The AFA has raised concerns associated with the potential rise in commission clawbacks in the wake of the financial fall-out created by the impact of the Covid-19 crisis.
In a message to members last week, the association stressed it has been concerned, since early in the crisis, about an expected increase in the incidence of commission clawbacks as a result of economic circumstances, rather than as a result of product switching.
Its key concern centres on circumstances in which advisers are working with their clients to find solutions that would allow them to retain their life insurance cover through what, for many, are tough economic times. It fears advisers could be penalised by way of commission clawbacks in situations where they recommend a reduction in the level of cover as a way to make the cover more affordable.
…the association says it is once again concerned that lapses could increase significantly
The AFA noted that in the early stages of the Covid-19 crisis, it expected a significant increase in lapse rates, but that the Government’s economic stimulus packages may have reduced the expected impact. However, with the various stimulus packages inevitably reducing over time, the association says it is once again concerned that lapses could increase significantly – but notes its advocacy on regulatory relief for this issue, on behalf of its members, remains ongoing.
In addition to reinforcing its active advocacy in relation to seeking regulatory relief around Covid-related commission clawbacks, the AFA also took the opportunity to clarify for its members an important section of the Life Insurance Framework legislation around clawbacks, which it says may not be well understood.
It notes a policy that has been in place for exactly 12 months, and not continued into the second year, is considered to have been not continued during the second year, and would therefore be subject to a 60% clawback. Equally, it says, a policy that is in place for exactly two years is considered to have discontinued in the third year and is therefore not subject to any clawback:
“This means that where a client has paid an annual premium or 12 monthly premiums but does not pay the second annual premium or the 13th monthly premium, that the clawback will be 60% and not 100%.”
The AFA stresses this clarification should be taken into account, where an adviser is not able to find an alternative solution for the client, and cancellation of the policy or reduction of the level of cover is unavoidable.
