The Financial Services Council (FSC) has announced the details of a new life insurance framework with substantial changes from the original proposal.
For delegates at the FSC conference this week the clarification represented a rare moment of substance after the opening two days, which one senior insurance industry source described to Professional Planner Online as “full of direct questions and political replies”.
The eagerly anticipated announcement will see FSC-member life insurance companies agreeing to a watered-down self-regulatory standard effective from July 1, 2013.
“The FSC framework sets a new standard of self-regulation for life insurance and is a positive outcome for consumer access and affordability through lowering premiums over time,” said John Brogden, chief executive of the FSC said this morning.
“This framework has changed substantially from the original proposal released in March following four months of consultation with our life insurance and financial advice network members, the Association of Financial Advisers (AFA), the Financial Planning Association (FPA), ASIC, APRA and individual financial advisers.
“It will help to address Australia’s chronic underinsurance problem by placing downward pressure on premiums, making life insurance more affordable,” Brogden said.
The FSC’s framework will introduce a consistent responsibility period and claw-back mechanism.
Where an advised policy lapses within three years of commencement, a three-year adviser-responsibility period will apply.
A tiered commission claw-back provision will be introduced as follows:
- 100 per cent of remuneration paid by an insurer to an adviser if the policy lapses within the first year;
- 75 per cent of remuneration paid by an insurer if the policy lapses within the second year; and
- 50 per cent of remuneration paid by an insurer if the policy lapses within the third year.
The FSC’s framework does not preclude and will not apply to advisers providing life insurance advice on a fee-for-service basis where agreed with their client.
Most financial advisers were opposed to the Financial Services Council’s initial, proposed Replacement Business Framework measures.
The reforms designed to stop the practice of insurance “churn” had many experienced life-risk specialists warning they may result in unintended negative consequences for clients.
I think the clawbacks are unreasonable. I know the life insurers will like them because they ensure that the insurers will make a profit on policies. Apparently it takes 4 years for a life company to make a profit.
However, I think that the penalty on advisers is unreasonable. The only way that I can see around this problem is to have a legal agreement, fully enforceable, whereby the life insured will be required to pay a fee if a claw back is made. Hopefully if we present this properly to the client then this “fee” will not prevent the client from taking up the insurance.
When a legitimate switch from one company to another is made (on the same terms, conditions and dollar fees or commission) the clawback will be negated by the fees on the new policy. I think that this is fine but when a client moves to another adviser then the clawback can be devastating. One adviser that I know lost $35,000 on a matter like this.
When fee for service is implemented on 1.7.2013 the problem for accountants will far outweigh these clawback rules
i really see a problem- we are missing out the main objective which is providing the client with “great advice” -on many occasions i have found a client who has not been advised that there are companies out there who offer to pay a clients premium on their life cover -for life – if a trauma claim is triggered-i provide them with this opportunity to change and even rebate them an amount to have their “wills” done etc- both the client and the adviser will be disadvantaged if he is ” re trenched ” in the 12th month !!! are we not encouraging new and improved products?? you guys say premiums are going to drop!! can we not shop around for improved rates-think again
The only case where this makes any sense, is cancellation of a policy that is to be replaced and the adviser is the same in both cases. And this I support.
Other than that is purely a process of adding some of the margin back to the issuer at the advisers expense and will have no effect at all on addressing underinsurance.There is no correlation.
In addition, this will not influence or deter replacement of cover written by an alternate adviser.
IW says
Agree with the proposed reforms in principle but they don’t go far enough. Too many cowboys out there. I propose banning up front commissions but keeping hybrid and level. It’s only a matter of time before commissions will be replaced by fees so prepare yourselves for it!
The FSC have got to be kidding! We spend hours of work to advise a client that they need insurance and getting it accepted and then if the client decides in 18 months that they can’t afford the policy or their situation changes and they cancel it, we have to pay back 75% of our income.
What a great way of discouraging planners from recommending insurance. They might as well say it will be fee for service and ban commission completely. Then we’re back to the old problem of people not paying to get advice on insurance. How the hell could they take 4 months to come up with that rubbish?
I can only hope that part of the framework has been ommitted from the article and it only applies to replacement business, not a client simply cancelling their policy. Otherwise it has nothing at all to do with churning.
What about the industry taking responsibilty for this as well? Have they banned “takeover terms”? What about the industry standard of offering more than 100% on up-front commission on the first years premium and then complaining that retail insurance costs them money in the first five years?
How about the industry making it standard across all products that any upgrades to benefits be passed on to all existing policyholders with policies less than X (I don’t know – may be 10?) years old.
What about the client who genuinely can no longer afford the policy 11 months into the contract? The insurance company keeps 11 months of premium and claws back 100% of any commission paid. Is this not a profitable exercise?
It seems that the adviser – who has met his or her operating costs out of the commission paid gets hit with a loss in revenue. We still need to run businesses with rent and staff and electricity bills. Or should we go back to days of the tied agency force housed in low cost divisional offices?
Make sure whichever of the associations you belong to know how you feel about this proposal.
I’m going to be a bit controversial here. Having worked in the industry and now as a financial adviser I believe I can see both sides of the argument. The key fact is that replacing one policy with another (whether in the customer’s interest or not) costs the industry $200m per year which ultimately gets passed on to our clients through higher premiums. If we were really focused on the customer then we would have embraced the industry’s original stance. We have to be careful here, regulation could be far worse than what has been proposed by the industry,
Why not stop upfront commissions altogether and only allow a “level” type of commission this would resolve the whole issue and it will not be necessary to have a claw back period after 12 months?