In my view, a statement such as this from a royal commissioner should lead us to question much of the whole report and the motives behind it. How could someone with this much influence make a recommendation to abolish a core funding mechanism for such an important part of our social infrastructure without considering whether there are other good reasons not to do so?
Many will argue that the job of the royal commission was not to look at all of the factors at play but to only focus on misconduct. When you are tasked with reviewing and reforming an industry, you must consider all factors involved or risk creating other problems.
The government has been under intense pressure, trying to win a public relations battle by blindly acting on all recommendations. However, the royal commission report demonstrated on several issues that it has a narrow view and limited understanding of the broader issues of certain parts of the industry. Mortgage broking is an example where the government has clearly stated that it believes the royal commission got it completely wrong and this would have won them few supporters just before an election, so their level of conviction on this must have been high.
In any case, my view is that there is ample justification for retaining life insurance commissions as they are an important mechanism for ensuring that consumers can access professional and affordable life insurance advice.
The removal of the commission-funded model would suddenly and dramatically increase the cost of insurance cover for clients, as they would have to pay for advice out of pocket, in addition to insurance premiums.
This is not just my view: Several life insurers have publicly expressed that removing life insurance commissions to advisers would result in a reduction in the number of consumers purchasing life insurance. The Financial Services Council stated in its submission to the royal commission last year that “life insurance policies, by their very nature, ought to be treated differently from other products”. The AFA and FPA have joined forces with the life insurance community as well as the Honourable Bernie Ripoll, a person that some may have considered an unlikely supporter of the movement to protect life insurance commission.
Considerable amount of work in the life insurance process
There is an enormous amount of work involved in providing personal insurance advice to clients and arranging cover with insurers. Before any advice is provided, the adviser must gain an understanding of the client’s circumstances to determine what type of insurance they need and how much cover is required. The next step is to go through a pre-underwriting process to determine what health problems the client might have.
People forget that, often, this is as far as the process goes, and the adviser does not get paid. I don’t know of any other professions that provide this much value to a potential client free of any costs or obligations.
If the client proceeds, from this point the advice is provided through a statement of advice and then more time is required to guide clients through the application and underwriting process. Then, there is monitoring and ongoing advice as the client experiences life events and milestones, such as starting a family, that may require changes to their cover.
Finally, there could be a need for the adviser to assist in the claims process. I have personally managed claims for a number of clients over the years, and I know that being able to hand over tasks like liaising with claims managers to a financial adviser can be a huge benefit during what is often the darkest time of their life.
Throwing the baby out with the bathwater
Under the current model, the commission is paid by the insurer because the client is introduced by the adviser, but also because it saves the insurer time during the underwriting and claims process.
Research in Australia and abroad has shown that consumers have no appetite for paying out-of-pocket fees for life insurance advice, especially without any guarantee that insurance cover will ultimately be available to them. As many pundits have already said, it would create a situation where it will be mainly the wealthy taking out life insurance, as it did in the Netherlands.
Furthermore, you can’t expect that consumers will agree to pay out-of-pocket costs when there is a problem of public trust in the life insurance industry. A 2017 survey by PwC found that while 78 per cent of Australians think life insurance is important, just 42 per cent believe their life insurer will be there for them should they need to make a claim.
Then there’s the issue around younger clients. It’s already a difficult task to get younger clients to think about life insurance. This will become a near impossibility if you tell them that they have to pay an out-of-pocket fee.
Australians are chronically underinsured as it is. According to Rice Warner’s Underinsurance in Australia 2017 report, the underinsurance gap between current levels of insurance and what families need to maintain their quality of life until retirement is a massive $1.8 trillion. As underinsurance increases further, this will place greater strain on the welfare system as more people seek financial assistance for serious injuries and disabilities.
Another concern is that, as a result of these changes, clients will gravitate towards inferior or inappropriate “self-service” or online insurance products.
Many financial advisers will say that if clients don’t want to pay a fee for advice, then that’s their problem and it’s too bad if they get inferior insurance or none at all, and it’s more important for the industry to make the transition to a profession. However, I think this is a callous attitude which puts the needs of the advice community ahead of the public interest.
I’m all for our industry becoming more professional. However, I would like to see it done in a way that allows more Australians to access advice, not less. The hypothesis that if we appear more professional then more people will obtain advice, no matter how much it costs, is an unrealistic and irrational fantasy. For the vast majority of consumers, a commission structure for life insurance is actually beneficial and can be quite sensibly justified. We’re in real danger of throwing out the baby with the bath water on this one.
Eugene Ardino, chief executive, Lifespan Financial Planning
For too long advisers have been too greedy. They always cite the more complex cases to justify their commission yet the majority of cases are straight-forward and with the industry addressing the inequities with their claims processes the fewer one-trick pony life risk advisers the better!
Why is the only choice between commissions or fee for service being out of pocket. Has there been any thinking around life insurers paying flat fee amounts based on the complexity of the insurance need?
Just like the term “sales” is seemingly unfairly branded with negative connotations, so too has the term “commissions” been unfairly branded. There is a place for different types of remuneration, including commissions to achieve different outcomes. If commissions are outlawed in Financial Services, then so should it be outlawed in the Real Estate Sector and Other sectors where it is prevalent. Commissions is just a form of remuneration for services rendered. As with any form of remuneration it is the application that can be or is abused or misused. Sorting out the application of commissions and behaviours of providers, rather than the form of remuneration, is required in the FS industry and any other sector where commissions are prevalent, for that matter.
At least we have group insurance (provided you opted in), NDIS and Centrelink. I’m sure Centrelink will help your loved ones in the event of a claim…. a pigs fly too
So far this year our small firm has assisted 5 of our clients to access and receive a payment for personal risk insurance.
We have witnessed first hand the extent of the benefit that 5 families have received because someone in their family cared enough to take on-board our advice and purchased risk insurance.
I can assure you that if we were charging them a large fee upfront for the time and effort to ensure they have the cover, that most of those families simply would not have ended up having cover.
Sadly these salaried experts that know very little to nothing about what actually happens in the real world are making decisions that have massive unintended consequences and at the end of the day, we will see even less of those that need valuable insurance having such cover.
One could almost believe he has a vendetta against Life companies.
Kommissioner Kenneth has failed to act in the best interests of either insurance advisers or consumers, so perhaps his remuneration should clawed back??
It is hard to understand that a learned person like the Royal commissioner can be so negligent as to not consider the total ramafications of what he has advocated in terms of Life Insurance. I would have thought that he would have been above the populist voice but alas!!
Its pretty simple.
Retain insurance commissions for Personal Advice provided with an SOA from a qualified adviser who is compelled to work in the client’s best interests.
Remove them for insurance sold under General Advice where there are no client protections and the salesperson has had half a days training and doesnt have to work in the client’s best interests.
Hopefully the politicians are listening Eugene!
Never has an industry been destroyed more than this
Well articulated Eugene
Like Mr Haynes I too thought Life insurance commission is not appropriate, but now I have changed my mind and believe like Eugene that without commissions insurance advisers won’t be able to sell insurance and society will actually be worst off via gross underinsurance. I know the word ‘ selling’ is disliked, but insurance advice is essentially ‘recognizing a need’ and rests on the minimum impost to purchase. This is very different to financial advice which is ‘satisfying a goal’ and therefore, usually has little or no impost to purchase.
This is a very well written article that cuts to the point of why insurance commissions are vital. I was stunned by the $1.8 trillion dollar under insured gap!