A report released in November 2020 by life insurance specialist, Brett Wright (click here), has highlighted a number of critical issues central to the life insurance commission debate, both from an advice practitioner and consumer perspective (see: The Case for Retaining Commissions …Continued).
In this Letter to the Editor, Wright summarises the key points raised in his report as he calls on the adviser community and other industry stakeholders to consider their own position on the case he makes for the retention of risk commissions…
Getting Consumers Covered
Life insurance is a pooled risk product, where the pool of many supports the unlucky, for the benefit of their communities and the economy.
…the pool of commissions enables advisers to cost effectively help the many
The same principle applies to life insurance advice commissions, where the pool of commissions enables advisers to cost effectively help the many by putting the right cover in place, regularly reviewing it and helping clients and their families through the claims process, if the worst should happen.
Advisers provide advice and help arrange the right cover, for the right price and we take care of all the paperwork with the insurers, to make a very complex and confronting process as easy as possible for consumers to protect their incomes, families and businesses.
Commissions …keep the system sustainable
Commissions remove the cost and complexity barriers for consumers and keep the system sustainable, while our clients receive policies that are generally better priced, provide more benefits, are easier to claim on and are fit for purpose, compared with outcomes if they tried to do it themselves.
When comparing a commission model with a fee for service model, even the average consumer will be charged between $3,000 and $5,000 to review their needs, construct an advice strategy and implement the cover. Consumers who hold their insurance under a commission model are generally in a much better position when it comes to benefits, price and claims experience.
Reviewing, Renewing and Claiming on Their Policies
Commissions cover the cost of any market reviews and policy adjustments, and clients are more likely to review the ongoing appropriateness of their cover and reconfirm the value and need for it, without the fear of incurring advice and service fees on top of stepped premium rate increases at each renewal, as the client gets older.
If a fee for service model was applied, advisers would need to charge consumers $600-$1,500 each year to undertake these reviews and make any adjustments, and consumers would also need to cover any increase in premiums applied by the insurer (it’s not uncommon in today’s market for a stepped premium to increase 10%-25% per year).
When consumers need to claim, advisers are there to organise all the forms, work with their doctors and manage their insurers, so they and their family can focus on recovering, without the stress of dealing directly with insurers and lawyers.
There is also a huge amount of advocacy work advisers conduct on behalf of their clients, to maintain integrity and trust in the system…
There is also a huge amount of advocacy work advisers conduct on behalf of their clients, to maintain integrity and trust in the system at the most important time for their client, which is often when they are at their most vulnerable, having been dealt the physical, mental and financial blows associated with losing the ability to work, or a loved one passing away.
The increasing complexity of income protection claims, in particular, can unfairly lead to a cost blow-out for claimants with each monthly claim submission, which may become more and more complex after APRA’s intervention.
What do consumers want, and can life insurance survive after a ban of commissions?
Life insurance is complex and confusing. People don’t wake up in the morning thinking about why they need to buy it.
Life insurance advisers cut through consumer apathy and we do this by making the process seamless for our clients, often collaborating with other professionals such as accountants, and willingly providing advice and services without the client needing to worry about being charged thousands of dollars in upfront and ongoing fees on top of their insurance premiums.
Advised consumers generally receive better value for money, know exactly what they are (and are not) covered for, and have superior fit for purpose cover that they can count on. They also have the help, support and advocacy from their adviser, every step of the way. Once cover is in place through an adviser, the consumer is in complete control, the policies are automatically upgraded and cannot be cancelled or changed by the insurer to the detriment of the policy holder.
A recent 2019 consumer study conducted by Rice Warner and Zurich, found only 8% of those surveyed indicated they were willing to pay more than $1,000 as an out-of-pocket fee for life insurance advice. None of the consumers surveyed said they were willing to pay $2,000 or more. Almost 30% of consumers said they were not willing to pay a fee at all for life insurance advice and a staggering 55% of consumers said they were not willing to pay more than $250.
Coupling this research with income figures published by the Grattan Institute in April 2019, which show 80% of Australian’s earn less than $80,000 per year and the typical worker earns just $57,918 per year, it is fair to state that 90%-95% of consumers would not be able to afford, and/or would not be willing to pay, a fee for service on top of their life insurance premiums which covers what it actually costs an adviser to provide life insurance advice and services.
Remember also, that since commissions have reduced under the LIF reforms, premiums have been increasing, not decreasing.
A fee for service model makes insurance advice unaffordable for 90-95% of consumers…
A fee for service model makes insurance advice unaffordable for 90-95% of consumers and forces them to rely on inferior direct or group insurance products that generally cover less, cost more and deliver poorer claims outcomes; or even worse, consumers will not bother with insurance at all.
There is room for a fee for service option and consumers who want and/or can afford it can access this solution already. But fee for service should not be the only option and it is essential consumers maintain their right to choose between the commission and fee for service models and decide which is best for them.
Why do life insurance commissions need to stay?
With the government, opposition and regulators continuing to say they may support a ban of commissions, I wrote this report with the sole purpose of starting open, honest, transparent and fact-based conversations with politicians, regulators, life insurers, associations, licensees, advisers at the coal face, and most important of all, the consumers we serve.
I think most advisers understand the government wants change, and most of us want change too. However, the changes need to be well informed, financially viable and drive simplification and innovation in the sector, so the industry can provide a faster, fairer and better experience for all Australians, instead of adding more and more red tape, suffocation and increased costs for all.
I’m totally frustrated with the lack of direction in life insurance and advice
I’m totally frustrated with the lack of direction in life insurance and advice, and it is safe to say that most advisers and their clients are at their wits end too. Working closely with my own clients and also seeing how other advice businesses (large and small) help their clients every day, I still can’t fathom how or why we are still sitting here questioning the value of life insurance advice and commissions, when advised clients who fund their advice through commission generally have access to better benefits, better premiums, better claims services and have cover that is fit for purpose, when compared with outcomes if they tried to navigate their path without an adviser.
The life insurance sector is at a critical point in time. The main goal and focus for all stakeholders needs to be ensuring life insurance advice remains accessible and affordable to consumers, and remains profitable for advisers. Without these two things, advised life insurance will die and a collapse of life risk pools will follow.
Brett Wright has 14 years’ experience in life insurance advice and is a director of his family’s 33 year-old life insurance advice business. He advises a diverse range of clients from young families through to large corporate key person insurance clients and he is also a director and founder of an Insurtech platform that is used by some of Australia’s largest insurance and risk advisory businesses to revolutionise consumer access to quality, affordable life insurance advice and products…