Among the 76 recommendations handed down by the banking royal commission was a recommendation to ultimately reduce the cap on life insurance commissions to zero unless there is ‘a clear justification for retaining those commissions’.
The government and the opposition have both supported this recommendation and ASIC has announced that there are 12 recommendations, including the recommendation relating to life insurance commissions, directed at or requiring a response from ASIC and the regulator is committed to “fully implementing each of these”.
Life insurance commissions are good for consumers
What happens when you take away life insurance commissions is that consumers do not seek out and pay for life insurance advice. We know this from the experience in the Dutch market where commissions were banned. In the Netherlands, advice is now only sought and paid for by the wealthy, not the everyday consumer – so it is restricted to those who probably need it the least, while those who probably need it the most have to resort to getting advice over the back fence and purchase products online or over the phone – and we all know from the royal commission how well that goes. Not well.
Ban commissions in Australia and you can expect similar outcomes – many everyday Australians just won’t be able to afford to pay, or would be unwilling to pay for advice upfront from their own hip pockets. They will therefore have to be content with the cover they have in their super funds, if any, take life insurance tips from their mates and buy direct or go without. How is this a good outcome?
Commission structures
ASIC Report 413 (Review of retail life insurance advice) published in October 2014, which is now getting on for five years old, revealed that more than a third (37 per cent) of life insurance advice in the ASIC sample failed to comply with the law. Almost half (45 per cent) of the advice given by advisers receiving upfront commissions failed. However, the pass rate for advice remunerated by other commission structures, so we can assume hybrid commissions, was 97 per cent.
Why would a failure rate of only 3 per cent sanction introducing zero per cent commissions? Things had to change, and they have. Time has moved on from 2014 and more and more advisers are remunerated via hybrid commissions. Kill the commissions that are failing consumers, yes, but, as I’ve said before, don’t throw the baby out with the bath water.
But we’ve all heard from me on this topic many times before – what do other key players, namely the life insurers themselves, have to say about it? We asked them and here are their responses.
Asteron Life – Daniel Waller, head of life intermediaries
We need a strong industry and skilled life insurance advisers to help people understand that insurance provides them with the freedom to live their lives, knowing we will be there during the hard times to help them get back to living their lives. I believe there is a role for commissions to play in making it affordable for people to access advice and thereby driving a level of competition in the market which is better for customers.
TAL – Niall McConville, general manager, retail distribution
Community access to high quality financial advice is critical. Regardless of the remuneration framework, a vibrant financial advice sector supporting well informed customers is essential to secure the financial future of Australian families.
Financial advisers are small business operators, providing local employment opportunities, often trusted members of the community, who work hard to provide competitive insurance products and services for their clients. The parallels with the recent debate on mortgage broking remuneration are very relevant and insightful.
The LIF reforms have set out a commission framework to properly balance and align customer and adviser outcomes. TAL supports the current LIF commission framework. Any further changes beyond the scheduled 2021 review need to be examined carefully.
Integrity Life – Chris Powell, managing director and CEO
Life insurance products are complex and not well understood by consumers. Professional risk advisers play a key role in analysing the life insurance needs of the consumer and recommending appropriate products and levels of cover based on the specific needs of their client. This is an incredibly important and essential role.
Fundamentally, Australians are underinsured. Difficult life events, such as permanent disability, long-term or terminal illness and death, can dramatically and negatively affect the financial position of any underinsured Australian and/or their family when they occur. Such underinsurance often leads to a significant burden being placed on government-funded social services in these situations. This is not a desirable community outcome. Australians should be looking to obtain greater wealth protection from increased life insurance coverage.
While it may be true that there is always an element of conflicted remuneration in any commission, it is also true that Australians are unlikely to place the same level of value on the advice provided if they are required to pay for it separately. Thus, any proposal to remove commissions completely is likely to significantly reduce the levels of professional life risk advice taken up by the community as a whole.
