Removing life commissions would reduce sales by 60%, FSC says

New research released on Thursday by the Financial Services Council (FSC) revealed that if the Quality of Advice (QAR) review results in the implementation of a scaled advice model and other reforms to simplify advice, the number of Australians with life insurance cover would increase by 12 per cent or 432,000 Australians.

The research, conducted by NMG Consulting and commissioned by FSC, suggests that conversely the ‘do nothing’ approach would result in a decrease in life cover for 612,000 Australians.

Commenting on the findings, FSC CEO Blake Briggs urged the government to grasp the “rare opportunity” created by the QAR to deliver affordable and accessible advice to consumers.

“FSC research shows how the unmet life insurance needs of consumers can be addressed by comprehensively reforming the regulatory framework, not just tinkering with it,” Mr Briggs said.

“If nothing changes, the number of life insurance policies held by Australians is set to reduce by 17 per cent in the next five years, leaving Australians without cover when they need it,” he noted.

According to the FSC, comprehensive reform of the advice framework is needed, a level of reform that, it said, has largely been reflected in Michelle Levy’s proposed ‘good advice’ framework released for consultation in the review’s proposals paper.

The changes that the FSC is throwing its weight behind include abolishing statements of advice and replacing them with a simpler ‘letter of advice’; breaking the link between financial products and advice; and abolishing safe harbour steps for complying with best interests duty.

“These insights suggest the benefits that a reformed financial advice framework can have across the broad range of financial services that consumers must navigate, from superannuation savings, to investing for the future for themselves and their families,” Mr Briggs said.

Moreover, the FSC’s research also found that commissions on advised life insurance remain an important component of adviser remuneration.

As such, the body noted that removing commissions would reduce advised life risk sales by 60 per cent and increase lapse rates.

"By 2027, this would result in a 32 per cent decline in the overall number of in-force advised life risk policies, significantly increasing the Australian underinsurance gap," the body noted.

"Simplifying the provision of life risk advice with both a simplified comprehensive life risk advice and a simpler way of delivering risk advice will steadily increase the number of new life risk sales, and slowly reduce Australia’s underinsurance gap each year. The simplification of comprehensive advice is expected to improve adviser efficiency by 32 per cent," it concluded.