Some time ago, after a submission to the federal government on LIF, I made the point to some former colleagues in the federal Treasury that the LIF proposals – then being driven by the media and the regulators – would cause the contraction of the life insurance industry, and the loss of government GST revenue.
They all looked sideways in surprise. True, I said, so where was the economic impact analysis of the regulatory push?
Of course there was none!
I told them that this will also reduce company tax collections, and have a significant flow-on impact on stamp duty collections by state governments, which average 10 per cent of life insurance premiums.
These stamp duty collections will now contract in absolute terms.
What follows is an analysis published recently in Strategic Insight:
“This is an overview of inflows and sales for the 12 months to the end of June 2017 for the Life Insurance Industry and the figures come from APRA.
Total Risk Premium Sales fell 9.2 per cent over the calendar year.
Market leader TAL recorded a decline of 24.6 per cent and AIA Australia recorded a decline in sales of 31.9 per cent.
In the Individual Risk Lump Sum market premium inflows grew at 2.9 per cent led by Zurich (64.2 per cent), ClearView (18.8 per cent) and AIA Australia (13 per cent), while AMP (0.8 per cent) MLC Life (2.8 per cent) and OnePath (-1.4 per cent) were flat by comparison.
Individual Risk Lump Sum sales fell by 4.0 per cent year on year.
Individual Risk Income Market inflows were up 3.8 per cent over the past year while overall Individual Risk Income Sales decreased by 2.1 per cent over the last 12 months.
Group Risk Inflows were flat, up only 1.2 per cent for the year.
Group Risk sales fell by 21.4 per cent, with Strategic Insight describing the volatile nature of sales figures tied to the success of insurers acquiring mandates in the latest round of remarketing exercises that are an ongoing feature of sector.
As a result of these activities, AIA Australia (-55.2 per cent) and TAL (-47.6 per cent) posted the highest decrease in sales.”
What will happen now?
These numbers tells us that the majors are starting to consider group risk is not going to be profitable at the present premium levels, and that as MetLife has re-entered the market in Australia it appears to have decided to take up that group risk segment, and Nippon Life (MLC) is trying to maintain volumes.
I assume that Nippon Life has a long-term, five-year strategy to re-build that business.
The group risk market, which is the principal source of life risk insurance cover for industry superannuation funds, has been a focus of substantial losses for insurers over the last three years, and these losses are forecast to increase and accelerate.
The result of these increases is that the prices of premiums have risen some 45 per cent across the group risk market, and the industry funds now have to pass this on in full.
The premiums will continue to rise in double figures.
There will be a move starting shortly to increase the exclusions on these default policies that are commenced without evidence of health – in other words, any pre-existing injury or illness will be excluded from claim.
Underwriting at claim time is a growing litigation basket, and an area where the regulator is sure to go; the consumer pain will be immense with denied claims.
The drop in risk premium sales of nearly 10 per cent is just the start, with the action of ASIC in focusing on commission as being the prime issue they are concerned with, apart from the 27-page SOA model, all contributing to the loss of confidence by advisers in this market segment.
This ASIC policy has yet to have an impact, but when it does, it will see a sustained drop in sales and thus cash flows.
It is estimated that the risk premium sales will fall again this financial year, probably by about 11 per cent, a slightly higher amount than last year, and that the pressure on the federal government will start to mount when stamp duty receipts to the state governments and company tax fall, and one or possibly two of the existing life companies start closing down offerings – especially group risk life insurance.
It is possible that AMP Life will be sold off.
This will leave us in a position in about 18 months’ time where the writing of life insurance will become an expensive proposition for consumers, because advisers will be loath to be fully exposed to 100 per cent clawbacks with rapidly rising premiums. Why take the risk?
This is the net result of the ASIC policy, and it will be quite stark.
Indeed, there will be some move by life insurers to allow (with the appropriate discounts to consumers) prepay of contracts two years ahead out of super funds, to offset this regulator imposition on the free market.
Indeed, some advisers are now looking to fully rebate life insurance commission to the client and to have the corresponding fee paid from their superannuation fund.
This obviates the legislative impact of clawback, and you cannot clawback zero commission.
