Lost in translation
The main problem I had when combing through APRA’s quarterly reports for life insurers’ earnings was finding any issues regarding industry sustainability.
I joined the life insurance industry in October 1975, and when I started, there were more than 50 life insurance companies dominated by the big mutual life offices, with numerous small to medium-size entities nipping away at their collective heels.
Forty years on there are only 12 registered life offices under section 21 of the Life insurance Act 1995. I would qualify that these are companies with retail product offers to the open market. That is, products to which any adviser licensed in Australia has access. I would also point out this includes The National Mutual Life Association of Australasia Limited which for all intents and purposes is now part of AMP.
Currently, there are only 11 retail life offices left in Australia. There are also eight reinsurance companies registered under the act, and a further eight registered entities not really offering what I term retail products. In other words, you won’t find them on most Licensees' APLs (for example Combined, Hallmark, HCF and St. Andrew’s).
When APRA released its life office data for the period ending 30 September 2015, it indicated that life office profits had risen 33.9 per cent to $3 billion, with life offices experiencing a collective cost of $466 million over the same 12-month period, an 11 per cent reduction over the comparative period ending 30 September 2014.
The main problem I had when combing through the APRA quarterly reports (released on 17 November 2015), was locating the sustainability argument.
So many positives with so few negatives on the life industry balance sheets.
Taking a simplistic approach I was of the following opinion:
- Life offices were facing an imminent “sustainability” issue
- ASIC was concerned about 'churning'
- ASIC was concerned about ensuring advised consumers’ best interests were met and somewhere within the 413 Report (published 9 October 2014) there was also criticism of direct marketed and group products as well.
- The federal government recognised the magnitude of the “under-insurance” problem in Australia.
So with the dust settling on LIF, for now, we have the following solutions to the aforementioned concerns:
- Maximum adviser risk commissions to be halved by 1 July 2018
- Doubling of the responsibility period (clawback provisions)
- Life offices announcing increase in premium rates, particularly for Income Protection, Trauma and TPD
- Life offices reporting of lapses to be standardised to better reflect the real lapse story
- Legacy policies to be brought into line with current product offers
- ASIC to review SOAs with a view to simplifying them for both the consumer and the adviser
Now, I accept the cost impost to life companies of having to start reporting true lapse rates, that is as opposed to counting a death claim as a lapsed policy or a 10-year-old policy premium reduction (say due to a decrease in the sum insured) being viewed as a partial lapse.
I also appreciate that the impact of having to offer ALL clients the “best” policy conditions will hurt the life offices with large legacy books.
In a nutshell, life offices are 34 per cent more profitable than 12 months ago, have cut costs and have developed a range of outlets beyond advised or retail insurance products. They will also be paying up to half the level of commission they currently do on new business from 1 July 2018, and will be able to take a larger chunk of an adviser’s income back for up to 24 months after it was originally earned.
Well, we’ve certainly resolved the churning dilemma. The massive problem that saw the Financial Ombudsman Service dealing with… oh, hold on a minute… dealing with no actual client complaints.
As the FPA said in 2013: “In our experience, the complaints we get against FPA members – which are generally ones which also go to FOS – are because the consumer has suffered some type of loss, or received very poor service. We don’t generally get any direct complaints because an adviser has replaced insurance business, and I daresay FOS is the same…”
So, under these reforms the consumer will now be protected from the evil risk insurance 'churners' out there, from something they apparently never saw the need to complain about in the first place.
Not much about the client; moreso about the supposed “cost” to the life offices, the ones currently suffering from a $3 billion profit.
But how has LIF actually helped my client here?
If a client comes to me after one year and says ABC Life just put up their Income Protection premium by 15 per cent at their first policy renewal. The same client asks me to compare the market and make sure his existing policy issued 12 months ago is still the best option for him. I do so and now find XYZ Life has an “apples to apples” IP product for $350 less cost, solely due to ABC Life unexpectedly lifting their rates.
What do I do? How can I act in the “best interests” of my client?
Ever since FSRA started on 11 March 2004, I have found it very difficult to understand how we have not been acting in the client’s best interests? Of course, I can say I always have. And, I can say, I always will. I am also yet to meet an industry colleague who isn’t adamant they have also always acted in their clients’ best interests.
But how has LIF helped my client?
I personally have no issues with further simplifying the SOA. My risk clients already receive four to five-page SOAs. So, an even simpler two or three-page risk insurance SOA going forward is fine with me.
Driven by the FSC influence, both Assistant Treasurers involved in LIF have inadvertently sent Australia down an ever increasing underinsurance road.
Not allowing advisers to be fairly remunerated in their dealings with every client – from a $125 a month premium for a 25-year-old tradesperson through to a $50,000 premium for a four-person buy/sell business arrangement – is a travesty of justice and flies in the face of our democratic right to receive a fair day's pay for a fair day's work.
I, along with so many of my fellow industry stalwarts, have agreed that we will have to become very selective, going forward, as to whom we can “afford” to provide “personal” advice to, and whom we simply cannot.
What has been unintentionally created here is an “advised upper class” of client as opposed to a “non-advised lower class” product customer. All because the life offices convinced the federal government that the blame for all their supposed ills could be placed at the feet of those greedy advisers and their evil commission grab.
You lie in the bed you make, and the FSC and federal government have made theirs. Enjoy trying to find the trillions of taxpayer-funded dollars required in the decades to come, ostensibly due to taking an ill-informed “quick fix” path, instead of getting to the bottom of what has really created such a massive “under-insurance” issue here in Australia.
Phil Smith is a director of Dawes Smith & Partners
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