An expansive report released by MetLife this week on the role of Australia’s life insurance industry includes a clear statement of support for the retention of risk commissions, together with a fact-based analysis that dispels some of the commonly-held misconceptions about life insurance in Australia.
These two issues reside within a broad-based Value of Life Insurance Report, which considers the role of the life insurance industry in Australia across three main categories:
- Individuals
- The economy
- Society
According to a statement accompanying its release, MetLife says the report is intended to provide policy makers, regulators, industry participants and other stakeholders “…with information about the positive impact and contribution of the sector,” in what it considers to be a further step towards increasing financial literacy for Australians.
…the insurer notes it seeks to “…redress perceptions which increase consumer disengagement and contribute to a worrying underinsurance gap
Further, the insurer notes it seeks to “…redress perceptions which increase consumer disengagement and contribute to a worrying underinsurance gap, which has been an ongoing and increasing problem for Australia’s working age population.” MetLife says this gap is further exacerbated by factors impacting life insurance customers such as access to quality, affordable advice and understanding recent legislative changes.
The role of advisers and the future of risk commissions
As already noted, one of the many issues addressed by the report surrounds what it advocates to be the critical role played by advisers in helping clients understand the value of life insurance.
While addressing issues of product sustainability, this section of the report also considers the recent history of regulatory pressures hovering over the future of risk commissions. Within this narrative, the report notes that only 27% of Australians receive financial advice, that reducing commissions will place upward pressure on the direct cost of advice to consumers and reduce access to quality advice, which may lead to the following potential consequences:
- Consumers will rely on off-the-shelf insurance products, which are not tailored to their financial and personal needs
- Consumers with lower economic means will lose access to advice
- Most consumers will not pay upfront for advice if the financial product is subject to an underwriting process that could lead to them being denied access to the product. This is different from investment products, which do not require approval to purchase the product
- Consumers on claim will lose the support of their adviser during this difficult time (renewal commissions support this service from advisers)
- Underinsurance rates in the Australian market may increase
- Many financial advisers’ businesses may become unsustainable, forcing them out of the industry and further reducing Australians’ access to advice
Dispelling the myths
The report takes the opportunity to articulate a series myths it considers are held by the Australian community and offers a reality check in order to address and dispel those myths. The myths the report addresses include:
- Life insurance is not value for money or is expensive
- Insurers don’t pay claims
- Insurance erodes retirement savings
- Insurance cover is hidden within superannuation
- People don’t want insurance in super
- Insurance has poor customer outcomes for people claiming against TPD insurance
- Insurance inside super is not fit for purpose
- Life insurance is ‘set and forget’
Call for unity
In noting the life insurance industry is presently under the microscope and facing significant regulatory change and shifting consumer expectations, MetLife Australia’s CEO, Richard Nunn, has made a call for unity.
Nunn says “It is the responsibility of all industry participants to play a positive role in helping stakeholders understand the value of life insurance and to promote this message to a wider audience.”
In the spirit of playing a positive role, Nunn notes this is the reason the insurer has made its report available to all stakeholders – to help them have conversations around value:
“It is imperative we continue to build awareness of the advantages of life insurance, not just to the individual consumer but to the economy and the community,” he said.
Click here to access the full Value of Life Insurance Report, released by MetLife this week.
Is this report being distributed to the regulators and government? Richard Nunn calls for Unity and I agree – “It is the responsibility of all industry participants to play a positive role in helping stakeholders understand the value of life insurance and to promote this message to a wider audience.” But how will that unity be achieved Richard? What are you personally doing to achieve it?
As I have said repeatedly in RiskInfo, all retail Life Insurance company CEO’s, the head of the AFA and FPA, and major licensees, must go to the govt with a watertight case. All it takes is for one CEO to get the ball rolling. So, Richard, are you up to the challenge to start this process?
It is not a bad report. The mention of advisers is from page 19 and they list the issues, including that banning commissions would be a global first. However, they themselves may not be aware of the long-term consequences of removing commissions like making insurance more expensive, less competitive, virtually no underwritten insurance and therefore a tiny, expensive market.
Taking a big competitor in the form of retail advisers out of the market is protectionism for the rest – industry funds and direct insurers. They can raise prices, lower quality, allowing them to make large profits on small volume. The market will also become much less efficient as overheads will be distributed over fewer customers.
Who will win?
The ideologues.
Who will lose out?
The consumer, massively so.
A section of the risk of this report includes this quote in the context of the reasons why Apra would do what it’s doing at the moment ”
“. An example includes product features that place the claimant in a better financial position than what would otherwise have been the case prior to the event leading to a claim. Product designfeatures like these may encourage claimants to remainon claim longer than is necessary due to the associated financial incentive.”
In 33 years of advising on risk and with a multitude of claimants mainly for income protection I don’t recall meeting one of my clients or anybody else’s IP clients who enjoyed being on IP claim for longer than necessary. That’s a myth! What is the Australian expression – all BS!.
