The government’s Financial System Inquiry (FSI) has gone some way to clearing the bottleneck of vested interests and suggested solutions around fixing Australia’s life insurance industry.
The FSI interim report was released in July, with the final report due in November. The inquiry’s broad scope includes Australia’s life insurance industry, with the issue of underinsurance frequently addressed in industry submissions.
According to the interim report: “Some submissions put forward the view that underinsurance for life and disability is significant, requiring policy measures to close the ‘underinsurance gap’.
“Rice Warner estimates that current life insurance cover is 64 per cent of the amount needed, with disability insurance much lower again.”
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In its submission, the Financial Services Council (FSC) refers to a KPMG study showing that 35 per cent of employed Australians have no private disability insurance. And it estimates that the aggregate level of underinsurance – that is, the desired level of disability insurance, less the actual level – is about $305 billion per annum.
Along with its analysis of stand-alone life insurance,
the FSI also examined the underinsurance problem through its analysis of the superannuation sector and of financial adviser competence. This includes issues around education standards, the planned public register of advisers, and proposed enhancements to the regulator’s powers.
Chan & Naylor, an accounting and financial planning firm licensed by non-aligned group Patron Financial Advice, has issued both first- and second-round submissions to the FSI. It raises concerns about specialised life insurance financial planning, suggesting “the insurance sector has been allowed to morph itself into the financial advice profession”.
David Hasib, Chan & Naylor partner and senior wealth adviser, believes there should be a clear distinction between financial planners who focus on risk and those who provide advice spanning the full range of investments, superannuation and retirement planning.
He suggests that out of “16,000-odd planners, a good two-thirds is made up of individuals who are risk specialists, but yet they’re called financial advisers”.
“I think it’s a bit confusing for the consumer,” Hasib says.
“A consumer who requires financial advice is often confronted by an individual that talks about insurance policies and basic managed funds, [but] hardly [at all] about strategy-based advice, the broader universe of investments and the implications of tax.
“What they get back is just a very basic approach that often misses the mark on what the client was aiming to achieve.”
Risk-only advice
Contrasting with Hasib’s concerns about risk advisers, others suggest that risk advice is best provided by specialists, rather than those who provide fully scoped financial planning.
Mark Everingham, managing director of Personal Risk Professionals (PRP), a corporate authorised representative of Bombora Advice, says: “It raises a question in my mind around the level of expertise of those people in the financial planning practices providing that advice.
“Part of the reason we are solely risk-focused is that I’m a big believer in specialisation. Risk [advice] in financial planning is a specialised area, as is investment and retirement planning.
“While it may be a growing component
of revenue for a practice, is the level of expertise there to deliver it appropriately?” he asks.
Everingham says he encounters a number of financial planning firms that prefer to concentrate on areas such as investment and retirement planning.
“We act for a couple of financial planning firms who say, ‘this is an important area of advice for our clients, and we want that to be dealt with by a specialist’,” he says.
“There are planners out there using a conduit like us. Personally, I don’t know if one person can be across all the intricacies of providing risk advice as well as all the requirements of delivering a high level of financial planning advice on top of it. It’s a very broad proposition to deliver.”
A red flag to ASIC
The Australian Securities and Investments Commission (ASIC) was due to hand down a report into “churning” of life insurance policies by the end of September (after Professional Planner went to press).
“When we find poor advice in a licensee, more often than not, poor advice around life insurance is a key problem. It’s frustrating that that’s still the case,” ASIC deputy chairman Peter Kell told a Financial Services Council conference in early August.
Kell made similar comments more than a year earlier, referring to “commission-based incentives in remuneration combined with inadequate compliance [that does] not align the interests
of the adviser with the client”.
This reflects the fact that “churning” – or excessive switching of life insurance policies by advisers – is a long-running issue
for the industry, yet to be fully addressed.
The Future of Financial Advice (FoFA) reforms banned the payment of commission-based remuneration for investment advice. However, it remains the most commonly used model within life insurance advice – though some financial planners have adapted fee-for-service structures by dialling down commissions.
Regarding the anticipated ASIC report on life insurance, Everingham believes the claims process also needs to be reviewed, particularly as it relates to disclosure.
“I’ve heard rumblings of what is potentially coming out [and] whether it’s around retirement, advice or claims not being paid…but typically, I think risk becomes very visible when claims aren’t being paid,” he says.
“The question then arises: ‘What’s the basis of that? Is it a non-disclosure issue, has a policy been replaced, when [the client] was better off where they were?’
“Whenever there’s a significant point of loss, it gets attention.”
