Risk commission cuts would force more advisers out

Zurich’s paper, The Risk Advice Disconnect, which helped inform its submission to the royal commission, cites Rice Warner research around commission settings in life insurance advice markets around the world.

While noting that many developed economies have restricted general financial planning commissions to improve the quality of advice provided to consumers, the research reveals that most of these markets have excluded life insurance commissions from these reforms, with the exception of Finland, Denmark and the Netherlands.

“In each of these cases, studies have shown a reduction in the number of intermediaries that are most equivalent in those markets to the role that financial advisers play in Australia,” the paper says.

“Typically, studies have shown reduction in their numbers in the years following implementation ranging from approximately 15 per cent up to 30 per cent.”

The paper suggested economic constraints from the changing fee model would similarly push risk advisers out of the local industry, with a survey of 250 Australian life insurance advisers by Zurich revealing that almost half said their business’s revenue would be impacted between 50 and 100 per cent if fee-only risk advice was introduced.

Around 50 per cent of life insurance advisers surveyed said they would leave the industry if such a model was introduced, according to the paper.

The insurer’s research also revealed that a significant proportion of Australian consumers would not buy life insurance if an upfront cost was the only way to purchase a retail policy, with around 28 per cent saying they would ‘take no further action’ if they had to pay a fee for insurance advice.

Rice Warner modelling cited in the paper pointed to a $70 million increase in the government’s social security bill and a $2.65 million annual loss in tax revenue if retail insurance sales were to decrease by 50 per cent.

Zurich’s paper ultimately concluded that “commissions should continue to be allowable within the limits specified in the LIF regime” and that “advisers should be able to be adequately remunerated for the cost of providing advice at the time they provide it”.

The paper was provided to MPs by the AIOFP this week as part of its drive to engage both sides of politics on the current issues faced by the advice industry, as ASIC gears up to conduct its 2021 review of the LIF commission settings.

The association’s executive director, Peter Johnston, said mandating commission levels across all insurers had removed perceived conflicts and any further reduction or removal of risk commissions would make provision of advice uneconomic.

“If advisers can only be paid a fixed amount from all manufacturers, we suggest these circumstances mitigate the potential conflict,” he said.

“The other related issue is the massive increase to compliance around all forms of advice, including risk. It is simply uneconomic to deal in the risk area when consumers are reluctant to pay a sustainable fee for service quantum to meet compliance and profitability levels for the adviser to stay in business.”