October 9, 2014
Australia’s life insurance advice sector has been placed on notice by ASIC following the release of a report that identifies ‘… an unacceptable level of failure’ by advisers to comply with the laws relating to appropriate advice and prioritising the needs of the client.
In a damning assessment, ASIC’s Review of Retail Life Insurance Advice found that more than one third (37%) of its sample of 200 advice files were considered to have failed to comply with delivering appropriate and compliant client advice.
… the life insurance advice sector needs to improve the quality of advice
The regulator says the life insurance advice sector needs to improve the quality of advice and ensure that the interests of consumers are given priority.
Part of ASIC’s review included an investigation to the reasons for the current high level of lapse rates in Australia, which are impacting the industry’s sustainability. It identified three main causes:
- Product innovation by insurers, such as changing actuarial assumptions at underwriting or the redesign of key policy features such as definitions and exclusions, which leads to the repricing of policies
- Age-based premium increases affecting affordability
- Incentives for advisers to write new business or rewrite existing business to increase commission income
The report also identifies a correlation between high up-front commissions and the degree of non-compliant advice being delivered. It says this includes’… situations where the recommendation is to switch products.’
ASIC Deputy Commissioner, Peter Kell, has urged the life insurance industry to “… consider how remuneration and compliance practices can better support good quality outcomes for consumers.” In doing so, the report makes a number of specific recommendations for both insurers and licensees:
Recommendations for insurers
- Address misaligned incentives in their distribution channels
- Address lapse rates on an industry-wide and insurer-by-insurer basis (e.g. by considering measures to encourage product retention)
- Review their remuneration arrangements to ensure that they support good-quality outcomes for consumers and better manage the conflicts of interest within those arrangements
Recommendations for licensees
- Prioritises the needs of the client
- Review their business models to provide incentives for strategic life insurance advice
- Review the training and competency of advisers giving life insurance advice
- Increase their monitoring and supervision of advisers with a view to building ‘warning signs’ into file reviews and create incentives to reward quality, compliant advice
The report was based on a review conducted between September 2013 and July 2014,which considered:
- How life insurance is sold by advisers
- How advisers are remunerated for that advice
- The drivers behind product replacement advice to consumers
- The quality of the personal advice consumers receive
Mr Kell noted that the regulator is committed to working with the industry to address the problems it has identified and to improve outcomes for consumers.
Following the surveillance work and the conduct that has been uncovered ASIC says it has commenced follow-up investigations in certain cases which are ongoing.
‘Where inappropriate advice was provided we are considering enforcement action or other regulatory action’, said Mr Kell.
Click here to access ASIC’s Retail Life Insurance Advice Review.