Integrity Life strongly believes the decision to receive commissions or reduce them and move to a fee for service model is best resolved through transparency and agreement between the adviser and their client. At the same time, we note that our systems have been built to be agnostic regarding fees and commissions. We can pay commissions or we can deduct them from the premium and allow the adviser to specify a fee for service. Our systems can also handle mixed fee for service/reduced commission arrangements. We can also collect the fee on behalf of the adviser and remit it to them if that’s their preference.
Finally, whatever decision is made by this or any future government, Integrity Life promises that we will strongly support advisers through any transition required.
Zurich Life and Investments, Tim Bailey, CEO
Zurich recently released research quantifying how much consumers are willing to pay in out-of-pocket fees for life insurance advice.
The study, conducted by Rice Warner on behalf of Zurich, revealed that only 8 per cent of those surveyed were willing to pay more than $1,000 and none was willing to pay $2,000 or more, the amount that almost two-thirds of advisers said they would need to charge.
Almost 30 per cent said they were not willing to pay a fee at all, a finding which illustrates the size of the challenge ahead if expert help with life insurance is to remain within reach of everyday Australians.
In this report, Mr Bailey said:
Life insurance is not without its complexities, and some of the commentary we have heard since the royal commission highlights a genuine lack of understanding of the sector and the interplay between the major channels and product types. For example, an appreciation of the differences between group and retail, the dynamics at play and the role each plays in delivering positive consumer outcomes, does not seem to be evident in many discussions.
Similarly, it is largely overlooked that since the implementation of LIF, up-front commission rates are now standardised, rendering one of the major objections to commissions – a fear of bias towards products or providers paying higher rates – effectively redundant.
Collaboration of all stakeholders is essential to ensure the 2021 review of life insurance advice by ASIC is as robust and comprehensive as possible. This will determine that the choices consumers have in accessing expert help with life insurance are robust and comprehensive.
Don Trapnell, director, Synchron
You can present as many arguments for and against as you want. The only winners will be the Industry Super Funds offering alternative low-cost insurance products through their Membership. A 20% kick-back on Life Premiums based on a 100,000+ Membership Base is not a bad little earner. The Unions and their mates at the ALP are having the greatest laugh ever at an Industry in self-destruct mode and given that they already control 60% of the Superannuation market. You bright spark Financial Planners do the math and tell me what you come up with?
I find it interesting that the advisers that see commission as the “right” solution try to argue that it is all about claim time. My experience is that there will be a low percentage of people making a claim, so what this means is 90% fund the 10% that will make a claim! Surely this must seem unfair?
Insuarnce companies want commission as this increases their profits, higher the commission the higher the profits. What will change is when an insurer sets up a true Nil commission product for the Australian market, not the simple 25% reduction now given by insurance companies.
It should not matter how a service is paid, if consumers have the ability to make a clear decision based to true figures then this will solve the problem and end the debate.
Instead of arguing about commission how about a discussion on how a client chooses to pay for the service provided. If this can be done then the issue is solved. I propose that life compnaies must produce accountable nil commission product that aligns with their commission product. The adviser then demonstrates the cost over a 5 year period of each, Nil commission vs Up front payment , the client makes the choice. I do believe this would fall under best interset duties also.
Hey,
I’m not a financial adviser / planner, and only indirectly related to this topic.
APRA released claims stats last week that showed “accepted” claim rates for “individual advised” business were quite a bit higher than for “individual non-advised”. I know the comparison isn’t like for like. But, hey, if you want a headline around value of advice, there it is…???
Don Trapnell is correct. The losers will be the consumers and social security. I fear poor people will not pay for advice.
[quote=Mark]Sorry but I disagree entirely with your premise here. Any fee-for-service adviser will be able to tell you, if you write insurance with NIL commission, its 25% cheaper to the client. I’m afraid that undermines your argument.[/quote][quote=Mark]Sorry but I disagree entirely with your premise here. Any fee-for-service adviser will be able to tell you, if you write insurance with NIL commission, its 25% cheaper to the client. I’m afraid that undermines your argument.[/quote]
Mark, you must be confused, drunk or both.
