The full costs of the Life Insurance Framework (LIF) may be a hundred times higher than estimated by Treasury according to two advice groups which claim the Government’s Regulatory Impact Statement (RIS) has overlooked a number of significant and relevant issues.
In submissions made to Treasury in response to the release of the draft LIF legislation, the Life Insurance Customer Group (LICG) and Lifespan Financial Planning have estimated the total cost impact to be from $1.86 billion to $2.5 billion per annum, well above Treasury’s predicted average annual regulatory cost of $18.2 million.
RIS ‘not required’
The broad disparity between Treasury and the advice groups stems from the fact that the former has only considered the compliance costs to financial services businesses.
The advice groups state that Treasury has made no consideration of the ongoing reduction in business incomes, reduced insurance sector revenue and reduced Government tax revenue.
They also state Treasury has not considered the potential higher premiums due to lack of competition in the insurance sector and the potential higher social costs as consumers may not be able to afford insurance, find the correct cover or struggle to successfully make claims through the direct insurance market.
The Explanatory Memorandum for the draft LIF legislation stated a full Regulatory Impact Statement was not undertaken by Treasury…
The Explanatory Memorandum (EM) for the draft LIF legislation stated a full RIS was not undertaken by Treasury with the Federal Government instead relying on three independent reviews and stakeholder consultations to make decisions about initiating LIF, the details of the framework and the estimated costs of its implementation.
According to the EM these reviews were the Australian Securities and Investments Commission Report 413 – Review of retail life insurance advice (October 2014), The Trowbridge Review of Retail Life Insurance Advice Final Report (March 2015) and the Financial System Inquiry Final Report (November 2014), with the EM noting the FSI report relied on the ASIC report for its consideration of the problem of poor quality life insurance advice.
The EM also stated that “Treasury will certify that the independent reviews and consultations is a process and analysis equivalent to a Regulation Impact Statement (RIS).”
Costs to balloon
In its submission the LICG claimed the reduction in income to small and independent life insurance advisers would be around $225 million a year alone, a figure which was similar to that submitted by Lifespan executive chair John Ardino.
At the same time the LICG stated costs to government, social services and community organisations were likely to reach $500 million as consumers fell back on to the public purse as a result of being unable to afford more expensive direct insurance or were unable to claim due to exclusions and underwriting conditions present in those policies.
…costs to government, social services and community organisations were likely to reach $500 million as consumers fell back on to the public purse…
The group also pointed to increased Financial Ombudsman Service (FOS) complaints related to direct insurers denying claims and the reduction in small business income tax and PAYG tax that would result from job losses. These would be offset by only a $100 million revenue increase driven by higher premiums on direct insurance sales.
However, the LICG stated the largest cost – of $1.23 billion per annum – would be borne by consumers paying high direct insurance costs, not having claims met under those polices or alternately paying higher retail insurance premiums ($287 million). These pressures would exacerbate the current under insurance problem within Australia ($100 million), while the potential 17,000 job losses would affect the livelihood of staff working in the insurance advice sector ($850 million).
While the figures compiled by Lifespan estimate job losses closer to 5,000, at an annual cost of $325 million, the group also estimated that social welfare costs related to a growing lack of insurance, underinsurance, job losses and a 40% claim rejection rate in direct insurance compared to advised insurance would cost more than a $1 billion alone.
According to Ardino, even a 5% increase in premiums for consumers due to a lack of competition would equal $800 million based on current annual premium figures of $16 billion.
Estimates point to more work needed
He stated while Lifespan did not have the resources to confirm its total estimated cost of $2.5 billion, the figures were compiled as “an illustrative suggestion to Treasury of what the various impact areas might be, and their potential extent based on very broad assumptions”.
“These figures are not meant to be part of a meaningful RIS but rather are about asking Treasury to look at this in a fairer way. They were drawn together from public figures and estimates and Treasury could do a better job of drawing this type of information together,” Ardino said.
