The Banking Royal Commission has recommended that the current cap on life insurance commissions should eventually reduce to zero, unless there is clear justification for retaining those commissions. But is the basis of this recommendation flawed?<\/p>\n
As Riskinfo has already reported (click here<\/a>), the future of life insurance commissions is in doubt following the release of the Banking Royal Commission’s recommendations, in which recommendation 2.5 reads:<\/p>\n When ASIC conducts its review of conflicted remuneration relating to life risk insurance products and the operation of the ASIC Corporations (Life Insurance Commissions) Instrument 2017\/510, ASIC should consider further reducing the cap on commissions in respect of life risk insurance products. Unless there is a clear justification for retaining those commissions, the cap should ultimately be reduced to zero.<\/em><\/p>\n Commissioner Hayne’s rationale in arriving at this conclusion is also outlined within his final report, in which he noted that many submissions following the release of his interim report advocated that current regulatory reform should be given an opportunity to run its course, ie the Life Insurance Framework reforms, which will be subject to ASIC’s post-implementation review in 2021.<\/p>\n The Commissioner, however, also expressed his doubt that a total ban on risk commissions would have much of an impact on underinsurance levels:<\/p>\n \u201cI doubt that a complete ban on conflicted remuneration in respect of life insurance products would lead to significant underinsurance.\u201d<\/p>\n Given his view of the levels of life insurance held by Australians inside the superannuation system, Commissioner Hayne added, \u201cI am not convinced that a move away from commissions for life insurance products would see large numbers of Australians without an appropriate level of life insurance.\u201d<\/p>\n In acknowledging that there may be some benefit in the industry delaying any further changes to life insurance commission levels until it has had an opportunity to assess the impact of the Life Insurance Framework reforms and other changes in the next few years, the Commissioner added on page 188 of his report:<\/p>\n “I encourage ASIC to take all necessary steps to ensure that it conducts its post-implementation review in 2021 as expeditiously as possible. If that review indicates that the cap on commissions has not contributed (or, at least, not significantly contributed) to underinsurance, then I would urge ASIC to continue reducing the cap \u2013 ultimately, to zero. Unless the reduction in life insurance commissions can be shown to contribute significantly to underinsurance, I can see no justification for allowing this form of conflicted remuneration to continue to be paid.”<\/p>\n Riskinfo notes the Government’s Life Insurance Framework reforms, which cap risk commissions and apply a two-year claw-back period, were predicated entirely on addressing the quality of life insurance advice to consumers, following ASIC’s Report 413<\/a>, rather than issues related to the level of underinsurance. Commissioner Hayne, however, has linked risk commission structures with underinsurance levels, rather than with the quality of life insurance advice solutions for consumers.<\/p>\n If the ASIC post-LIF implementation review in 2021 establishes that the quality of life insurance advice accessed by consumers has improved, will it consider this to be a reasonable justification to retain risk commissions – as the balance between consumer best interests, conflicted remuneration and a viable retail life insurance advice environment continues to challenge all stakeholders?<\/p>\n\u201cI doubt that a complete ban on conflicted remuneration in respect of life insurance products would lead to significant underinsurance.\u201d<\/h6>\n