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:
- Consumers’ premiums have risen significantly, not declined;
- The nation’s underinsurance position has increased from $1.7 trillion in 2016 to over $2 trillion today;
- Insurance company losses have led to extensive industry-wide redundancies;
- Government revenue has decreased due to production loss related stamp duty revenue.”
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.
On at least a monthly basis there is a Life Insurance Insto email with Premium Increase of 25% pa, 38% pa, even 50% pa increases.
No one will be insured in the future at these ever increasing premium rates.
This greedy salesman has been in the industry for over 50 years and in that time managed many claims for clients and afforded their families to live in dignity. All on commissions in the main that were NOT excessive.and actually benefited the client.No fees for claims management either. Did all of this take any selling? Sure did. In this world people are all selling something be it expertise, care or product. Nothing changes.
I am interested to know if everyone thoughts on Writing Level commission as opposed to hybrid As I am a huge fan from this year.
Level commission with most insurers 30/30.
1. You will break even after about 5 years as opposed to 66/22.
2. After year 6 you are better off on level commission.
3. It increases the value of you book.
4. 12 month responsibility with a sliding scale clawback as opposed to 24 months with hybrid.
It works if they keep the policy for 5 plus years the problem is that in the insurance companies are continually increasing the premiums so most don’t or look to reduce.
Anyone who thinks this is a win has to be living in dreamland. LIF has decimated the LIfe companies and caused a lot of Australians to dump their cover due to costs. Churn was never a real issue as the Life companies cut off the advisers who churned in any case. Using the logic of one comment reduction in commissions just reduces the amount of life insurance sold as it has become uneconomic to do so for small premiums.
So we have the company tax payments for life companies essentially wiped off, the stamp duty revenues for the States (10%) of each premium dropping like a stone, and thousands of redundancies.
If you designed a Government policy to shoot yourself in the foot then this is the case study.
And you all have to remember that this was dreamed up by the FSC and promoted by Josh Frydenberg as Minister, and thus it says a lot for the FSC’s grip on reality.
They were told this would happen but did not believe the Industry instead believing minor functionaries whom have since disappeared.
Well done FSC – upholding your members interests as usual and lowering their profit to zero
Insurance is a seriously complex product.
If you haven’t worked in the industry and at the coal face for a period of time don’t bother putting your two bob’s worth in because you won’t understand the issues and it won’t help the situation.
OK, if I unpack this, LIF has done exactly what is was meant to do? Less new policies, which could be interpreted as less switching which means they have eliminated churn?
If I was the regulator, I would be calling it a massive win
So you assume that most new policies are results from switching? Any hard data to support this findings?
Probably an anonymous comment from an FSC member? but you are wrong on two counts.
1. After the LIF was passed and the FSC members released the correct data , ASIC actually admitted that churn was not an issue. They admitted it.
2. The reason new business has fallen off a cliff is quite simply that advisers cannot afford to write it under the LIF commission rates and clients do not want to pay fees. Risk is not simply bought by customers, it is sold by making them understand the need and by spending time giving them good advice. Customers do not simply walk into an advisers office, they are gained through advertising. Take your marketing costs and the increased costs of regulation, then subtract the new LIF rates and a 2 year clawback and advisers are either breaking even at best or losing money writing new business. Nobody works for free and THAT IS WHY NEW BUSINESS HAS FALLEN OFF A CLIFF.
Life companies going broke as loads of people cease Life Cover due to massive increases in premiums since LIF.
Plus far less new Life Policies written.
Only a Canberra Bubble moron could see this as a win.
Is this Over Complicated O’Dyer’s comment of a win ???
What a joke let’s go back to the old days of high commissions which will increase the uptake of insurance policies, so basically you are confirming what people have said for years about our industry that we are all a bunch of salesman who only push products on people for commissions.
How about following the best interest duty and highlight the need for insurance to your clients and
charge them a fee no commission for it.
Why would receiving commissions over fees be more successful in getting more clients to take insurance, ohh that’s right because clients don’t feel they are paying you for your service but really they are with higher premiums there’s no such thing as a free lunch.
The amount of old insurance salesman in this industry is clearly evident by all these other comments
You have a reasonable argument that no cover is comparable to bad cover which was sold by a greedy salesperson.
