Removal of Commissions Would Damage Insurance System

The complete removal of life insurance commissions in Australia would inflict significant damage on the life insurance system that would be difficult to reverse, the AFA has claimed.

The Association made the statement as part of its response to the Insurance Round of the Financial Services Royal Commission in which it also stated such a move would be unprecedented and counter to the reforms already taking place under the Life Insurance Framework.

“The banning of commissions on life insurance in Australia would be a global experiment, the likes of which have never been seen previously…”

“The banning of commissions on life insurance in Australia would be a global experiment, the likes of which have never been seen previously,” the AFA stated, adding, “Whilst different models apply around the world…in terms of countries that have a vibrant voluntary stand-alone protection system, this would be a first”.

The submission added that there was no example of a successful no commissions stand-alone protection model anywhere in the world, and international experience did not suggest that banning commissions on life insurance was a viable model.

“A very limited number of countries have introduced caps, however notable leading economies such as the USA, New Zealand and the UK have no limitations on stand-alone protection business,” the AFA noted.

The Association also highlighted the impact on the wider insurance sector claiming the banning of commissions would lead to a ‘substantial decline’ in the volume of new business that would in turn place significant pressure on the operations of life insurers.

“Equally importantly, it would lead to the healthy lives leaving the regime and pushing prices up as a result of anti-selection. It would be the less healthy lives that would dominate the risk pool. This would generate an irreversible downward spiral,” the AFA stated.

The submission also questioned why the issue of life insurance commissions was raised by the Royal Commission while the Life Insurance Framework was only part way through its full implementation process.

“We are perplexed as to why this would be a focus when the life insurance industry is in the middle of a major reform program where caps have been placed on the level of upfront commissions and a standardized two-year clawback has been put in place,” the AFA remarked.

“We are perplexed as to why this would be a focus when the life insurance industry is in the middle of a major reform program…”

“These reforms are less than a third of the way through and there is only limited data available to demonstrate the impact. In our view it is totally unreasonable to be talking about further reform to life insurance commissions when the current reforms are only in the early stages of implementation,” the Association added.

The submission highlighted that under the LIF regime, commission rates had been capped and standardised removing any incentive for advisers to choose one product over another and those reforms “…flowed from a long period of consideration and consultation and are what could only be described as world leading in terms of the extent of restrictions being enforced”.

“The LIF caps are the lowest caps for any country that has a cap, right across the world. Whilst it is very early days with these reforms, the life insurers are already reporting that there has been a reduction in the level of policy lapses, which is an important outcome,” the AFA stated.

“We have not seen any recent evidence that would support any need for further action and certainly not a ban of commissions on insurance. In the absence of this evidence and without the opportunity to see the full impact of the LIF reforms…there is absolutely no basis for further change.”

  • I have been told that, some time ago, the UK did in fact ban commissions on life ins, with disastrous results. So disastrous that apparently the UK has now implemented commissions up to 240% in order to try to salvage what was left of their industry.

    • Mike Page

      That is correct, Peter. It was about 20 years ago. The one thing that the human race (and I include politicians in that, just) learns from history is that the human race does NOT learn from history

      • Daryl La’ Brooy

        Especially the politicians which is why engaging with them is very important otherwise they just listen to one side of the argument such as what the media push.

    • GregF

      That is true, so I am not sure why this fact was not included in their submission? It would have added some reality to their argument, which the politician will argue is only speculation.

    • Daryl La’ Brooy

      Bit like the ban on negative gearing by the Hawke Labor government in the mid 1980s, this policy got reversed within about 18 months.

    • Phil

      In fact Peter, the directors of my Licensee went to the UK [definitely not a junket like our political ‘friends’] and conducted an exhaustive investigation and report that absolutely confirmed the previous banning of commissions in the UK was a massive mistake. Now the UK [and many other countries] don’t cap commissions, BUT, they are very different models to what we have here. Our love of ‘stepped rate’ premiums is the main issue. The causal event for [supposed] churning in our industry. Yet, if advisers are acting in the best interests of their clients, they have little choice but to recommend the replacing of stepped premium policies [once they become ‘legacy’ policies and too expensive compared to ‘current’ premium offerings]. Rest assured Daryl, the FSC will happily sit on the fence on this one. In their biased [short term thinking] minds they figure they will win either way. No advisers – no commissions and associated costs – plus inferior direct marketed products and Group covers – with many claim disputed until FoS needs to become the size of the ATO! Not to mention the relief of not having to sort out the legacy policy conundrum plaguing life offices at present. Exasperated even further with the likes of TAL, AIA and Zurich buying the businesses of OnePath, Suncorp [Asteron] and CommInsure.

