The position of advisers as intermediaries between insurers and consumers, and the way they are remunerated, has caused a structural problem within the life insurance industry, says John Trowbridge.
Speaking at the FSC's Life Insurance Conference in Sydney yesterday, the former APRA member and author of the Trowbridge Report said it is "worthwhile" that the life insurance sector is being reformed.
This is because of the "underlying structural problem" created by the role advisers play as intermediaries between an insurer and a client, and the way in which they are remunerated.
"Historically, intermediaries have been essential in stimulating product demand not withstanding a clear need across the community for the products that the life insurance industry actually produces," Mr Trowbridge said.
"Product-aligned services and remuneration of advisers are built around what advisers want and what they say the customers want. And, what they say the customers want is not necessarily the same thing as what the customers do actually want.
"Insurers, historically, have survived and prospered only with the support of advisers, hence the effective customers of the insurer are the advisers not the consumers themselves as the policyholders," he said.
"Commissions have become the normal form of adviser remuneration, and they have done so for a long time, and especially where the initial commission on a new policy and replacement policy exists materially higher than renewal commission, which creates a conflict of interest."
Mr Trowbridge said these conditions have created a "first move disadvantage" for insurers, where no company could "break ranks" from paying out commissions without "jeopardising" its business.
"Insurers have - [but] not deliberately - become captive to advisers, and that is not a criticism, by the way, of the advisers; that is just the way the industry has been structured," he said.
This problem may not be obvious because many people have "come to expect" that life insurance operates this way, Mr Trowbridge added.
The conflict of interest problem is "real" and no matter how much education, training and professionalism advisers have, commissions "just cannot work" in the best interests of customers. Reform is therefore necessary, he said.
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