- Yes - they will pay more (77%)
- No - they will pay about the same (13%)
- No - they will pay less (6%)
- Not sure (5%)
Our latest poll asks whether you believe your clients will pay more for life insurance advice under the LIF reforms.
The context for this question stems from the early findings generated by the 2017 Investment Trends Planner Risk Survey, which we reported last week (see: Advisers Set to Charge More…).
These initial findings indicate around half of the advisers taking part in that survey agree that they will charge more for the advice they provide post the implementation of the LIF reforms.
That these advisers say they will charge more probably means they think their clients will also pay more, overall, for the same services. But this doesn’t necessarily automatically follow, especially if advisers believe that life insurance premiums may reduce (on average) in a Life Insurance Framework world.
Whether the client will finish up paying more for risk advice in future may depend on the adviser’s business model and the proportion of business revenue generated by risk advice:
- The ‘holistic’ advice business which may absorb lower upfront commissions by way of the fees they obtain from non-risk advice services.
- The risk-only/risk-focused advice business which can and will accommodate lower upfront commissions until the doubled renewal commission levels (from 10% – 20%) ‘kick-in’.
- The risk-only/risk-focused advice business which will not introduce additional value-added or complementary advice services, and which must consequently charge a fee to compensate for reduced upfront commissions in order to meet upfront costs.
- The risk-only/risk-focused advice business which will introduce additional value-added or complementary services post LIF to compensate for reduced upfront commissions.
Rarely do we pre-empt our poll results, but we think it unlikely that many advisers believe overall client costs will come down as a result of the LIF reforms. Present anecdotal thinking suggests that in terms of ‘cost to life company’, lower upfront commissions will be balanced over time by the doubling of renewal commissions, leaving premiums around the same level as they are today.
The costs associated with delivering life insurance solutions may eventually reduce, which would place downward pressure on premiums – but this will probably be due to increased efficiencies within life companies and advice businesses that would happen independently of the LIF remuneration reforms.
As usual, we could go on! But we think you’ve got the picture by now. What kind of advice practice do you operate? Do you think your clients will eventually be better off from a cost perspective under the LIF reforms? Or do you think your clients (for the purpose of this poll – your new clients) will pay more in future for life insurance advice solutions?
As always we welcome your measured comments and will report back to you next week…
Dear Risk Info,
There is no conceivable way the Life companies will reduce their premiums.
It’s all about profitability for shareholders, and bonuses to the company executives. The lack of competition within the industry due to fewer operators allows them to get away with it.
Premiums will not reduce because of the way they are applied today.
The life industry used to base their life/TPD premiums with the actuarial probability equation, that between the ages 16-25 the potential for a claim increased and accordingly so did the premiums from one year to the next.
Being cynical, if you survived and were between the ages of 25- 35 the actuarial statistics showed the potential for a claim was lower, and year on year the premiums reduced to the age of 35. They then started to increase again after age 35 by around 10.0% based on the probability for a claim going forward.
You will not see that kind of pricing structure on any computer projection today !
What you should have done is, attach two additional question to your survey !
Q If you are a Risk only adviser or a holistic adviser (viz Financial Planner) that is only giving advice on Risk only, if you charge a fee and receive lower commission as a result of the LIF legislation, do you think your potential client will pay a fee for risk only advice ?
A
Yes
No
Next question, since you can only reduce current premiums by 30.0% on a Nil commission basis, thereby reducing the initial premium on say $3000 p.a.
How much do you think you can charge above that 30.0% discount for your advice
A
$1000
$2000
$3000
They already are, the insurance companies have already taken advantage of the coming implementation. Then they will use it as an excuse to increase their prices once more.
The biggest cost to clients and Life Companies and the number one cause of lapses,
is the practice of increasing premiums by more than 5% p.a. and when the premium increases are 10% or more, this creates all the grief, as clients simply will not accept these increases, especially when they know their incomes are rising at less than 4%.
A 5% p.a. premium increase still gives the insurer a massive return over 10 years,
as a $3,000 initial premium will give a return of $37,732.
Upfront and servicing commission of $9,346 to the adviser practice over the 10 years to look after the client is profitable to the practice if the policies are maintained with the Life Company and clients will keep their policies, as 5% p.a. premium increases are acceptable to them.
The cost to administer renewals should be low to the Life Company as that is an
automated process, though one which is a constant headache to advisers, with terrible wording and legalistic mumbo jumbo and as stated before, is the main reason for clients cancelling their policies, which reduces all advisers and the Life Companies capacity to efficiently attain NEW clients, due to continually being dragged back to sort out the problems associated with the Life Companies own inefficient and badly worded processes and protocols, that leads to higher premiums and the same cycle starting again.
So the obvious question, is that knowing most of the costs to the Life Company and
advisers are in the first year and that claims are around 16% of premiums, this begs the question of, where have all the rest of the premiums gone?
With my fantasy 5% increase model, over 10 years the Life Company receives $37,732
minus $9,346 to the adviser practice, minus $6,037 average claims paid = $22,349 return for a product that either sits in the cloud, or costs 1 cent per sheet of paper, as that is all clients get, bits of paper which is nothing tangible like a car, it is quite simply, a promissory note.
So based on the Life Insurance Industry continuing to generate 44 Billion Dollars a year and around 26.4 Billion left after paying claims and adviser practices, it makes me wonder again, why has the conversation been on adviser remuneration and false claims of churn, when the obvious question should be, where will the 26 Billion dollars balance go every year?
LIF has forced revenues down and placed unfair write back provisions against advisers, yet has failed to ask what improvements in efficiency and productivity will the
Life Companies bring into play with their 26 Billion dollar per year cash cow and with no regulation to make Life Companies more efficient and pass back savings to consumers, what does the Government think will happen?
There are many Robo Companies overseas who are circling the current Life Company
model and developing new Business models that will decimate the Life Companies
within a few years if they do not get their act together, as unlike the current bloated, bureaucratic system, where excuses and re-active Business planning seems the norm, the next generation do not care for that, they want speed and efficiency and are developing systems that will deliver efficiency gains that will send the Life Insurance Dinosaurs to extinction.
Claims are around 16% of premiums? Where did you get that figure from? Around 50% of premiums paid are returned to clients in the form of claim payments.
Jeremy you are MORE than spot on with everything you have stated above…..anon, where did you get your figure of 50% from? I would love to know the claim payment facts with every insurer.
Comments are closed.