Risk advice must be ‘economically viable’ to ensure sustainability

As the federal election draws closer, there has been a growing push for the government to re-examine the Life Insurance Framework (LIF) commission cap settings, despite the Quality of Advice Review (QAR) recommending they stay in place.

Speaking at a Financial Advice Association Australia (FAAA) roadshow event in Sydney, general manager, policy, advocacy and standards Phil Anderson reiterated that life insurance commission settings form a “key part” of the association’s policy platform.

Covered under objective 1.5 in the platform, the FAAA has marked taking action to “better enable the delivery of life insurance advice to facilitate more Australians being adequately covered” as an ongoing long-term goal.

Anderson explained that “making sure that the LIF caps enable the provision of life insurance advice in an economically viable manner” is core to this objective.

“We need to make sure that it remains feasible to provide advice to younger Australians about their life insurance needs,” he said.

“We’ve also expressed very strong views against what we’ve seen in the in the life insurance market in recent years and upfront premium discount, which we don’t think is in the best interest of clients. We don’t think it’s in the best interest of advisers either.”

Speaking with ifa earlier this year, Skye Wealth founder Phil Thompson argued that the lack of disclosure by insurers about the practice of duration discounting, while not illegal, is certainly misleading for customers.

“The reason why it’s not good is because a lot of consumers and a lot of advisers don’t even know that duration discounting happens in the market because it’s really difficult to understand the actual discount,” Thompson told ifa.

“If I’m going to buy an Apple laptop, and I see that it’s normally $2,000 but today it’s $1,500 then great. I can see what the original price is and what the discount is today, and I also don’t need to purchase it once I’ve already bought it, but if I have to purchase it every year, I would want to know what the likely long-term cost is.

“And the insurance companies actually under disclose these discounts. Most of them don’t actually disclose it at all.”

Anderson added that the overall survival of the life insurance industry is at stake, with these being among the long list of issues emerging in the space.

“We think that there’s been substantial decline in the number of advisers providing life insurance advice, significant decline in new business,” he said.

“So, we’re not getting the number of new clients into the insurance pools to make it sustainable long term. We’ve had too many years of substantial premium increases, which mean that advisers are spending their time trying to retain clients, rather than focus on new clients.”

On Wednesday, Association of Independently Owned Financial Professionals (AIOFP) executive director Peter Johnston said the possibility of a minority government creates issues in getting any movement on commission levels.

“One of the key advice issues that needs fixing for consumers, advisers and the nation, in general, is how the LIF legislation has been strangling the risk/life cover and severely affecting national underinsurance,” Johnston said.

“With a hung Parliament looking likely where either the left leaning Teals or the Greens will be playing a pivotal role, getting risk back to pre-LIF conditions will be very difficult post-election.

“The specific problem is the entrenched ideology of rejecting commission-based renumeration regardless of the circumstances by the left leaning fraternity.

“Unfortunately, the left have further infiltrated all levels of government and bureaucracy over the past decade where sadly they don’t understand the risk culture and reject the notion that most consumers prefer paying for their insurance cover by a commission formula.”

While he acknowledged that the QAR recommendations supported the current commission split, “clearly this formula has failed”.

“The recommendation should have been to return the conditions back to the pre-LIF environment,” he added.