  • Warren

    Good on the AFA for continuing to fight for advisers and exposing the truth. It’s a shame the FPA are not fighting alongside the AFA! Peter, the UK banned all commissions following the GFC, which was a kneejerk reaction – and a silly one. After recognising their mistake, commissions were re-introduced, but not after much damage had been done. Yet for some reason, that message is not getting through to government and other bodies here in Australia. In that regard, the FSC needs to be disbanded, ASIC needs to be held to account for a flawed audit 4 years ago which created this mess, and the FPA needs to get their act together, join the AFA and continue fighting. LIF is not set in concrete. A reversal of these ridiculous laws is essential – especially this evil 2 year clawback – if Australia is to have a viable retail life insurance industry.
    One last point – the one thing that amazes me is that up to 40% (so I have been told) of advisers have indicated they will leave the industry in the coming few years. Why is that not raising concerns with the government, ASIC and the FSC? Or don’t they care?

    • Daryl La’ Brooy

      By the way where are the Life insurance companies in this debate? They can see the damage being done and yet remain slient.

      • Warren

        Good question.

    • Ten Beers

      I feel they are underplaying it regarding advisers exiting. i find it compelling to retire if over 55 and having a large client base. Im reaching to turn the lights out this month. The bulb shone for over 30 years!

  • Guy Mankey

    Banning commissions would not damage the insurance system. It would destroy it.
    Long standing industry figures show that around 90% of people who attempt to make a living out of selling insurance fail. And those figures are based on upfronts of 100%+.
    By capping upfronts at 60% the government has effectively barred entry for new advisers into becoming an insurance specialist. Banning commissions would eliminate those who already have their foot in the door because (and we’ve heard it 100 times) people won’t pay the level of fees that would need to be charged to make the provision of insurance profitable.
    It currently costs me $200,000 plus a year to write new insurance business, and that’s before I get paid. I cannot see how I could cover that expense under a fee for service basis.
    If commissions are banned I stop writing new business and put 2 staff on the unemployment list.
    If renewals are banned I file for bankruptcy (as I couldn’t repay the debt I still carry after buying out my business partners).
    On top of this, I am being asked to devote enormous amounts of time and money over the next few years to study financial planning units that are not in any way relevant to my occupation.
    If I don’t do the exams and commissions aren’t banned, I’m deemed (after 42 years at that point) incompetent to talk to someone about whether they should have life insurance. If I do the exams and comms are banned, I’m allowed to have the discussion but can’t afford to.
    And through this we have Bernie Rippoll at my dealer’s conference a few weeks ago saying words to the effect of, ‘We don’t need to ban commissions. We’ll simply make the compliance around receiving the commissions so onerous you’ll be begging to have them turned off. And that will also eliminate the threat of class action’.
    The current insurance system actually works pretty well. Consumers have access to people who have a duty of care to look after them. And advisers can make a living and build a future, allowing them to be around to help at claim time.
    A final thought… Insurance is basically a legal ponzi scheme. If no money comes in at the bottom there is nothing with which to pay claims. If commission on insurance is banned and I and others simply stop writing new business (& chasing up overdue premiums for healthy clients who aren’t that fussed if their cover lapses), how long does it take before the system gets the wobbles? Does the government guarantee claims? Can it afford the additional burden on social security? Does it crack down on the bad behavior of super funds (whose members are excluded from the same level of protection as retail clients)?
    The question of banning insurance commission isn’t just about how an adviser gets paid or whether consumers should have a choice in how they wish to pay for something. There are much bigger issues at stake.
    I hope the people with the power to legislate the future have the wisdom to do so prudently.

    • Daryl La’ Brooy

      Well said Guy! May be you should make a submission to the Royal Commission and inject some sense into their deliberations.

