Chan & Naylor: Removing Life Insurance Commissions Will Lead to Chronic Underinsurance

Leading national accounting and wealth advisory group Chan & Naylor continues to call for greater transparency and tighter regulation within the life insurance industry, however argues that removing commissions in their entirety will simply lead to more Australians turning away from financial advice and result in the vast majority of people becoming chronically underinsured.

These concerns follow the Australian Securities and Investment Commission’s (ASIC) recent report, which found that 37 per cent of life insurance advisers failed to comply with the law when discussing products and were more focused on commissions.

“Vested interests clearly must be addressed and this will not be accomplished through self-regulation,” said David Hasib, a Partner at Chan & Naylor Wealth Planning.

“However the existing framework is robust enough to prevent risk advisers churning policies, and if commissions were removed altogether in lieu of a service fee then this would not correlate to a one-to-one premium saving for the client.”

According to Mr. Hasib, product commissions within the insurance industry do work for the benefit of the consumer as long as the advice provided is transparent, helps the client make an informed choice and provides a product that best fits their needs. Commissions also justify the work that risk advisers undertake to investigate the features and benefits of policy definitions, which can set one insurer ahead of another despite the premium being similar, or for the work undertaken by the adviser on the client’s behalf at the time of a claim.

As such Mr. Hasib agrees that stronger regulation is required to ensure greater enforcement of disclosure as well as an agreed industry consensus on standards. However he does not agree with those who are backing a call for the removal of commissions in their entirety.

“Australians already don’t invest enough in their financial well-being, so why would they do so if they are expected to pay more for advice?”

In recent weeks Mr. Hasib has argued that the issue of conflicted remuneration has not been satisfactorily addressed by the proposed Future of Financial Advice (FoFA) reforms. As such he believes that the entire industry, including dealer groups and product manufacturers, must be held more accountable, particularly as between 80% to 85% of financial planners have some form of institutional ownership (via their licensee).

“If we can remove the inherent, product selling culture of the 80’s & 90’s, then it will be to the benefit of all Australians,” reiterated Mr. Hasib, who also supports the Government’s proposed public register initiative and recognises the need for stronger regulation to improve standards under ASIC.

“We do need stronger guidelines, but we also need clear transparency both for the industry and for consumers,” said Mr. Hasib, adding that he believes there is a growing undercurrent of support for this position as peer attitudes are beginning to shift away from the institutionally owned groups towards an independent advice model.