What the FSC, AFA, FPA, ASIC, government, opposition etc have been hammering on about is that the fundamental problem with churn (and pretty much every other ill) in life insurance in Australia is the level of commissions paid to advisers.
In their infinite wisdom, their solution is to penalise advisers by reducing the commissions payable, extending the clawback period and basically making it almost impossible for advisers to make a living without charging a fee-for-service for their insurance work, something that hasn’t worked in any country.
The end result will be less advisers working with consumers, and clients dealing directly with insurers and taking out policies that are more expensive, less comprehensive and harder to claim on. Such a scenario will only increase the level of under-insurance in Australia. The longer this system runs and the more examples that are reported of people holding worthless policies they can’t claim on, the worse the situation will become, putting the very viability of the life insurance sector in Australia at stake. Those who already have insurance cover will find premiums spiking due to a smaller and reducing pool, which will in turn lead to more people cancelling their cover and so the downward spiral will continue.
At some point, it will force the industry, regulators and politicians to review what’s happened. They will find that financial advisers were not the fundamental problem in the system, but actually added value right through the chain. Of course, by then, the vast majority of risk advisers will have departed the sector and it may be too late to restore the system to balance by attracting new and former advisers. To do so, they’ll likely have to offer upfront commissions similar or even higher than those currently on offer.
How does this relate to the Great Plague? Well, back in the day when the plague was decimating the population of London, the powers-that-be got together and decided it was all the stray cats and dogs roaming the streets (and roofs – it’s where the term ‘raining cats and dogs’ came from) that were causing the rapid spread of the disease. There wasn’t any evidence of this, but surely with all these mangy animals running around they must be responsible. The solution? Begin eradicating the stray animals. We now know that the plague was actually being spread by fleas in rats. What do you think was the main source of keeping this vermin under control? You guessed it, the stray cats and dogs.
Ultimately, this ‘solution’ only compounded the problem and tens of thousands of people died needlessly because of an ill-conceived and non-evidenced-based ‘solution’.
LIF is going to have exactly the same impact on the life insurance sector in Australia, with consumers ultimately being worse off and the government footing the bill through increased welfare and sickness benefits.
But I guess it’s much easier to sheet home the problems of a sector on a poorly represented (yes, I’m talking about you AFA and FPA) and easy scapegoat than to scratch beneath the surface and find it’s the product providers (i.e. insurers) and their hypocritical, self-serving policies that lead us into this mess in the first place.
Jason Meotti is a senior financial planner at Financial Fitness WA
Well written article Jason. There are two reasons why a flood of advisers did not respond to Trowbridge in the beginning. Firstly, no government will ever take note of what we say and secondly, we had so called professional bodies to do this on our behalf. We didn’t expect miracles but I don’t think anyone realized how inept these organisations showed themselves to be. And as for Kelly O’Dwyer, you only have to read some of her comments to realize why Tony Abbott never promoted her into the ministry.
In this case the Rats are the Financial Services Council and the biggest Rat of them all is actually a Fox in Rat’s clothing. There is absolutely no evidence to support implementing the LIF. Churn is only 1%, the LIF is just designed to make non-aligned advisers, who are free to make product choices for clients, unviable. The LIF gives vertically integrated banks and insurance companies the competitive power to flog inferior products to unsuspecting clients; and the FSC, FPA and AFA are OK with this because they are all conflicted because they are heavily funded by the FSC members. Likewise would be many Liberal Politicians. The LIF will be a disaster for Advisers and Consumers. The fact the AFA continues to doggedly support the LIF with no evidence to back their support will be on of the greatest betrayals in the history of our industry.
A brilliant article Jason.
But then why is all this being said do late in the game? I am a reasonably new adviser (less than 3 years), yet when the Trowbridge study was underway and we were asked for feedback, I am told that only 124 of the thousands of advisers, replied. Mine was one of them and I even emailed Frydenberg directly with my feedback, warning as this article has said, that government will be facing increased payouts for welfare (to advisers) and sickness benefits to all and sundry.
I have worked with international banks for years and understand a little bit of corporate lobbying. It was clear to me that the big insurers were using their usual corporate muscle to push this through and the AFA (of which I am a member) was the front. I did suggest to Fox that since the large insurers were the ones that were sponsoring AFA so much, that he may be in a conflicted situation, when ti came to representing advisers interest that were directly opposed to insurers. He denied it (what else would be he do?).
So with us, the adviser community having twiddled our thumbs while Rome burned (excuse the mixing of metaphors), I guess we can only suck our thumbs because that is all we will soon have left.
Well written and may well represent a majority of advisers. In the defence of AFA, they could well have fought for no changes but clearly there was likely to be changes and possibly much worse scenarios would have resulted. For me a hybrid model has been used mostly for many years and given that the majority of my cover is level premiums type insurance; I could clearly state that churning has never been a result in my business.
I really do think they have obtained incorrect information to lead down a path of a poor outcome for the 99% of advisers doing the best they can. The result may well further erode the industry as the article says despite us having been so resilient over the years.
However, I have never considered exiting the industry but now I will within 2 years. After 30 years of love and care to clients and their needs, its time to make a early exit at 55 and let the clowns continue to make businesses, families and individuals suffer.
I am getting less tolerant of stupidity.
Wow extremely well said, verbalises the thoughts of every sensible adviser and clearly states the facts
Great article. My crystal ball says that in five years time the insurance companies will reap what they have sown and it will not necessarily be what they expect.
I believe they call it the “law of unintended consequences”
When “utmost good faith” was removed as the foundation stone of the Insurer and replaced by the need to generate more and more profit – things changed. Lax or zero underwriting of policies held in employer sponsored super funds and changes in social norms that see people using and referring to illegal drugs as “recreational” for example have also contributed to the problems we face today. Nothing is going to change quickly but I will bet that Australia will have less insurers in five years.
The parallels are scary. I’ve been feeling like a mangy cat or dog through no fault of my own for the last couple of years and now i know why…Great article.