Risk commission removal would be unprecedented: Report

MetLife’s Value of Life Insurance Report, released earlier in July, looked at the monetary value consumers gained from insurance in the event of illness or injury compared to government benefits, as well as examining the consequences of removing risk commissions for Australian consumers.

The report noted that while the royal commission had recommended the removal of commissions “unless there is clear evidence of underinsurance”, the move was likely to further restrict access to advice in a market where only 27 per cent of Australians currently had a financial adviser.

It said that the “potential consequences” of a removal of risk commissions were that consumers would rely on “off-the-shelf insurance products” that were not tailored to their needs, and that clients with lower economic means would lose access to advice.

The report also said consumers were unlikely to pay for upfront advice for a product that was subject to an underwriting procedure that could see them rejected.

“This is different from investment products, which do not require approval to purchase the product,” the report noted.

In the report, the insurer noted that the UK’s abandonment of a commission ban on insurance after its 2013 Retail Distribution Review provided “an interesting case study” for the Australian market.

“The RDR reforms initially recommended a ban on all commissions, including for life insurance products,” the report said.

“In 2009 following industry consultation, the FSA said it did not believe advisers continuing to receive commission on insurance sales would be detrimental to consumers, and that remuneration structures were not a key cause of the problems it saw affecting consumers.”

The report noted the fact that while other jurisdictions had varied sales models for life insurance, they also often came with obligations to purchase the insurance at some point in a client’s financial lives, such as when taking on a mortgage.

“While different payment models apply around the world, no country that has a strong, voluntary, stand-alone life insurance system has banned commissions. The removal of commissions on life insurance in Australia would be a global first,” the report said.

“For all these reasons, MetLife firmly believes that consumers should have a choice of how to pay for life insurance advice; either fee-for-service or via commission.”