Remembering here that there are already clawbacks that apply in the life insurance industry, but the regulator, who is trying to use them as some form of penalty or control device, appears to not understand the industry. Enforcement is one thing but rationality is another.
ASIC forgets that life insurance is not a packaged product and the insurer does not have to offer terms to applicants, and clearly some people will not be covered due to a range of factors (including drug use and mental health events).
So, in summary terms, there will be a lot more SOAs written moving people from high-cost insurers to lower-cost insurers, and there will be also large chunks of business moving elsewhere due to very high premium hikes and consumer complaints about claims administration.
The regulator has, in effect, created a large churn program.
In all of this, the big loser is the government – in terms of at least $1 billion in tax revenue – followed by the consumers (with price increases), and then the financial services industry, courtesy of increased compliance costs.
Ultimately, the question posed to ASIC will be why are people paying fees to you to increase costs to everyone, including consumers who will pay all of these fees, for very little result?
The industry is unlikely to absorb the fees at all.
The underlying outcome of this ASIC policy will be that less people will have life risk insurance, costs for the consumer will rise (ASIC fees will now have be included in disclosures on SOAs) and a greater impact on the future revenues of the federal government will occur.
Mervin Reed is a Chartered Financial Adviser with Tasmanian Private Wealth Advisers (licensed by Dover Financial Advisers), and a former senior federal and state public servant.
Do ASIC read any of these articles and responses? or do they not really give a hoot for the combined wealth of knowledge and experience of those who do contribute here?
People are still dying. Shock!!
Mervin your article is well written and presented. A reduction in life sales will reduce government revenue.
It will also increase government expenditure, as the widows / widowers / dependents turn to social security to provide for them because of the premature death of a bread winner.
Government and industry should be united to create a solution to this mess!
Mervin I absolutely agree with you but the treatment of non-bank advisers has never been about logic.
There is a silent agenda being pushed by ASIC.
The LIF changes have been forced through and legislated on behalf of a cartel called the FSC. This is for two reasons, to
1. Increase the sale price of their insurance arms…and sales have gone through already
2. Impoverish independent advisers so that their clients and potential clients will move back to the bank affiliated insurers
In 13 months commissions will be halved and on-costs via TPB registration, more detailled SoAs and higher education will drive up costs. The classic pincer movement. Gross income will be cut by 50% but net income will probably be cut to 25-30% of what it is now.
That said, why is no-one from our professional Associations asking ASIC to quantify the gains to consumers and showing why the changes are in the ‘best interest’ of consumers. The professional Associations aren’t fighting because as a result of virtual compulsory membership they have been fattened up and lie asleep in the sun, with their latest earth shattering offer of free assistance with stress relief.
Mervin Will you put this submission to the Banking Royal commission. After all, the Banks drove LIF so their insurance arms could be more attractive for THE sale. All approved by two ministers who were former bankies. The only pleasure I got was watching an inept politician who does Ministerial impersonations reaching for the oldest argument in the political joke book – ” we changed our mind because of the constant speculation about an RC ” Rubbish. The Nats would have rolled Turnbull next week!
Great article with foresight on problems with ASIC and Government over-regulation. I am resigning as a financial planner this month. I am just sorry I do not have the public superannuation benefits and salary that ASIC give themselves. At least my contribution to ASIC will be reduced.
Well said and sorry you have to leave. I am but a few years behind you for the same reasons. A few things to tidy-up or I’d be OUT with you this month, believe me. Will miss my clients after I do, as you no doubt will. Cheers. Hope your retirement is a happy and healthy one.
The whole industry got it wrong by not standing up to the Union/Industry Funds’ push into financial planning market. The Industry Bodies also lack the clout to do anything ! Where would these Industry Bodies be if they had to provide their member’s with an annual FDS or opt-in requirement? All this red tape is killing the industry and increasing/worsening the under-insurance issue in Australia. The client accepts a premium not the commission I receive. It is a shame that after 38 years in the industry and all the families that have benefited both financially and emotionally from our assistance, that we find ourselves in the predicament we are in! FSR has been around now for well over 10 years and the regulations are now more onerous that ever before. We can’t wait another 10 years for the government to realise that they got things wrong – they’ve already had nearly 15 years to look back on. Commission/fee disclosure has now been around long enough for us to all judge. The problem does not lie here!!!! If insurance commission is now standardised across the industry then why should ASIC be so concerned about it that they place it on the front page of their SOA template even before the client gets to read anything else? It’s time to stop penalising all the legitimate advisers due to the failings of a handful of scrupulous others. While we are all fully supportive that client’s need to be able too make informed decisions, it’s also time for governments to stop making politically biased decisions and for product manufacturers to lift their games. The disturbing question is how many of us would enter into the industry right now, for the first time, knowing how precariously it is currently placed? Rant over!
