A new white paper commissioned by MLC Life Insurance has delivered a detailed and sobering assessment that contrasts the cost of delivering life insurance advice and the remuneration advisers receive.
While some of the headline numbers clearly demonstrate the challenges facing commission-only advice propositions in particular, the report concludes Australia’s life insurance advice industry has arrived at a watershed moment, and maps out a set of recommendations intended to address and overcome the challenges outlined in its findings.
…Australia’s life insurance advice industry has arrived at a watershed moment
The white paper: Cost and efficiency of delivering life insurance advice, was prepared by research firm, Plan For Life. It explores the various components of the advice process as it applies to both new and existing clients and outlines the time and costs associated with each of the advice process components.
In overlaying advisers’ remuneration on the averaged cost of delivering their advice, the paper concludes that advisers who rely only on life insurance commissions will make a loss under the Life Insurance Framework remuneration reforms which will apply from 1 January 2020.
In concluding that relying on commission alone is unlikely to cover the cost of advice, the research confirmed the logical finding that as the complexity of a client’s insurance needs increases there is a corresponding increase in the cost of providing that advice. Those increased costs relate to the amount of time and extent of the adviser’s experience required, along with the nature of the policy solutions normally required.
The following table, taken from the whitepaper, sets out the researcher’s finding that commission-only advisers will make a loss at every point along the spectrum framed by simple policy advice at the ‘bottom end’ and complex policy solutions at the top:
Given the outcome of this commission and cost analysis, the whitepaper suggests that commission-only advisers may need to reduce their expenses by as much as 20-25 percent to return to profitability.
If this cost gap is not addressed, the report suggests risk advisers may need to commence charging their clients a fee in addition to commissions received from product issuers to remain sustainable.
Sean McCormack, Chief of Group and Retail Partners, MLC Life Insurance, noted “What is clear from the research is that there is a need for more detailed knowledge of the true operating costs associated with providing advice, and how each facet of the process – such as marketing, administration, client servicing and compliance, can impact overall profitability.”
McCormak emphasised that with upfront commissions reducing further next year, ”…it is imperative that advisers act.”
…it is imperative that advisers act
He said the whitepaper analysis shows impacted advisers should take the opportunity to better understand ‘peer relative industry averages’ and use this information to review their own business’ costs and, potentially, make changes to their business model.
Other key findings revealed in the whitepaper include:
- On average, a total of ten hours is required by a risk adviser to prepare and implement life insurance advice for a client in simple cases, and up to 15 hours for more complex cases
- Life insurers must do more to improve the efficiency of the advice process, by simplifying and speeding up the policy application and underwriting process
- While 67% of risk advisers say they have experienced a reduction in profit since the introduction of LIF in 2018, a surprising 42% say they haven’t made changes to their business model to accommodate the reduction
- Less than half (48%) of risk advisers said they felt they were ready for the next phase of the Life Insurance Framework remuneration reforms
- Advisers need to better understand their cost base
- Only 7% of adviser responses indicated they are charging clients for claims support despite the time and costs involved
…the status quo for risk advisers is unsustainable
The destination at which the whitepaper arrives after its journey through the life insurance advice process – taking into account the stark reality of the Life Insurance Framework remuneration reforms – is that the status quo for risk specialist advisers is virtually unsustainable.
In what may be an under-stated observation prefacing the report’s recommendations, PFL states the survey results point to numerous ways in which advisers could be assisted to meet the challenges of the new world of reduced commission and greater compliance. It says these solutions include business processes that are within advisers’ own control as well as those which fall within the life insurers’ sphere.
These are the whitepaper’s recommendations:
Given the changing scenario created by the LIF commission changes, there is a clear need for advisers to look not only at new models for generating income, but also, to understand exactly what each aspect of their key processes are costing and identify where efficiency can be improved.
We would strongly recommend performing such a cost and efficiency review even where a revised fee-generating approach has already been established. Identifying the existing operational cost base so as to pinpoint where weaknesses in business functions reside, is a vital precursor to fixing them.
Specific areas of inefficiency identified, that could be fairly quickly addressed by the adviser include:
- Substantially increase the amount of time spent on lead generation and obtaining new clients
- Where possible, utilise communication technology such as Skype and Zoom to reduce the amount of time spent in travelling to external meetings
- Introduce better ways of recording client information, for example replacing manual methodology with much more efficient planning and administration software
- Delegate administrative work where possible, by virtual teams, virtual assistants
- Create a standard data format by using Jotform or Typeform, which could be sent to clients at renewal time to collect current needs and requirements, thereby reducing subsequent time and meetings
There are several ways in which life insurers can assist advisers’ practices, which we would recommend as follows:
- Provide training in how to analyse business costs and efficiency, as well as ways to restructure fees within different business models
- Provide training on how to save costs by automation and use of technology
- Review the questions in the personal statement, determining ways in which these can be made shorter and easier to complete (while still being fit for purpose and managing risk)
- Review technology platforms and establish or improve Application Program Interface (API) Capability so that submitted data is entered into systems only once
- Analyse the life insurer’s processes, viewed from a client and adviser-centric point of view, with the aim of simplifying the requirements and shortening the durations
Click here to access an Executive Summary of the whitepaper report.
And click here to access the full whitepaper report.