  • Jeremy Wright

    There will be a basis for further change when the commission levels drop further and the 2 year, NIL RESPONSIBILITY period on Life Companies and 100% responsibility on adviser practices for events that have nothing to do with them, really starts to bite.

    Then on top, the ridiculous FASEA requirements that will drive most of the experienced Life advisers out of the Business.

    When the S–t hits the fan and all the “”EXPERT”” analysts and the regulators are called in and asked why the Retail Life Industry ended up like the Australian car manufacturing Industry, ( dead ) and the levels of Under-Insurance has sky rocketed, they will do what they always do, which is ask for more funding to pay their salaries and after extensive “research,” will come up with conclusions that will absolve them of any responsibility and then they will make further suggestions and recommendations that will try and revive a dying Industry that they caused it to be, due to their inept and illogical theories, based on Ivory tower greed and a total lack of understanding of what their jobs were..

    Look at where the Big Banks have taken us with their vision.

    We now have a fractured Life Insurance and Investment Industry, where many Billions of dollars has been spent on building sand castles at the low tide mark.

    Well, guess what? Actual experts told the leaders of these Empires years ago, that unless they built long term, viable foundations on high ground, the tide will turn.

    The tide has turned and what did they do?

    They once again ignored sage advice and instead asked the same people who caused the mess, for advice on how to fix it, AKA the FSC, being just one of a congo line of leeches that are still sucking the life blood out of a once great Industry.

    How can the oldest Life Insurance Company with Billions of dollars cash flow, all of a sudden, be sold for a fraction of it’s worth had it been run correctly.

    One reason, is the focus went away from what built the Company, to just one example of a world gone mad, where this Company decided to put substantial resources to Gender Fluidity, where all staff are to be trained on how to address people, so if they are confused about themselves, staff won’t say things that may cause more confusion.

    The end result is that this and the countless other “New Age” thinking, sucked resources away from important areas to the point that Gender Fluidity has become mute, because that Company will cease to exist.

    So let us see what the Guru’s come up with next.

    • Squeaky_1

      I’m out July – Dec 2020 Jeremy. Your words explain what accurately mate. Too sad for words what these idiots are doing to our once great industry. Saw a great idea floated in the comments of another article. Adviser ditched this industry, became unlicensed and supplies ‘Financial Life Coaching’ to his clients – they love it and fully appreciate no more 50 poage SOA’s. They love the verbal advice, trust him (as they have for 30 years of course!) and he enjoys it again now to. Not a shabby idea at all. He simply ‘enables’ them to act on their own and ‘manage’ their investments and insurances. Too simple. I think this will be me in 2 years (or less perhaps). It gives the proper finger to these idiots controlling our industry out of our hands. Think about it guys and gals. Seems to be no downside if you are smart about it!

      • Ten Beers

        I really cant see how you could work that way and not come to authorities for such influence. Ill be out and totally out soon.

        • Squeaky_1

          To paraphrase Barack Obama “YES! You can!” and “if you like your adviser you can keep your adviser” I wish I had copied and kept this other advisers’s comment in the other article as he went to some detail explaining how he does this and it was a work of art. All bases were covered and he and his clients were very happy. Can be done I believe. I will continue to search for his comments again as they are worth finding and contemplating. Most common sense I’ve read in this looney bin in ages.

          • Ten Beers

            i also recall the comment but didn’t see how it would pass the test and be acceptable. Financial coaching unlicensed would draw concern from regulators.

          • Squeaky_1

            You could be right Ten, I’m no expert in this regulatory madhouse. I’d like to believe the regulators wouldn’t even find out and even if they did it would be a private contract between two consenting adults, so to speak and the regulators would simply be kept out of it. It certainly wouldn’t be like i’d be doing them harm after decades of helping them so ne regs needed really – I know how to safely advise on risk – don’t need unqualified politicians telling me how!
            He did say it was only about a dozen of his best (HNW?) clients – paying him a simple fee (I think I recall), and they were in agreement that the regulators were clown princes not knowing what they were doing. Who knows, the way I’m feeling right now (scared to write business, unmotivated and disillusioned after 30+ yrs) I may just want to get out completely. These damn regulators and life companies have SO much to answer for the way they have and still are destroying advisers and their businesses. Should be criminal charges against self serving and unqualified politicians muddling through the management of our industry and country. One rule for some and one rule for others . . .

