The 10-year anniversary marking the announcement of the Life Insurance Framework reforms naturally drew strong interest from Riskinfo readers this week, where the FAAA’s Phil Anderson used this milestone as an opportunity to call for an increase to the LIF commission caps…
Highly-respected financial services industry figure, Phil Anderson, has called for commission caps under the Life Insurance Framework reforms to be increased to 80/20.
Anderson, FAAA’s GM Policy, Advocacy and Standards, made this call in releasing his detailed analysis of the state of the life insurance sector ten years on from the announcement of the Life Insurance Framework reforms by then Assistant Treasurer, Josh Frydenberg (see: The Life Insurance Commissions Journey – A Historical Perspective).
The FAAA is already on the public record in calling for an increase in upfront commissions for life insurance, as a strategy “…to better enable the delivery of life insurance advice to facilitate more Australians being adequately covered.” The call to move to 80/20, however, remains Anderson’s personal view, as distinct from that of the association.
Anderson’s outstanding documentation of the events impacting the introduction of the Life Insurance Framework reforms – and his subsequent assessment of what he sees as its disastrous impact on the advice sector, includes references to key people and events dating back to the implementation of the Future of Financial Advice Reforms, which were borne of adverse outcomes generated by the Global Financial Crisis in 2008.
His blunt final assessment concludes:
The journey over the last 15 years for the life insurance sector has been a particularly challenging one with multiple regulatory changes having a negative impact on the uptake of life insurance and a substantial reduction in the number of financial advisers providing risk advice.
In the case of the LIF reforms, it was a combination of zealous opposition to commissions, commercial interest and political expediency that resulted in a forced outcome on a small sector that lacked the political power to prevail. The ultimate outcome for consumers and the sector was clearly predictable and was expected by the advice associations at the time. However, this only serves to demonstrate evidence of a poor process that has delivered a poor outcome for Australian consumers.
Any reasonable assessment would conclude that the LIF reforms have been an abject failure and have contributed to a decline in the sustainability of the life insurance industry.
In updating readers on the debate over whether life insurance commission caps should be reviewed, Riskinfo will next week share the current-day reflections of the key architect behind recommendations made to the then Government in early 2015 which led to the introduction of the LIF reforms, John Trowbridge.
Firstly, Brett Clark, former TAL CEO, needs to apologize to the industry for saying that advisers should give the 60/20 commission split a go. The ignorance behind that statement was staggering. Secondly, I don't with to pre-empt Risk Info, but whatever Risk Info shares next week in relation to John Trowbridge's proposal of a reduction of commissions to 20%, let's never forget that this man's actions were reprehensible.
I hear "insurers would love to pay 80% upfront – 20% trail (GST needs to be paid to the ATO so it's not 88:22) but the law prohibits them from paying 80% upfront. I'd like to see them put their money where their mouth is when the law changes to allow 80% upfront that they will backpay advisers who wrote business when the upfront commissions was 70% (2018) and then 60% (2019 onward)!
That is a surprise as 80/20 commission is a higher commission cost than pre-LIF commissions and if commission cost rises it places pressure on premium pricing.
Really? I seem to pretty clearly recall 100/10 (+ more in a lot of cases, up to 140% in the 1980s/90s when analysed) was around for a LONG time, decades in fact, prior to the relatively recent LIF. That's not even to mention the ridiculous 2 year responsibility period and unnecessary time-wasting compliance and red tape dance for advisers.
After experiencing and watching our industry over the past 39 years I can promise you this:-
– Nothing less than 100/20 will retain the few experienced RISK SPECIALIST advisers still clinging on.
– Nothing less than 100/20 will bring experienced RISK SPECIALIST advisers back (those still young enough and/or who haven't sold their client bases already anyway).
– Nothing less than 100/20 will induce new RISK SPECIALIST entrants into risk advice.
– Nothing less than 100/20 will make up for the extra compliance and red tape burden involved in writing risk business today.
– Nothing less than a reduction of commission responsibility period from 2 years back to one will bring new advisers in, retain current advisers OR bring old advisers back
Decades ago when commission was 100/10 (and even more in many cases!) there was nothing like the time wasting compliance and red tape work to get through like there is today. The 'proposed' 80/20, while well intentioned and coming from the heart with Phil Anderson, is still significantly lower than what's needed to right the wrongs of life company greed, adviser abandonment and inaction, the self-interested meddling of politicians and the special interest group corruption of our once great industry. 80/20 is FAR too little, FAR too late.
If you wish to see if my prognostication has any merit, just do a count of RISK SPECIALIST ADVISERS supplying life companies with new business come EOFY 2026/27. A few hundred will be left at the VERY most. Life companies, through their short-sighed greed, simply won't know what to do with themselves when that new business slows to a barely noticeable trickle. Forget profit – it won't even meet their daily expenses. There will be significant retrenchments and large scale business remodeling. The landscape will be unrecognizable. All the life company execs, politicians and others who caused this will be long gone and unpunished.
The government should just stay out of pricing (mandating upfront commissions, trail commissions and clawbacks) as well as product (BullS**t IDII contracts and no more Agreed Value Income Protection, thereby causing existing clients with Agreed Value IP policies to have their premiums increase become no new inflows can enter the pool as the pool ages) and just leave pricing and product innovation to the free market forces of supply and demand (between insurers, advisers and lives insured).
However the government should be able to influence policy.
As an example, I wrote in to the Royal Commission and suggested that all advisers should have been required to ask their clients for how many years they wanted to hold on to their insurances (Life, TPD, Trauma &IP) and if the answer was more than 15 or 20 years (eg till retirement at 60, 65 or 70), then the government policy COULD have been that advisers were required as a default to recommend Level premiums but could provide a justification if they wanted to recommend Stepped premiums. This would have solved the alleged "churning" issue and made it profitable for insurers.
… well that horse has bolted hasn't it?!
The principle still remains, the government should stay out of pricing and product and throw LIF on the scrapheap of STOOOOPID IDEAS conjured up by salaried bureaucrats and academics in their ivory towers rather than practising life insurance advisers in the real world.
Let insurers, set their own upfront commissions, trail commissions and clawbacks WITHOUT COLLUSION (in accordance to the Trade Practices Act) and the government policy can be that advisers have to provide a document that must be initialed by the client that shows the Commissions (upfront and trail) and clawbacks of all life insurance companies and the insurance company (and their commission payments) their adviser is recommending, thereby triggering a discussion both with the clients as well as the compliance team if it appears that the adviser is acting in their own interest rather than the client's best interest.
The other data point that should be disclosed to clients premium stability over the last 10 years for stepped, level and optimum (or any other hybrid premiums unique to that insurer in table and graphical format) and allow free market economics to run its course.
There is still time yet to save the insurance industry in Australia by adhering to the principle of "Government can only influence policy and not price or product"!
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