Code of Practice and aimed at setting standards of best practice for life insurers, licensees and advisers for the delivery of effective life insurance outcomes for consumers.

In his report, Mr Trowbridge observed that both the general insurance and banking industries have had codes of practice in force for some years. He said that these codes have ‘…added discipline and fairness to the product providers and have been favourable for consumers’.

According to Mr Trowbridge, the Life Insurance Code of Practice should be a customer focused document, which promotes adequate life insurance coverage for all Australians. The code would be self-regulatory, industry funded and cover direct, retail and group life insurance products.

The suggested contents of the Code of Conduct include:

• Standards of practice during the life cycle of the life insurance process, including standards of behaviours for insurer employees such as Business Development Managers
• Product disclosure to be succinct, transparent and in plain English
• Suggested standardised practices for insurers and advisers dealing with nondisclosure, pre-existing conditions and other matters
• A commitment to consumer education especially in relation to life insurance concepts
• Improved consumer access to information
• Standards for underwriting practice, for example clearly communicating why insurance coverage is not provided in certain circumstances
• Standards of practice for policy increases, such as a fair and reasonable, and efficient approach to handling requests to “increase” or “alter” an existing insurance policy online, including ensure an efficient underwriting process on par with new business
• Standards for claims handling, such as: (i) fast tracking assessment and decision process when an urgent financial need of benefit is necessary; (ii) best practice timeframes for claims assessment; (iii) best practice communication requirements during the claims process
• Standards for handling financial hardship
• Complaint and dispute processes, including internal and external processes
• Principles around providing a legitimate upgrade path for clients to current policy series or backdating of definitions for conditions a client is already covered for.

The Report recommends that the Code of Practice be developed by life insurance providers in consultation with licensees, advisers and consumers.

Implementation and review recommendations

The remaining recommendations detail the steps that need to be taken to implement the policy recommendations, and a final recommendation that the changes are to be reviewed in 2020.

Mr Trowbridge has proposed that ASIC be asked to endorse and review the remuneration recommendations, as well as the AFSL mandate.

Next steps

According to Mr Trowbridge, it will be a matter for the AFA and the FSC and their respective members to decide how they wish to respond to the recommendations. The issuing of this report does not imply its endorsement, in whole or in part, by the AFA or the FSC or anyone else associated with the project.