          • Ten Beers

            your 2nd para is how I feel. I am currently seeking medical assistance also. I sadly feel trust has no value now and that we cannot offer value efficiently and effectively and will only be able to serve about 105 of our current clients and this is ethically challenged me to no end and thats not a good adviser in my book. Charging more and only to the ones that can afford it goes aganst my ethics and values.

          • Squeaky_1

            Yep, welcome to my world. I hear you about trust, ethics and values. These imbeciles in govt now think they can do exams for ethics and it will make people ethical. Simpletons extraordinaire! I’m in the sad position of sitting at my desk most days and muddling through for another 2 years until I’m 60 at which time I will sell my client base and retire. I believe I have decided this for sure now. IF I do, for some unknown reason, stay after 2020 it will only be to 2024 absolute latest when I will categorically refuse to sit for an exam where the only beneficiary will be legislators – totally unnecessary to help my clients best interests!
            I am now a passive ‘client manager’ rather than a client hunter, as in days of old. Not proactive now thanks to this depressing compliance burden so I’m more ‘reactive’ for lack of a better word. Far too dangerous and troublesome to write new business now, especially with this punitive 2 year clawback (thanks life companies! NOT!) I’m simply thankful my renewal income covers everything I need it to and then some, happily – the only thing keeping sanity together. The upside is risk commissions will stay and a good risk renewal stream will always have value and be highly prized – even more so when initial comms reduce. Some argue against this but I hold it to be self evident. All the very best to you ‘Ten’ and I wish you all possible the happiness and joy for your retirement which, like mine, will come soon enough. Don’t let the bastards kill your positivity – I know it is a battle each day. As they’ve always said, “Don’t let the turkeys get ya down!” Cheers. 🙂

          • Squeaky_1

            Here’s the ‘reply’ I referenced from the other story and its comments section, copy/pasted here: (not a silly strategy, think it through!):-
            Anonymous 4 days ago.
            Fasea is a joke. The FPA is pathetic.
            This industry is a complete embarrassment.

            I left over 2 years ago. I’m unlicensed, still advising and I stick my middle finger up at all of you baffoons who have stuck their snouts in the trough and are feeding on and taking advantage of compliance red tape. I’ve had enough of your circus and hoop jumping. You can take your regime and shove it.
            All of my clients are super happy not receiving these ridiculous 50 page soa’s that none of them read or wanted. All of them were sat down and explained the ridiculous compliance regime and love the verbal advice. Love the hand holding without the huge cost of compliance. I have my life back. Good advice for an awesome adviser like myself does t need compliance.
            The water is fine. Sack the FPA, sack ASIC, sack your dealer group. Sack this industry.
            Become a life coach focusing on financial matters. I laugh at this pathetic industry daily.
            Goodnight financial planning industry, your a joke.

          • Squeaky_1

            I’ll go out on a limb and say they can be as concerned as they damn well please . . . if we are not breaking the law, have full consent and agreement with and are genuinely helping the client then they can go jump. In the absence of client detriment or complaint the authorities would have very little leverage (assuming we were not breaking a law).

      • Leighroy

        Hey Squeaky, don’t wait until 2020. Do it now, and be rid of the negativity in your life. I did it a year ago and have never felt better. Could have just managed the existing book indefinitely but really didn’t feel that was fulfilling, bit the bullet, and can now do things to benefit society which are appreciated, rather than being constantly told I am a bad person by earning a living.

  • swaami malabalab

    A big part of the evolution of Life Insurance, is the remuneration of intermediaries by way of commission, and if it wasn’t the cheapest way to distribute the insurers products, it wouldn’t be the chosen method.

    In my opinion, the move to a ‘fee for service’ system, would take distribution back to a shopfront arrangement like NRMA use, whereby advisers are beholden to a particular company’s product, like the old National Mutual, AMP, and Colonial Mutual days. The probable outcome would be advisers being employed by the insurers, not self-employed and to some degree independent, as is the case today.

    This would not have a downward affect on prices nor make available to the insured, a better product, or advice.