Please don’t respond to articles when you are in these states.
I read with interest the various comments put forward
As a starting point, Mortgage brokers have retained the privilege of earning commissions for their work. I have nothing at all against the industry, but the time taken to secure a mortgage is vastly less time consuming and onerous than trying to secure insurances on behalf of people.
In most cases, the collation of the required documentation is done by the borrower for the mortgage broker and in most cases, the outcome is achieved, by way of provider secured and amount to be lent, whereas in the latter, there is a great degree of complexity and a raft of possible uncertain outcomes. If any industry should be moved onto time spent for providing a service, it is Mortgage Brokers. They generally do not need to provide much by way of ongoing service given the tightening of credit and difficulty these days in having one’s loan refinanced.
In setting up insurance, there is a distinct legislative and lengthy advice process to be followed in the production of documents , followed by underwriting which one hopes is successful. I guess this process can range from 10-20 -40 hours of work, even more sometimes, depending on requirements and complexity. And the whole process after all this time might be unsuccessful.
This means that only the very wealthy would be able to afford fee for service and the very people who need the advice will not get it. How sad is this. Surely the Hayne Report did not intend working class Australians to lose this avenue of access to advice and its payment mechanism?
The current under-insurance issue will only get bigger over time. At some stage in the future, a vast number of people might well be welfare recipients because they could not afford the costly fees to pay someone to help them with their insurances. Unintended consequences, collateral damage and the Government will have to pick up the pieces down the line of a decision made in haste and in my opinion, not quite fully understood.
So, if a client wished, after some years, to have the covers reviewed and possibly reduced/restructured owing to financial difficulties, they would be expected to pay even more fees for service at a time when they don’t have the finances to maintain their covers at the current levels.
It seems to me the Life Insurance Framework is working, commission rates are down and advisers will still have some degree of ongoing (lower) revenue to provide a level of ongoing services to insurance clients.
For enhanced rigour and transparency, introduce a Fee Disclosure Statement regime here to ensure that insurance clients receive a level on ongoing service.
Let us all be pragmatic and let common sense prevail. Total eradication of commissions does not improve an industry, it eradicates it where fee for service is the only option.
Actually…this is a gross misrepresentation of the Dutch market.
Amongst other things, what has occurred is a reduction in intermediaries (that’s businesses like yours Don).
There has been a small increase in quality advice as evidenced by compliance with the rules.
Yes, there is evidence poor people are less likely to take advice. But they’re also generally less likely to want to pay for services that aren’t central to putting food in the table and a roof over the family’s head.
Considering I’m sure you’ve done your research on the Dutch market vs grabbing a simple headline that suits your own interests I’m sure you’d be aware that a distributor that purports to be a product salesman vs an advisor is exempt from 21% VAT, automatically covering the premium differences you purport are a hurdle to seeking advice.
Of the insurers mentioned in the article I note that Zurich is the only one interested in DOING anything to help get to the root of the issue and to unearth strong arguments in FAVOUR of commissions. This is being “:committed to advisers” and being involved in SUPPORT of advisers. Risk advisers will not exist if commissions are removed. My 33 years experience and practical trials of ‘fees’ for risk advice bear this out conclusively – as does the Zurich research. Sure, Zurich published this for advisers AND for ZURICH because if we don’t exist they don’t either. Still, Zurich is the only company (possible also MLC) that is DOING SOMETHING and being counted. All the others seem to want to simply jawboning their way to extinction – OR they’re just happy for Zurich/MLC to do the hard yards. I’m disgusted with the lack of support on this issue of commissions from the life companies generally. They ALL should be treating this as a MAJOR priority and be consumed with a solution and lobbying. What a bunch of introverted gooses are these executives – hiding in their offices behind the VERY occasional press release to the likes of Don Trapnell (God bless him) when they should be ACTIVE in fully controlling the narrative on commissions Australia-wide. Their silence is deafening. Wake UP! [b]Where the hell are they and what the hell are they thinking?![/b][b][/b][i][/i][i][/i]
[quote=Mark]Sorry but I disagree entirely with your premise here. Any fee-for-service adviser will be able to tell you, if you write insurance with NIL commission, its 25% cheaper to the client. I’m afraid that undermines your argument.[/quote][quote=Mark]Sorry but I disagree entirely with your premise here. Any fee-for-service adviser will be able to tell you, if you write insurance with NIL commission, its 25% cheaper to the client. I’m afraid that undermines your argument.[/quote]
The assumption here is that you do not charge an upfront fee for risk advice. If you did this would significantly increase the upfront cost to the client – is this is their best interest or is getting some advice a higher priority – perhaps ask the client? Similarly do you not charge an ongoing fee for advice – or do you not offer ongoing insurance advice at all – is that in the client’s best interest?