However, insurance clients KNOW that the adviser gets commission and they are ok with it, even knowing what the commission is but they are not ready to pay any amount of money for the service itself. I have only ever had one person project the premium forward for 15 years and added up the commission and said “that is too much”. Everyone else accepts paying the commission because – if insurance is done right – going to an adviser gives you the best deal, better than much of online and for many people better than an industry fund.
They are not necessarily ok with it, they accept it. There is a big difference.
you seem to speak for so many people, who exactly are you?
Yes, insurance policies sell themselves, just like your job would get completed if you were paid nothing as well.
Very self righteous Patb but not very accurate. I have had many substantial claims and NOBODY complained about upfront commission.
Thank you Peter for getting this information to government which is exactly what the useless FPA and AFA should have been doing but are too conflicted by their FSC master payments.
I would like to hear comment from Sally Loane and the FSC who were instrumental in causing this disaster. Sally said the LIF would have “better consumer outcomes” but the opposite has happened. Her members have been systematically gouging higher premiums on existing customers but at the same time discounting premiums for new customers and trying to encourage churn.
Come on Sally Loane, lets hear your response. Hopefully you now understand what commissions actually are and how they benefit since your disastrous seat in the Royal Commission chair?
The main problem is that Insurance of most types still needs to be SOLD. Once you take away the incentives even though insurance will still be recommended if a negative response it will not be pursued. Hence underinsurance.
Unlike the UK and NZ there is no industry super fund lobby that claims their super fund insurance is enough for everyday Aussies. Until this argument is addressed parliamentarians (particularly Labor) will never understand. They just see insurance as superfluous and that advisers simply write it to line their pockets with huge commissions with no regard for best interest
“Best consumer outcomes” were the least of ASIC’s concerns, all they wanted to see was more compliance, red tape and work for less money imposed on every financial adviser. ASIC is completely run by ex-union and ISN employees (EG Danielle Press) and they are all Labour voters too so they hate IFA’s and will do anything at any cost to see us all strangled from regulation, compliance and increased costs. ASIC couldn’t care less about how the consumer comes out of this as long as they make life as difficult as possible for advisers, licensees and retail product providers!
No shit Sherlock , everyone is surprised by this comment except the financial planners who knew this was going to happen, and it will get worst before it gets better. Well done ASIC to a bow you dicks.
The FPA and AFA should do more about this. The current arrangements are hurting everybody.
The hilarious part of all of that is that if you switch to level premiums, do a proper job so the policies last and can handle the initial cashflow deficiency you are as well or better off than you have ever been as an insurance adviser (unless you churned a lot but it seems that was not common). You also only have a one year clawback.
I can imaging an actuary in his/her office saying ‘any sensible adviser would go level commissions and would not be worse off at all, in fact substantially better than with 110/10, so no problem’, while for the risk adviser it looks as if they lost half their income (110 or 140 down to 60).
I am doing risk and am doing more risk and would happily take on those sub-40 sub-1000 annual premium lump sum covers. Under level commissions these people are valuable even for me in my 60s.
You mean level commission, not level premiums
The issue with level premiums are insurers can re-rate. We have seen some as high as 50-60% especially for IP. If your referring to level commission I agree as an adviser you break even after 5 years on level comms under 30/30 and it also increases the boom value.
Bravo! Finally an association that is actually trying to lobby for advisers. The self serving FPA and AFA could learn a thing or 2 from these guys!
get ready for the exodus from the FPA to the AIOFP. The FPA are a total waste of space
At the end of the day it is everyday people that will be affected by this in the end. Mum’s and Dads with kids will not have the means to give their kids a decent life if one of them suffers ill health or death. Sure someone gets a commission for doing the work but nothing is for free. Even commission Hayne gets paid to do his job.
Yes it is no longer viable to give risk insurance advice and that is a real issue for Australia going forward.
Some people do not like Mr Johnston. BUT he does advocate PUBLICLY with Government, not talk behind doors and be picked off by the smarties in Ministers offices. None of this is new! We predicted this 3 years go but ASIC would not listen-it did not match their long held nil-commission ideology. Interestingly FOI has revealed ASIC was tugging FASEA , establishing the rules behind the scenes while publicly professing only the law matters. Mr Longstaff knew that.