  • Ken

    Isn’t it time commissions where looked at for what they truely represent and not what some salaried uneducated politician thinks they are
    I was a printer by trade did not particularly like it being stuck in a factory at 20 years of age but a job was a job
    I would do perhaps 25 jobs on a machine in a week and the apprentice with me would do 40 yet at the end of the week we got the same pay why ? Should he not have gotten more he worked hard produced more income for the business but got no additional reward for his efforts
    Commission in all areas not just insurance is a viable way to remunerate a person is it not ?
    It says work hard bring in the business we the business will prosper and you will prosper along with it by being paid the income you deserve
    Why should it be capped ?? If everyone ( the insurers ) pay the same maximum why is it conflicted remuneration ?
    Is it jeolosy ? Why should someone earn more than a politician or CEO ? What these people seem to think is everyone is a individual with little or no overheads working from home and making “stacks” when in actual fact they are fully operational registered businesses with ongoing staff requirements like wages Super workers Comp sick pay holidays and training THIS ALL COSTS MONEY and this is in conjunction with Rent telephones stationary cleaning Etc Etc Etc
    Advisers often work long hours starting at 6 or 7 in the morning and finishing late at night
    Where do these overpaid politicians think income is derived from and if you work hard why not get paid the rewards for “pulling up your sleeves” and getting stuck into it. Maybe we should try it with people on the “dole” oh that’s right we did once it was called the “Red Scheme” and got howled down by the opposition as being alikened to slavery so we went back to a fortnightly handout without any qualification.
    Commission is a ligitimate form of payment and has worked in the world for thousands of years It is probably the only means of payment now that can assist anyone trying to get into the home ownership area and have any chance of owning it
    Wake up all you politicians and vote with a conscious look at what is happening here and the extreme pressure Australia is doomed tonif something does not change here

    • Squeaky_1

      Extremely well said Ken and I endorse all that you’ve said. I fear we are running out of time to convince those who need convincing. I suggested Jeremy Wright but I don’t think he’s interested. He’d be the one who could pull it off – an orator, wordsmith, intelect to spare and a will to do it. Good people skills too. That’s the type of special person who can save our game – not many others. Oh well, happy I’m at the end, not the beginning. Cheers, Ken. keep the faith, somehow mate!

  • emkay

    This ongoing attempt to destroy advice and advisers is beyond belief. The banks destroyed this industry and now they are gone (BT notwithstanding). But still this isn’t enough for whoever is running the witch hunt. If Short-on gets in the industry will die. So, with the help of public servants and self-serving politicians the unions industry funds will prosper the most. They will continue to include sub-standard rip-off insurance at inflated prices (eg today, client life cover dropped from $1150 PA to $437 PA in retail) No opt in for them, no transparency as to how they spend members money either.
    So, who has the most to gain from destroying the advice business? education providers (AFA & FPA included), unions, unionist public servants, insurers, soft politicians and the media. take your pick, or add to the list.

  • Squeaky_1

    The article states: “The banning of commissions on life insurance in Australia would be a global experiment, the likes of which have never been seen previously,” the AFA stated, adding, “Whilst different models apply around the world…in terms of countries that have a vibrant voluntary stand-alone protection system, this would be a first”.
    What? They banned commissions in the UK – REMEMBER?! This is not a “world first” or “experiment”! This HAS been done before and it was an abject disaster that had to be reversed as it decimated the industry. What is it the AFA is trying to achieve by saying all this – it is clearly incorrect!

  • Squeaky_1

    The decisions that will save our industry are far to important to be anywhere near the grubby self-interested hands of wholly unqualified politicians. Why don’t politicians have CPD requirements and exams before they can come anywhere near something as important as administering their portfolios. It is shameful and they are a blight on Australia. Then they dictate to us how highly qualified I must be to advise a client on a term policy when it is all I’ve done for more than 30 years. Idiots, freeloaders, gutter-snipes and self-enrichers all!

  • robk

    Just to correct a misunderstanding. The UK did not ban commission for protection products after the GFC. It was banned for products with an investment element and was called the Retail distribution review. The review focussed on commissions but also the whole advice process and the level of education of advisers.
    Plenty on the web if you search for example

    Previously in the 1980s commissions were standardised by the regulator and the competition authorities said that was illegal.