In a study of the effects the LIF will have on new risk specialist practices from 2018 onwards, the dealer group found that a new practice opening its doors on 1 July 2018 faces a drop in real value of commission income by as much as 40 per cent.
“This dramatic drop in the real value of gross income is an existential threat for most risk insurance practices. Few will survive such a big hit to their top line,” the dealer group said.
“The new practice will recover somewhat in subsequent years as the increased trailer commissions are paid, but not completely, leaving the typical new risk insurance practice about 20 per cent worse off after seven to eight years.”
“This is a much worse result than most other observers are predicting,” the dealer group added.
According to the dealer group, many observers of the effects of the LIF are merely comparing the halving of the first year commission with the doubling of the subsequent year commissions and concluding “all will be well”.
In fact, Dover said that these observers are ignoring the effects of the two-year clawback period, increases to lapse rates and the time value of money.
“The drop in the real value of the adviser’s gross commission income will be matched by an equal increase in the real value of the insurer’s gross commission income,” Dover Financial said.
“It’s a zero sum game that will be won by the insurers. It’s a profit shift from advisers to insurers worth hundreds of millions of dollars,” the dealer group said.
Dover explained that risk advisers should start making business changes now, as waiting to act until 2018 will be too late to prepare for the effects the reform will have.
“Risk advisers should [work] now to adapt to their changing environment. This includes practical advice on improving their systems, reducing the length, time and scope of their statements of advice, emphasising strategies over product placement, and widening the range of services provided to clients,” the group said.
Dover has released an e-book titled Fifty ideas to take your risk insurance practice from good to great, which explores the research and the current state of play.
Roger, can you get in touch with me. 0417 700 364
The game is over and at the final bell there was only one winner (guess who) and it certainly wasn’t the consumer. Has anyone noticed the huge increase in premiums pending / planned by the Life Offices. It’s great to say that there will not be any increases in premiums (outside normal CPI, age and perhaps Stamp Duty during the new responsibility period) but what about the 30% increases being experienced NOW. At this rate by 2018 premiums will be double the premium today. The Life Offices seem to be absent without leave at the moment or is it pay back for making comment on sites such as this. My response is “if you weave a tangled web, expect to get caught up in it”.
Clawbacks should still be 1 year but if the LIF rules get through by doubling to 2 years then they should at least still remain on a pro rata basis not the dacronian 100% in year 1 and 60% in year 2 which would be a major impediment for those advisers (and possibly their clients) that choose to write new business after 1/7/16.
And what of the advisers who changed to hybrid commission structures as I did over 20 years ago. There is no gain to our business model from the second year onwards, only a loss to our initial entitlements from 1 July 2018 PLUS the doubling of the responsibility period.
Finally someone is waking up to the con, Insurance Companies are the only ones to win out of the LIF reforms.