The Future of Financial Advice (FoFA) reforms could lead to an increase in insurance switching, potentially impacting on the long-term sustainability of the industry, predicts one stakeholder.
CommInsure Managing Director, Paul Rayson, said while he strongly believed in the principles behind the FoFA reforms, and that they would improve trust and transparency in the advice industry, he cautioned that they may also have unintended consequences for the life insurance market, driving up insurance switching and applying pressure on profitability.
… increasingly we’ll see insurance commissions subsidising investment advice
According to Mr Rayson, new conflicted remuneration rules, which prevent commissions being paid on new investment and superannuation product advice, may lead some advisers to balance this loss of revenue with increased insurance product advice.
“FoFA may have a couple of adverse effects for insurance, in that increasingly we’ll see insurance commissions subsidising investment advice, and that may lead to more insurance switching,” Mr Rayson said.
He added that the opt-in provisions, which require an adviser to recontract with a client every two years, may also increase the volume of insurance switches, as advisers seek to demonstrate ongoing value.
“The average duration of insurance policies is shortening, and the current pricing does not reflect this. Increased lapse rates will place upward pressure on the cost of insurance just at the time when we need to make insurance more affordable for Australians,” he said.
Increased lapse rates will place upward pressure on the cost of insurance
Mr Rayson raised the issue during a panel session at last month’s Financial Services Council’s (FSC) annual Life Insurance Conference. Also on the panel was the Australian Prudential Regulatory Authority’s Ian Laughlin, who said the regulator had already observed trends in the industry which may point to future sustainability issues.
“Recent lapse experience has been poor for a number of companies,” Mr Laughlin said.
“No doubt, there are various forces at work here, driving this worsening lapse experience. And that might include the economy, and maybe the activities of advisers. The question is whether this experience is a short-term blip, or a more fundamental change.
“We urge all companies to monitor this issue closely, and seek to understand the reasons for their experience and from this form a robust view on their likely long-term experience,” he added.
As I have always stated, year after year, in these replies to so called churning. My priority is to the client. If an insurer keeps fine tuning & making their premiums more competitive and offering better defined benefits & terms, if I DO NOT review annually my client’s policy(s) & needs I am classified as being negligent & offering a disservice to this client. If I can offer a better product to my client, as long as it benefits his/her needs. I have no qualms in recommending they consider this change, whether it be annually, biannually etc. The commission is a bonus to me for looking after the clients needs correctly.
Bottom line, if I DO NOT do this, then I expose myself to risk of another Adviser doing this on my behalf. If I am a churner for doing this, I will wear the label.
Example: A high net worth client spending $15k a year on protective cover for his family & himself-or business. I can offer him this package with another insurer for 10% less, client choice, comparing apples for apples, what do you think that client will do.
If trauma cover involved, same level of cover, new insurer waivers 3 month waiting period on certain trauma events, plus if the client is correctly advised of the suicide clause waiting period again, that person is than going forward fully aware of what is transpiring.
If any change in health or circumstances that would penalise or restrict terms offered, than it would be advisable to be prudent & advise the client, although their are better contracts, terms, and pricing available, it would be best to retain current cover held.
Please someone tell me what I am doing wrong.
RC, three questions relating to regular changes of policies:
(1) what is your client’s protection timeframe? If it is 15-20 yrs (e.g. income protection), does a level premium suit them better? If you can source a reliable level premium, a guarantee of upgrade, and a product that doesn’t get closed down every 4-5 years surely that counts for something…
(2) where does it leave your client in the event of a claim and the 3-year window relating to non-fraudulent non-disclosure?
(3) does the selection of a new insurer take into account any independent ratings on their claims service?
I’m mindful that much of this switching has been driven by research software, which while helpful, has it’s limits.
Hi John
Here where you are coming from & I had that attitude many years ago, but Level Premium policy’s other than for Life Cover ONLY, can be a disadvantage to a client, long term.
Level premiums were designed for an insurance companies benefit long term, not the client’s. rates are still not guaranteed & can be changed, no guarantee that older style contracts from a defunct insurer or merged or taken over insurers product will be updated inline with new contracts & benefits introduced, which can disadvantage a client.
It he three year non-disclosure should not be an issue to a client or adviser based on their fact finding and data collected & applied to the application.
Independent Ratings are like a commercial, glossed up to entice the consumer. Do your own research. Know the policy & the benefits yourself that you are offering to your client. You are a better selling tool knowing your product inside out than any core score rankings.
As stated, my interest is the client’s first & foremost.
A classic example of the disadvantage of a Level premium policy is my own Wife’s Life, Trauma & TPD taken out with Tyndall Life. Most advisers would not even know who they were. Had a great innovative policy with great benefits. Tyndall were taken over by Royal & SunAlliance, then Asteron, who are know a part of Suncorp.
My wife’s Trauma cover has NO buy-back, NO re-instatement. As this was an older policy no longer offered by the original insurer that was taken over, there was no incentive for the new company to offer updated terms & benefits. The only reason why the policy is still in force is because of the life cover being a reasonable cost to a stepped premium now.
If you really want this discuss the merit of a level premium policy than you should consider a Whole of Life contract, that provides true level premium cover for the entirety of a clients life. Not just to 65 or 70 than it becomes to expensive to maintain.
Sadly no life company in Australia offers this product anymore. A
This industry has taken many years to evolve to where it is (was), with natural market forces, common sense, client expectations and “what works” as the driving force.
When committees and pencil neck bureaucrats come along with “better ideas”, “protectionism” and wreak havoc then clearly there is going to be a disaster and un-natural consequences.
I’m seeing a future where a client with less than $100K cannot afford advice. Banks and industry funds will have total domination. Good conscientious advisers will go and find something else to do- minus the red tape.
Evolution will be undone and the real victim- our clients.
Ian Laughlin expressed it perfectly where he asked all Insurance Companies to monitor and “SEEK TO UNDERSTAND THE REASONS”
This is the fundamental basis for all Business and something the retail Life Industry needs to do now or they face a downward profit spiral.
I have advocated for years that the best way to solve a problem, is to ask the right questions and get advise from experts with practical experience.
The world is full of theoretical experts, though without coal face experience, these theorists can only tinker around the edges and attempt to justify their fee’s and salaries, yet not actually fix the problem.
After 26 years specialising in this business dealing with Insurance Companies and clients, I would be amazed if the Companies actually agreed to consult with and implement strategies from REAL, not perceived experts, to improve the long term sustainability of the retail Life Insurance Industry.
The answers are staring the life Companies in the face. Who will be the first to ask?
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