Alternatively are you and adviser that wraps ongoing insurance costs up with other advice and bill the client a higher overall fee through their super – what about the sole purpose test? Hayne and ASIC are onto you! How would you address a risk only client’s ongoing advice and service needs without ongoing advice – is this in their best interest to not receive advice again?
How is a client disadvantaged whether they pay the fee directly OR indirectly. Indirectly they may even get a tax deduction (e.g. income protection premiums including a commission) – that certainly wouldn’t happen for direct risk ongoing advice fees.
Assuming an average premium of $5000 and current ongoing commission of 22% the ongoing commission (or indirect fees) would be $1100 – pretty good value in comparison to the typical ongoing fees charged for “advice”, thus wouldn’t the client be better off? (FPA claim the average ongoing advice fee is $3450…and this probably excludes risk advice or conversely assumes ongoing commission – you can’t have your cake and eat it)
Perhaps we just forget the clients insurance needs.
Premium cheaper, but you then have to pay for the advice, pay for any review and pay for help at claim time. Think Mark, think…
Mark, what about when the Adviser initial fees and ongoing fees for service are included? A $1,000 premium is $750 at a 25% discount, but not much good if you have paid a $2,200 fee to implement the cover. Year two, what fees would you be charging to service the client? Or are you updating address details, payment details and doing reviews for free? But it will take some years to recover that upfront fee – if it doesn’t lapse beforehand. Looks like the real winner would be the insurer who was able to place an expense back on the client.
mark you must be from a direct insurer or an industry fund because any person who has been involved with selling risk insurance will tell you a industry without commission simply will not work
https://www.youtube.com/watch?v=vsXBh0pMZ_A
I guess the issue with so many of these “outside looking in” folk is that they often have a cursory look at the issues with a less than reasonable understanding of (all of) the history.
I get the reasons why commissions have come under fire, however i reject the solution we are currently dealing with.
the fact is that a lot of “small”: cases only ever made it on to the books because advisers had a healthy mix of large and small clients, then along came increased levels of compliance, it became obvious that the cost of advice to a “small” case client, wasn’t a lot different from the cost of compliance for a “large” case client. I would have been less concerned / worried about a reduction to say 88% / 22% with a cap on “Large” premiums, than the current slide into loss making advice.
sure, some clients will pay a fee, but they are few and far between (unless you only work in the sector)
I for one want to see an increase in commissions ( either to the old up front and trail pre L.I.F. or at the least the 88/22 Hybrid option) otherwise we will not only change a fee, but will restrict those to whom we will be prepared to offer advice to in the future.
at this point I don’t hold out a lot of hope, I guess both advisers and clients will need to suffer before common sense eventually prevails
What everyone seems to have left out is that you need someone on your side when you (or your family) needs to make a claim. I recently met a blind person who tried to claim his TPD insurance from an industry fund 4 years ago. They refused and as he had no adviser he just let it go!!! Insurances will go down in price because the insurance companies will never pay a claim.
Sorry but I disagree entirely with your premise here. Any fee-for-service adviser will be able to tell you, if you write insurance with NIL commission, its 25% cheaper to the client. I’m afraid that undermines your argument.