In the real world IP claimants have run out of their savings and have started to sell saleable goods after about four months if they are still on claim and there is no light at the end of the tunnel. When they eventually go on partial disability they are required to do a profit and loss every month. You have no idea how that wears down the claimant on partial disability. Even the fact of submitting claim forms and doctor’s reports every month for total disability eventually trips even the most resolute claimant into a state of depression. At this point they need advisers to encourage them to keep on going, do what’s necessary, and don’t give up.
The real issue with income protection premiums is twofold in my view. Firstly, and most obviously, the shareholder driven insurers that now populate our industry are no longer short-term thinkers and they most certainly did not cost properly any of the IP products they were pushing out to us as advisers. They failed to cost those products accurately because they felt they had to compete with other manufacturers in terms of market share, and they were fearful that the 1st to move to pricing accurately would next to be last in the market. Management bonuses would be zero on that basis, so it didn’t happen. Mutuals had their problems but they were at least mostly long-term thinkers.
The second issue is of course LIF. Most risk advisers that I know of 5+ years of accumulating a client base soon realised that they could go back and visit their existing clients, writing increases on existing products, and be paid at 110% (with only 10% renewal) BUT WITH A ONE YEAR CLAWBACK.! That halved the capital risk of taking on a new risk client that suddenly became de rigueur under LIF. Why the hell would you recommend new products under LIF to existing or new clients unless you had to.
No fresh fully underwritten young lives coming into the business is a disaster for any insurance company as they know that their ageing client base is heading towards claim time and there is no cross subsidy within the pool from the usual young lives.
I welcome this report but I’m also disappointed. Sadly this MetLife report carries on the current political position of the life insurance CEOs. Last week Simon Swanson of Clearview clearly stated that commissions must remain, but he did not go the next step to state that the only way life insurance advisors could run a sustainable business is that if LIF commissions revert back to 80/20′. This MetLife report makes the same omission..
Why would that be when most responsible and intelligent life insurance CEOs know that they need life risk advisers to stay in the business to firstly preserve existing books, and secondly to be able to deliver fresh new young business to bolster their statutory number one funds. The CEOs know with great certainty by now that commission of 66/22 is not going to work without fees, and no one wants to pay fees for risk business. And then there’s the ever increasing compliance load, not to mention adviser fees, delivered to us by our friends at ASIC
I can only go back to the reason why LIF was introduced. The banks conceived LIF because e they had decided around 2015 or earlier that they were paying out too much in reparations for poor life risk being delivered in the branches. The to sell their life insurance operations decision by their boards was easy for them to take – sell their life insurance operations, BUT TO WHO?.
But the banks had a problem. No one in Australia wanted to buy Comminsure, MLC, BT or One Path – there wasn’t the climate nor the appetite for anyone to buy those companies, and certainly not for the prices the banks thought they could get. So the banks had to “‘ tart up the old mutton to look like lamb ” to any prospective overseas purchaser, and that meant reducing distribution costs . Then the banks got lucky. ASIC produced Report 413 which we now know was completely flawed and based on very selective evidence from one particular dealer group, where the culture was crap!
What a coincidence! Commissions being blamed by ASIC for unprovable “churning”. A climate ripe for false claims. The banks were in charge of the FSC at the time and everyone went along for the ride. The remaining non-bank owned life insurers suddenly saw a goldmine – distribution costs are just halved by this LIF idea. What a deal!. Well by now the TAL s, AIA, Zürich (all overseas owned) have now reaped what they sewed. Every statutory number one fund in the country is under threat, yet those CEOs are still lacking a bit of kahuna’s – they appear reluctant to be seen criticizing a Coalition government.
From where I’m sitting all of the banks CEOs have expressed views targeted to Treasury that life insurance COMMISSIONS SHOULD REMAIN, and should not be abolished by an ideologically bound ASIC. But none of the CEOs have PUBLICLY grasped the nettle to add to that statement that advisers cannot survive on anything less then 80/20, with or without, modest fees fees for life risk advice when it’s provided without any cross subsidy associated with investment advice.
Every CEO running a life office in this country knows that the 80/20 has to be re-instated – but right now they’re not quite ready to do it .
Frankly I think the CEOs think they can run LIF just a little bit longer. CEOs of insurance companies have become gamblers: they still think that they can wait for a little bit longer before the cows of LIF become carcasses and come home on trucks, unfit to be taken to an abattoir. They appear to believe that once FASEA eliminates half of our risk Specialist adviser force that the new entrants will come flocking through the doors and reinstate the volumes of life risk business written pre LIF
Come on CEOs. Girdle your loins , strap up your kahuna’s, and enter the fray with both feet and tell Josh Freudenberg what he doesn’t want to hear
Commissions
Commissions on life insurance products have been the
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