“Instead, they have overlooked a number of factors and just looked at compliance and we have looked at just eight factors and shown there is substantive content that are all discrete factors and are inter-related but have not been examined at all.
“Is Treasury saying some or none of these issues will occur and if not will the costs be greater than $18 million,” Ardino said.
Campaign to continue
The LICG stated it would continue to oppose the proposed LIF legislation believing the changes do not benefit consumers and pointing to its figures as evidence, and has gathered nearly 2,000 signatures on a petition calling for a Senate Review of the LIF.
“The proposals clearly benefit the vertically integrated models at the expense of the IFA market…”
“The proposals clearly benefit the vertically integrated models at the expense of the IFA market. It must be remembered that one of the main objectives of FOFA was to reduce the grip & influence that these models had on consumers.”
“The proposals will also increase Life Insurance Companies’ & Banks’ profits, through cost reductions, once again at the expense of the IFA market and to the detriment the consumers they serve.”
“We are of the understanding that the Government, has not considered the full impact of this legislation to consumers or Government. This is why we are calling for a full independent financial impact study to be completed, as our estimates on the effects to consumers, small business and the Government of the proposed legislation is in the order of $1,862 million per year.”
This is yet another matter to deal with resulting from the government’s incursion into our industry. Without any realistic measurable expectations, the heavyweight financial services companies with their own agendas have been driving this from Day 1. They’ve pressured the government to make changes which haven’t been necessary and what a monumental cock-up it’s all turned out to be! It won’t affect the companies – indeed they’ll be where they want to be – in control and their profits will soar. But it isn’t a win-win. For advisers and the insuring public it will be a lose-lose. Truly dreadful.
Ok, so Treasury’s estimate of costs may seem a little low, but if you’re going to refute their claims you (and we collectively) best have a reasonable foundation from which to cast stones. The LIF presents a challenge and major inconvenience to our businesses, but if we want to be treated with the respect we (claim to) deserve, then let’s start acting like it. Throwing around ridiculous numbers predicated on assumption that insurance advisers are so specialised that they will be out of work on on the dole is ridiculous and, for those of us that aren’t completely incompetent, it should be a little offensive (I know that’s not the intention, but it is a dumb claim by Lifespan). Likewise you can scratch that $225m cost due to reduction in income for businesses like mine; that’s just tough luck, and crying poor is pathetic. As for reduction in competition driving up prices, well that very well could happen, but so long as there are adequate distribution networks and volumes for insurers I’m not sure we’ll see much change in rates (talking about underwritten stuff, not the auto-acceptance garbage).
If I, as a Risk only adviser, find myself as a FEE ONLY adviser, then I WILL NOT be doing all the admin work I currently do now for the insurers for a miserable 10% renewal. I will charge separate fees for advice and implementation, and once the policies are on the books, GOOD BYE. And clients under premium stress WILL NOT pay me a fee for review.
As I speak, I am currently working, free of charge and with the certainty of DECREASED renewals, on two clients programs where their situation of affordability has changed, and/or premium increases are killing them. But I keep some skin in the game from renewals, albeit decreased.
Insurers will have to carry the admin can I carry now as a Risk Only adviser – reducing covers to keep some cover on the books; chasing new credit card authorities or convincing a client to make up two months of premium when a PDC bounces
Any adviser/politician/Treasury officer or overpaid industry association executive who thinks admin costs for insurers will not increase under a NO COMMISSION regime is dreaming !!! And the new-breed younger fee-based RISK ONLY advisers, with freshly polished but useless degrees, will not have the same caring client focus as experienced risk advisers leaving the business. Why should they – no skin in the game, no lapse penalties, no loss of renewal, and no desire to form long-term client relationships that pay no revenue
There is a brave new world coming round the bend- and insurers owned by banks just do not want to know ! And ASIC and their consumer cronies should be careful what they ask for !
Read my lips – premiums will be going up, not down, when insurers find admin costs increasing in a NO COMMISSION environment.
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