well said and a great media article also. Your 38 years and I’m 28 years. these years have helped so many and at any one time we are negotiating 8 to 15 claims and this does not account for IP claims ongoing or WB claims ongoing. However, we will close the doors at the end of this financial year unfortunately and I will give time to my family and charities through volunteer work. Regretfully, all these years of negotiating values on behalf of my clients will be lost to our area. I’ve seen the pendulum swing far too far.
Thanks for a very well written and considered article. The most amazing thing to me is the total lack of thought and planning for the future on display by the corporate regulator and the Federal government. However if history is anything to go by, don’t expect any change in the short term.
Of course the real sting in the tail will be as a result of fewer people being advised “properly” and the levels of cover (not just the numbers those covered) will mean that where once a family would have been taken care of by properly advised life/ trauma / TPD and IP policies, that gap / shortfall will now have to be taken up by the Government by way of pensions, and other centrelink hand outs. there was a definite need to do something, but this was never it.
im guessing it will be some years before they see the error of their ways, meanwhile there will be a loss of valuable expertise to the industry, a few business will go bust or be gobbled up by the competition, and possibly a few life offices may even withdraw from the market completely
Some months ago Treasury requested feedback on the success of FoFA. Treasury actually said that the closure of financial planning businesses was a not a valid indication of the failure of FoFa. Hence one could argue that there stance on LIF is the same and that sadly the Government simply does not give a rats if advice businesses go to the wall and are replaced by TV adds and specifically the direct market.
Mervin – great common sense comments here… and spot on. It’s simple economics and has been seen in other industries and market sectors where media driven scare mongering and then reactive political grandstanding wind up shafting an entire market system that needed some tweeks at worst. FOFA/LIF/Best interests…and more and more people are avoiding Financial Advice and the good, well educated planners are having no choice but to charge more or deliver less for what is already being paid. To put into context if i want someone to change some lights around in my house, add a couple of power points and maybe a ceiling fan I’m up for $1000 from an electrician. And advisers who already meet the qual framework can’t charge much more to deliver a years worth of ongoing review/support and compliance. There is no united voice, the industry groups have officially bent over, and watch good people walk out the industry door as it’s too hard. They can’t get midwives anymore because they got run down, litigated against and so on..sound familiar?
Absolutely Correct and Spot on. ASIC, you are a joke!!
. . . get it right if you take the time to comment . . . ASIC is a SAD AND UNFORTUNATE joke. If they were just a joke we would be laughing but this is NO laughing matter. Due directly to many of ASIC actions the following is occurring as we speak:
1) Client Best Interest is being FLUSHED down the TOILET.
2) Caring and experienced advisers with 30 year+ histories serving client best interest are being FORCED OUT of the industry by ASIC pushed regulation.
3) Direct Life Company Sales are being boosted – this is sales with NO compliance oversight, no underwriting at point of sale (it is at claim – a disaster for many clients) and life company execs love it (little do they know or see of their future due to this)!
4) Millions of hard working Aussies will be without adequate family and/or business insurance protection in 5 or so years as advisers will be hard to come by (good experienced ones) and life companies will have pushed premiums through the rood due to low sales with few sales under proper advice.
5) any number of failings we have discussed re ASIC on these pages previously – pick your favourite . . .
.
So yes, ASIC is a dangerous (to client’s welfare), uncaring and slovenly government funded department that has no right to exist in the current form. It is a sad, dangerous, meddling and clandestine group simply focused on justifying its own existence and putting its hand out on Friday fpr taxpayer money in its paycheck. Disgraceful and disgusting.