Retaining Risk Commissions – The Rationale

The independent leader of the Treasury’s Quality of Advice Review has documented a progression of issues, data and other information which underpinned or informed her decision to recommend the Government retain the existing exemption on conflicted remuneration for benefits given in relation to life risk insurance products, ie risk commissions.

For those advisers yet to view them, these details were contained in the first section of Michelle Levy’s 12-page snapshot release on the QoA Review’s findings on the issue of conflicted remuneration across both life and general insurance products.

In documenting these factors, Levy has neatly summarised a raft of outcomes or consequences that have ensued – intended or not – from the recommendations made in the final report of the Banking Royal Commission and from the implementation of the Life Insurance Framework reform measures.

Banking Royal Commission

In her opening statement about the snapshot of the data the Quality of Advice Review has considered on life insurance, Levy refers to Banking Royal Commission Recommendation 2.5 which recommends that, when ASIC conducts its review of conflicted remuneration relating to life risk insurance products, the regulator should consider further reducing the existing cap on commissions in respect of life risk insurance products.

Following the positioning of Banking Royal Commission Recommendation 2.5, Levy notes two significant data collection projects, both undertaken by ASIC, namely:

• Life insurance data collection from life companies
• Life insurance advice file reviews

The following observations were documented by Levy in her 12-page snapshot report:

Life insurance data collection (LIDC)

ASIC collected aggregate level data from a number of life insurers every six months, covering the period from 2017 to 2021 (inclusive). This data included information on:

• Premium rates
• Sales changes
• Adviser changes
• Sales data – new business and all-in force business for each six-month reporting period
• Commissions
• Full and partial lapse data
• Full and partial clawbacks.

Levy documents the LIDC found:

• The overall number of new life insurance policies including death, TPD, trauma and IP cover issued between 2017 and 2021 declined.
• The proportion of all types of new basic life insurance policies (i.e. life insurance policies without riders) sold through financial advisers (as compared to direct sales) increased from 70 percent in the first half of 2017 to 83 percent in the second half of 2021.
• Overall, the average premium across all new basic life insurance policy types increased by approximately 15 per cent between 2017 and 2021. Levy noted there were a number of factors contributing to this including:
  • An increase in the average sum insured
  • A change in the mix of product types being purchased
  • A change in the age of those purchasing life insurance
  • A change in the underlying premium rate structure itself for some products. For example, for new death-cover, the average sum insured increased significantly (46 per cent) between 2017 and 2021 but the premium rate per $1,000 of sum insured decreased.
• As expected, the commencement of the LIF reforms in 2018 resulted in a significant reduction in first-year commissions for all policy types between 2017 and 2021, with the average commission rate falling by approximately 20 per cent per dollar of premium, which corresponds to a 34 per cent proportionate decrease in the rate of commissions being paid.
• For death-cover sold through a financial adviser, the lapse rate appears to have decreased for all durations over the 2017-2021 period, particularly within the first two years of issue. However, it is too early to observe any trends in policy lapses for policies sold in the later data collection periods.

Life insurance advice file reviews

The LIF Review compared two sample sets of life insurance advice files: 521 files from 2017 (before the LIF reforms were introduced) and 522 files from 2021 (after the full implementation of the LIF reforms). These life insurance advice files were assessed for compliance with the best interest duty and related obligations in the Corporations Act 2001 and to determine whether there were significant concerns about client detriment/harm arising from non-compliant advice.

Levy noted the file reviews found:

• Compliance with the best interests duty and related obligations had improved, with the pass rate increasing from 37 per cent of assessed files in 2017 to 58 per cent in 2021.
• There was a reduction in the number of files for which there was a significant concern about client detriment/harm from 12 per cent in 2017 to 7 per cent in 2021.
• The proportion of advice files with indicators of churn reduced between 2017 and 2021.
• The sample of advice files assessed were dominated by commission-based advice, with more than 90 per cent of the assessed files in both 2017 and 2021 involving the payment of a commission in connection with the sale of a life insurance product (as compared to clients being charged an advice fee).

Summary

Following the documentation of the outcome of the LIF Review, Levy noted in her snapshot that while the data demonstrates the quality of advice has improved between 2017 and 2021, it is difficult to conclude that the improvement was because of the LIF reforms: “This improvement could also be attributed to a number of other factors,” noted Levy, “…such as the implementation of the professional standards, which introduced education and training standards for financial advisers.”

The independent reviewer added the data also indicated an increase in the age and wealth of clients that received life insurance advice, concluding: “This might indicate that lower commissions have encouraged advisers to prefer to provide advice to those with higher sums insured and higher premiums.”

…nowhere does Levy actually state that the current level of LIF commission caps should also be retained

Levy’s compilation of the outcomes from these two significant projects appear to lend support to her recommendation to retain risk commissions. As stated in a previous report by Riskinfo, however, nowhere does Levy actually state that the current level of LIF commission caps should also be retained. Rather, she simply notes the commission caps that exist under current requirements before proposing:

Retain the existing exemption for benefits given in relation to life risk insurance products, but require financial advisers (relevant providers) who provide personal advice to retail clients in relation to life risk insurance products to obtain their client’s informed consent, in writing.

As previously reported, the implication here is that the current caps should remain, but it’s not definitive. Riskinfo believes this carefully-worded statement by Levy potentially leaves room for further conversations in relation to what should constitute reasonable commission caps in future.

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