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.”
The main reason the insurers wanted to change commission structure was because lase rates started increasing (putting upward pressure on pricing) and this was at least in part due to advisers increasingly switching business from one insurer to another. On a present value basis, the cost to the insurers was pretty much the same the same both pre and post LIF.
And the reality is that financial structures always incentive behavior. In every field of endeavour. Yes, even in financial advice.
If you want to make any change, you will need to work with the insurers and their issues. CALI has a priority on growing the industry. So do financial advisers. Perhaps working together is the answer.
So advisers churning was the root cause of this? There were a few big churners the insurers knew who they were and limited them ie took upfront away from those particular advisers, but that was a very small petcentage of the risk adviser pool at that time, and not enough to make the whole industry unsustainable.
Any business needs to make a profit, to do that over the long term you also need to be sustainable.
The risk industry isn’t sustainable due to the insurers discounting new business in a race to the bottom, whilst shafting existing clients.
It’s not our job to save insurance, we advise on a lot more than that anyway to make our money.
How can we advise people to enter the risk pool now the policy will be jacked up year after year, and it will lapse In the end anyway
So it’s up to the insurers to pull thier heads out and reset the whole pricing structure for risk, ro make it profitable and sustainable
Not up to us at all,
It’s difficult to know where to begin in explaining this abject regulatory failure.
Firstly, the ASIC Report 413 was deliberately designed to create a reason to springboard change.
ASIC already had an answer, but they needed a process to support that answer. and they completed a study that would lead to the push for recommendations for the abolition of Risk Insurance commissions entirely.
This was manipulated and misguided based on ideology, political pressure and consumer groups that consistently criticised Risk Insurance Advisers, but who failed to really understand the complex nature and the often long winded process in placing business.
The Trowbridge Report was flawed and then the FSC loudly supported it’s implementation and issued veiled threats to the industry that if a reduced commission basis did not result in an increase in the quality of Risk Insurance Advice, then they would push heavily for the total banning of commissions entirely.
I am certain the FSC and ASIC were infuriated when the decision to retain at least reduced commissions via LIF was implemented as opposed to either following the Trowbridge model or banning commissions altogether.
The now Liberal Senator, Andrew Bragg was previously Head of Policy for the FSC at that time and produced several media releases and internal documents that very obviously stated their preferred outcome.
The then FSC CEO, Sally Loane was way too close to Minister Kelly O’Dwyer and the FSC had previously made political donations to O’Dwyer’s seat of Higgins.
The resulting outcome has been an absolute disaster for the consumer, the Life Insurers and the Advisers.
It was entirely wrong and based on a web of lies, political pressure and a cohort of left wing consumer and legal groups that could never accept or entertain that anyone gets paid a commission for anything, let alone the placement of quality Life Insurance.
Any notion that churning of policies was a problem, could well and truly have been quickly controlled by the Insurers, Dealer Groups and Licensees and Associations.
Unless the upfront commission rate returns to the pre-LIF levels and the ongoing rates sit at 10-15% minimum, the Life Insurance business will continue to be unsustainable and will eventually die.
The Risk Insurance space used to be a vital, enthusiastic and profitable sector with a vibrant culture of professional people who treated their responsibility to their client’s well being and interest with dedication and utmost obligation.
These people still exist of course, however, their numbers are few and far between meaning access to a quality Risk Adviser is almost non-existent whilst the insurance pool of new business continues to plummet resulting in an ever decreasing pool of funds used to manage an increasing claims ratio.
It needs to be rectified immediately and it needs someone with some courage to stand up and say
“we got it wrong”.
Phil should know all about it….he was up to his neck in the cooperation with the FPA/FSC/Minister O’Dwyer which then led to FASEA, Grandfather ban etc…and this threesome are still collaborating.
Yes has anyone from the FPA or AFA ever accepted any responsibility for their support to LIF ?
Seems these so called Adviser associations did a wonderful job of stabbing the Advisers in the back
LIF was the final nail in the coffin for me to have to do anything with Risk – 60% upfront and a 2 year claw back is not enough to deal with the headache that is insurance – the insurance companies are a nightmare, plus they keep changing the goal posts.
It made adoption by young clients unviable – $1000 premium was about $1200, however switch to LIF they became a $600 client and if they cancelled you effectively worked for nothing.
So I stopped doing risk – and now only provide advice to retiree’s and pre-retiree’s who don’t need insurance.
If someone has a need for insurance, I decline advice as it’s not my specialty and they would be better served by someone who is up to date.
So yes LIF has been wonderful for stopping insurance advice, that and the insurance companies by being to hard to deal with.
Labor Inherited LIF, and the reality is that it was glad it was done by the Coalition and not them. Commissions of any sort have always been an ideological blockage for the labor lovelies particularly those with legal backgrounds.
Phil has outlined the incredible damage done by LIF to the life insurance industry and it continues to exacerbate.
What fascinates me is that no one in Labor, now captured by the industry superfunds because of thier ever increasing donations to Labor political funding, has worked out that if the life insurance industry in Australia suffers market failure, as appears to be on the books, then the industry funds will not be able to offer cheap DEFAULT cover to their members.
Any actuary working in the life insurance industry, and not under a cone of silence, will confirm, if asked the right question, that for a # 1 statutory fund to continue to dabble in the frolic that is default cover for industry funds, then the strength of their number one fund has to be gained by having at least 70% of its risk fully underwritten and preferably with a majority of younger healthier fully underwritten lives. Default cover is as we know is not underwritten
When will someone point out the elephant in the room. Treasury?. Not on thier current record. Our friends the life insurers? Nah, not while those CEO bonuses continue to be paid on profits that are sourced entirely for gouging legacy product policyholders and from those who make the mistake of purchasing new business on a duration based pricing principle.
We could be looking at market failure coming soon.
One wonders if Treasury ever mentions this to any Labor Minister for Financial Services .
WE are indeed looking at imminent market failure of risk as early as EOFY ’26-’27. For all the reasons you mention plus inadequate commissions (reward for effort) and ridiculous 2 year chargeback terms. Life companies should surely see this on the wall. Possums in the headlights.
What else is new
get the super funds to protect their members – problem solved
Thank you Phil