Australia’s underinsurance problem has increased by more than $300 billion in the last four years as soaring premiums and reduced adviser incentives prevented consumers from taking out life insurance, an advice industry body has said.
In an email sent to parliamentarians on Thursday, AIOFP executive director Peter Johnston said the dramatic increase in underinsurance was an “unintended consequence” of the life insurance framework legislation, which currently mandated maximum adviser commissions at 60 per cent up front and 20 per cent ongoing for risk advice.
“The impact on the risk industry from [the] LIF is extensively complete due to the dramatic drop in new policies being written by risk advisers,” Mr Johnston said.
“This production deficit has led to industry-wide institutional financial losses with the following flow on affects and unintended consequences:
The comments come following the latest APRA statistics, which revealed the life insurance sector suffered a massive 209.9 per cent drop in revenue in the March quarter of 2020 to minus $6.3 billion, down from $5.7 billion in the last quarter of 2019.
Adverse claims experience is also continuing to affect insurers and drive premium increases despite many consumers facing financial hardship as a result of COVID-19.
Mr Johnston suggested an increase to mandated maximum commission levels for risk advisers would go some way towards reversing insurer losses and the worsening underinsurance problem, pointing to current commission levels in New Zealand and the UK, where political recommendations to ban commissions were ultimately never acted on.
“The UK government responded by increasing commissions to 240 per cent and New Zealand 180 per cent to revive the [insurance] industry – it has worked,” he said.
“Considering our commission levels were 120 per cent then reduced to 60 per cent, around 90/20 most think will greatly assist.”
The email was part of the AIOFP’s recently launched political awareness program, which aims to educate a broader segment of parliamentarians around the dynamics of the advice industry.
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