Never seen an issue with commissions that are appropriately disclosed, as they should be. It creates remuneration for advisers from clients who can’t afford, or simply don’t want to pay upfront lump sum fees for advice. Premiums were supposed to go down (or at least hold steady) as a result of reduced commissions, not continue rising.
Insurers are just increasing their bottom line, and are the only party that benefits from the attack on advisers – no greatly measurable benefit to the client/consumer.
A client cannot afford to/ would not want to pay my upfront fee of $24,000 on a $10,000/yr policy if wanted to be paid what I would get from commissions over 10 years (60% + 180% =240% or $24,000 in addition to their premiums), considering my clients will be holding on to their policies for 30 years.
Any risk adviser that charges less is just engaging in a race to the bottom and will go out of business soon especially with the increased compliance, FASEA exam and education requirements. Bye bye.
What business in the world expects its distribution to set up the running costs of a business and sell its product for nothing ? This applies to retail fund management as well. How will they survive without distribution when over 90% of their business has come from their distribution channels. Cutting off your nose to spite your face ?
Has there been one single benefit through the introduction of LIF? just one?
ASIC has gotten larger, which is a benefit if you work for ASIC.
Writing insurance used to be my bread and butter. The article forgot to mention the compliance burden which is the final nail in the coffin. I’m in those stats – don’t go there anymore.
AIOFP executive director Peter Johnston said the dramatic increase in under insurance was an “unintended consequence” of the life insurance framework legislation,
They only had to ask a cross section of “experienced ” Risk Advisers to get the answer to this one.
talk about the Elephant in the room.
we have reduced our annual premium activity by around 85%.
1. there is little or no incentive to write Life insurance. (commissions need to be reset to at least 80/20)
2. the increased compliance and lack of consumer enthusiasm for fees in addition to the “small” commissions involved makes it less palatable
3. the increased underwriting burden as a result of the market share at all cost mentality by the Banks when they entered the market has exposed the insurers to greater losses, in other words the actuary rule book was thrown away.
we are where we are because that is where ASIC and the Government ( of both colours) want us to be, the real cost will be the additional burden on the taxpayer when the under insured begin to look for financial assistance at what would have been claim time .
don’t expect Nero to put his fiddle down while Rome burns any time soon.
Unintended Consequences if you could monetise them the financial advice sector would make Bill Gates look like a pauper.
Only going to get worse. For the first time in over 20 years we’re starting to turn young people in need away because we can’t afford to give them the advice they need for the remuneration we’d receive from insurers. Well done to the regulators – the true damage of what you’ve done will be evident in 10-20 years as reliance on Centrelink becomes unsustainable.
I generate risk leads through my website and i’d say around 60% are under 40. I now find myself turning away most of them if it is just lump sum cover as the commission payable on a premium under $1k is just not worthwhile and that’s not to mention the 2 year responsibility period. Off to real insurance they go to get an inferior product.
Still confused how one can have more than a 100% drop in anything, and negative revenue?
well done everyone whose short sighted focus was on smashing the advice industry only and nothing else.
I thought they said premiums would come down, they did this to sell on their insurance companies and also just sell directly through phone campaigns which they had to stop that is the real issue at heart.
we had a 25 electrician call to get insurance we will make a commission of $800 with a two year claw back to produce the Risk SOA is a cost of 500-600 that doesn’t take into account the advisers meeting times. you then think about the risk of advising on that service if something goes wrong and its simply not worth it.
I would love to see the so call high churn numbers.
the fact right now is the insurance companies are creating a churn they are discounting new policies by 10% I ran a quote for a client and it was cheaper to recommend the same product under a new policy due to the upfront discounts this is wrong and has to stop or we at least need reprieve to give simple insurance advice without an SOA provide quotes and PDSs
If you think this is bad, wait until commission is banned and a advisers have to charge a fee for the insurance work.
It’s definitely coming as ASIC can’t stand that we take commission
if that happens nobody will provide advice in the space, which will only further exacerbate the issue.
Absolutely spot on.