LIF a 'threat' to the existence of risk practices

In a study of the effects the Life Insurance Framework (LIF) will have on new risk specialist practices from 2018 onwards, Dover found that a new practice opening its doors on 1 July 2018 will face a drop in real value of commission income by as much as 40 per cent.

"This dramatic drop in the real value of gross income is an existential threat for most risk insurance practices. Few will survive such a big hit to their top line," the dealer group warned.

"The new practice will recover somewhat in subsequent years as the increased trailer commissions are paid, but not completely, leaving the typical new risk insurance practice about 20 per cent worse off after seven to eight years.

"This is a much worse result than most other observers are predicting," Dover said.

According to the dealer group, many observers of the effects of the LIF are merely comparing the halving of the first-year commission with the doubling of the subsequent year commissions and concluding "all will be well".

Dover cautioned that these observers are ignoring the effects of the two-year clawback period, increases to lapse rates and the time value of money.

"The drop in the real value of the adviser's gross commission income will be matched by an equal increase in the real value of the insurer's gross commission income," Dover said.

"It's a zero sum game that will be won by the insurers. It's a profit shift from advisers to insurers worth hundreds of millions of dollars," the dealer group said.

Dover said risk advisers should start making business changes now, since waiting until 2018 to act will mean it is too late to prepare for the effects the reform will have.

"Risk advisers should [work] now to adapt to their changing environment. This includes practical advice on improving their systems, reducing the length, time and scope of their statements of advice, emphasising strategies over product placement, and widening the range of services provided to clients," the group said.

Dover has released an e-book, Fifty ideas to take your risk insurance practice from good to great, which explores the research and the current state of play.