‘Vicious downward spiral’: Change on LIF more necessary than ever

The Life Insurance Framework hasn’t been in force for quite a decade yet, however then-assistant treasurer Frydenberg announced the details of LIF on 24 June 2015.

As Financial Advice Association Australia (FAAA) general manager policy, advocacy and standards Phil Anderson noted in a piece reflecting on LIF, this marked neither the beginning nor the end of the lengthy process.

Indeed, the transition period that led to the current position of 60 per cent upfront commissions ran from 2018 to 2020, which Anderson acknowledged was a “very intense period and one that still holds a great deal of anger”.

“The LIF reforms were very drawn out, yet some seem to think it all happened with no warning as part of some compromise deal that was done in a backroom,” he said.

“This was a process that gradually unfolded over time, and continued to be an area of regulatory attention through until the Quality of Advice Review. There is much to this journey that is on the public record, however the past can be easily forgotten.”

Importantly, Anderson noted that the negative impact of LIF has been felt across the entire breadth of the life insurance market – hitting consumers, insurers and advisers.

“Whilst we can probably all hold the view that life insurance is a critically important product to protect consumers in times of need, what has happened to the life insurance market in recent years is a worrying journey,” he said.

“Some would describe it as a vicious downward spiral. Others have described it as a burning platform. There is no doubt that what we have seen in the last 10 years has been highly problematic, with a heady combination of substantial decline in advisers and new business volumes, substantial increases in premiums and an overall decline in life insurance clients.

“Advisers tend to spend most of their time on administration or saving existing clients in the face of premium increases and a cost-of-living crisis. For many practices less than half of new business is new clients. More lives are continuing to leave the risk pools than enter. This is not what a sustainable market looks like.”

As Anderson has previously pointed out, unless risk advice is “economically viable”, underinsurance in Australia is only going to get worse.

“We are left with a small number of risk specialists who naturally focus on the high income and high premium end of the market,” he added.

“The LIF changes have had a hugely negative impact on the overall market and the time has come to address this problem and provide some momentum towards some form of recovery and better access to advice and insurance for everyday Australians.”

While the Coalition had expressed a desire to rethink commission levels in the lead up to the election, its dismal result will do little to keep the issue on the agenda.

“Any reasonable assessment would conclude that the LIF reforms have been an abject failure, and have contributed to a decline in the sustainability of the life insurance industry,” Anderson added.

“This is an important issue that needs to remain on the regulatory change radar, and Government needs to keep a close eye on the life insurance market to ensure that it remains sustainable. There are many who fear it is on the wrong trajectory.”