‘Critically endangered’: Insurers’ role in healing the risk advice sector

Following the introduction of the Life Insurance Framework (LIF) reforms in 2018, which saw commissions drastically reduced, many financial advisers have been unwilling to provide risk advice, calling it a dying industry.

Speaking with ifa, Katherine Hayes, director and financial adviser of Hayes and Co Insurance Services and a director of the Financial Advice Association Australia (FAAA), argued that for the sake of the risk advice sector, insurance providers should employ “limited advice providers” to fill the gaps.

“As someone who’s a risk specialist, I can’t help but see the dangers facing the life insurance industry as a result of the consequences of the rapid changes that have occurred over the last couple of years,” Hayes said.

“The health of our life insurance ecosystem, I think that’s in a critically endangered zone, and while I think more changes are required, it can’t be left the way it is. Changes need to be made to return it to a healthy ecosystem.”

With so few new entrants to the advice profession and even fewer specialising in risk advice, Hayes explained that limited advice providers working for insurance providers could be a viable solution, helping more Australians access advice regarding their insurance needs.

“When we removed providers from our ecosystem, we removed a training ground, the base training ground, where a lot of advisers got their first introduction into the financial planning space,” she said.

“There is simply not enough people who are trained to give risk advice well, to service the existing number of policyholders out there, let alone take on new ones, and I don’t think small businesses or financial planners have the capacity or the willingness or the risk appetite to take on the people needed for that.”

Highlighting the lack of advisers providing risk advice, the 2023 Q4 Adviser Musical Chairs Report, released by Adviser Ratings in February 2024, found that just 480 advisers were responsible for writing half of all new life business in 2023.

Advisers remain apprehensive

While recognising that many within the profession are likely apprehensive about reintroducing advisers into insurance providers due to prior poor behaviour, Hayes said that with the right guardrails they could provide a necessary boost to the sector, servicing clients who may not be commercially viable for traditional advisers to take on.

“There needs to be guardrails in terms of which clients they interact with. For example, it could be if somebody doesn’t have an adviser, sure, they’re going to need advice, but if they do have an existing adviser, you’d be directing them back to their adviser, rather than stepping on toes,” she said.

“There’s always going to be elements of the market that advisers may not traditionally look at. If somebody calls up and says, ‘Look, I know what I want. I just want a half a million dollars’ worth of life cover’.

“Most advice practices would struggle to do that commercially, but a life insurer may be willing to take that on and cover that cost internally, and as long as the client is aware that if you’re going to XYZ insurer, you’re only going to get XYZ insurance product, then it’s OK.”

Commenting on the issue, Christine Cupitt, chief executive of the Council of Life Insurers (CALI), told ifa that if life insurers were able to provide limited advice, they would function alongside existing advisers, rather than replacing them.

“We want to see legislation introduced that allows life insurers to provide simple advice only on their own products, and only when customers ask them to. Of course, this requires appropriate limitations and strong consumer protections,” Cupitt said.

“Where people have more complicated advice needs, life insurers will continue to put them in contact with financial planners who can give them broader advice that compares products across the market. We want to complement the valuable work they do, not get in their way.”

With the second tranche of the Delivering Better Financial Outcomes (DBFO) reforms expected to allow a new class of advisers that can provide basic advice, Cupitt further stated that it would allow insurers to better provide for their customers.

“Under proposed financial advice reforms, this is the kind of advice life insurers would be able to provide to their customers when they ask for it, at no extra cost to them. We shouldn’t be turning people away when they ring our call centres. After all, giving simple answers to simple questions is basic customer service,” Cupitt said.

“Less than a quarter of people say they want basic information only, proving how critical the federal government’s Delivering Better Financial Outcomes legislation will be to giving Australians the kind of advice they want, when and where they want it.”

With so few advisers willing to offer risk advice, Hayes said that if insurers are willing and able to deliver the crucial service, then they should be allowed to do so.

“If the rest of the ecosystem isn’t willing to meet that need then I don’t think it should be standing in the way of those who are willing to do something about it,” she said.

“Does it come with risks? Absolutely, it does. But I think the risk of not doing anything is greater.”

She noted that, as current risk advisers reach their client capacity, a number of strategies are needed to address the needs of new clients, among these are limited advice providers.

“When it comes to the risk space, most advisers who are risk specialists, they’re getting to the point, because there’s so few of them, their risk books, their capacity to take on new clients is limited. They don’t have the capacity,” Hayes said.

“We need greater capacity to serve, and that will happen by new entrants. It’ll happen by efficiencies, both within the advice practices as well as on the insurers’ innovation and their tools that they provide. There’s multiple prongs that need to improve and need to change.”