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.
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
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.
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.
Bit like the ban on negative gearing by the Hawke Labor government in the mid 1980s, this policy got reversed within about 18 months.
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.
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?
By the way where are the Life insurance companies in this debate? They can see the damage being done and yet remain slient.
Good question.
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!
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.
Well said Guy! May be you should make a submission to the Royal Commission and inject some sense into their deliberations.
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.
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.
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
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.
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
https://www.theguardian.com/business/2012/dec/30/fsa-ban-commission-selling-death
Previously in the 1980s commissions were standardised by the regulator and the competition authorities said that was illegal.
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