The future of life insurance commissions

Among the 76 recommendations handed down by the banking royal commission was a recommendation to ultimately reduce the cap on life insurance commissions to zero unless there is ‘a clear justification for retaining those commissions’.

The government and the opposition have both supported this recommendation and ASIC has announced that there are 12 recommendations, including the recommendation relating to life insurance commissions, directed at or requiring a response from ASIC and the regulator is committed to “fully implementing each of these”.

Life insurance commissions are good for consumers

What happens when you take away life insurance commissions is that consumers do not seek out and pay for life insurance advice. We know this from the experience in the Dutch market where commissions were banned. In the Netherlands, advice is now only sought and paid for by the wealthy, not the everyday consumer – so it is restricted to those who probably need it the least, while those who probably need it the most have to resort to getting advice over the back fence and purchase products online or over the phone – and we all know from the royal commission how well that goes. Not well.

Ban commissions in Australia and you can expect similar outcomes – many everyday Australians just won’t be able to afford to pay, or would be unwilling to pay for advice upfront from their own hip pockets. They will therefore have to be content with the cover they have in their super funds, if any, take life insurance tips from their mates and buy direct or go without. How is this a good outcome?

Commission structures

ASIC Report 413 (Review of retail life insurance advice) published in October 2014, which is now getting on for five years old, revealed that more than a third (37 per cent) of life insurance advice in the ASIC sample failed to comply with the law. Almost half (45 per cent) of the advice given by advisers receiving upfront commissions failed. However, the pass rate for advice remunerated by other commission structures, so we can assume hybrid commissions, was 97 per cent.

Why would a failure rate of only 3 per cent sanction introducing zero per cent commissions? Things had to change, and they have. Time has moved on from 2014 and more and more advisers are remunerated via hybrid commissions. Kill the commissions that are failing consumers, yes, but, as I’ve said before, don’t throw the baby out with the bath water.

But we’ve all heard from me on this topic many times before – what do other key players, namely the life insurers themselves, have to say about it? We asked them and here are their responses.

Asteron Life – Daniel Waller, head of life intermediaries

We need a strong industry and skilled life insurance advisers to help people understand that insurance provides them with the freedom to live their lives, knowing we will be there during the hard times to help them get back to living their lives. I believe there is a role for commissions to play in making it affordable for people to access advice and thereby driving a level of competition in the market which is better for customers.

TAL – Niall McConville, general manager, retail distribution

Community access to high quality financial advice is critical. Regardless of the remuneration framework, a vibrant financial advice sector supporting well informed customers is essential to secure the financial future of Australian families.

Financial advisers are small business operators, providing local employment opportunities, often trusted members of the community, who work hard to provide competitive insurance products and services for their clients. The parallels with the recent debate on mortgage broking remuneration are very relevant and insightful.

The LIF reforms have set out a commission framework to properly balance and align customer and adviser outcomes. TAL supports the current LIF commission framework. Any further changes beyond the scheduled 2021 review need to be examined carefully.

Integrity Life – Chris Powell, managing director and CEO

Life insurance products are complex and not well understood by consumers. Professional risk advisers play a key role in analysing the life insurance needs of the consumer and recommending appropriate products and levels of cover based on the specific needs of their client. This is an incredibly important and essential role.

Fundamentally, Australians are underinsured. Difficult life events, such as permanent disability, long-term or terminal illness and death, can dramatically and negatively affect the financial position of any underinsured Australian and/or their family when they occur. Such underinsurance often leads to a significant burden being placed on government-funded social services in these situations. This is not a desirable community outcome. Australians should be looking to obtain greater wealth protection from increased life insurance coverage.

While it may be true that there is always an element of conflicted remuneration in any commission, it is also true that Australians are unlikely to place the same level of value on the advice provided if they are required to pay for it separately. Thus, any proposal to remove commissions completely is likely to significantly reduce the levels of professional life risk advice taken up by the community as a whole.

Integrity Life strongly believes the decision to receive commissions or reduce them and move to a fee for service model is best resolved through transparency and agreement between the adviser and their client. At the same time, we note that our systems have been built to be agnostic regarding fees and commissions. We can pay commissions or we can deduct them from the premium and allow the adviser to specify a fee for service. Our systems can also handle mixed fee for service/reduced commission arrangements. We can also collect the fee on behalf of the adviser and remit it to them if that’s their preference.

Finally, whatever decision is made by this or any future government, Integrity Life promises that we will strongly support advisers through any transition required.

Zurich Life and Investments, Tim Bailey, CEO

Zurich recently released research quantifying how much consumers are willing to pay in out-of-pocket fees for life insurance advice.

The study, conducted by Rice Warner on behalf of Zurich, revealed that only 8 per cent of those surveyed were willing to pay more than $1,000 and none was willing to pay $2,000 or more, the amount that almost two-thirds of advisers said they would need to charge.

Almost 30 per cent said they were not willing to pay a fee at all, a finding which illustrates the size of the challenge ahead if expert help with life insurance is to remain within reach of everyday Australians.

In this report, Mr Bailey said:

Life insurance is not without its complexities, and some of the commentary we have heard since the royal commission highlights a genuine lack of understanding of the sector and the interplay between the major channels and product types. For example, an appreciation of the differences between group and retail, the dynamics at play and the role each plays in delivering positive consumer outcomes, does not seem to be evident in many discussions.

Similarly, it is largely overlooked that since the implementation of LIF, up-front commission rates are now standardised, rendering one of the major objections to commissions – a fear of bias towards products or providers paying higher rates – effectively redundant.

Collaboration of all stakeholders is essential to ensure the 2021 review of life insurance advice by ASIC is as robust and comprehensive as possible. This will determine that the choices consumers have in accessing expert help with life insurance are robust and comprehensive.

Don Trapnell, director, Synchron

Adrian Flores

Adrian Flores is a deputy editor at Momentum Media, focusing mainly on banking, wealth management and financial services. He has also written for Public Accountant, Accountants Daily and The CEO Magazine.

You can contact him on [email protected].