November 6, 2018
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.”