A three-year clawback was proposed in the Life Insurance Framework (LIF) developed by the Association of Financial Advisers (AFA), the Financial Planning Association (FPA) and the Financial Services Council (FSC).
Since Assistant Treasurer Josh Frydenberg endorsed the LIF, the AFA has been campaigning for greater clarity around what constitutes a legitimate replacement policy and what is effectively “churn”.
“We have no greater detail now than we had five weeks ago…other than some insurers having made public comments indicating that they wouldn’t be applying clawbacks in the event of a claim, and there should be no surprise in that statement,” says Brad Fox, chief executive officer of the AFA.
“I think there’s growing recognition from a number of politicians, which our members have contacted off their own bat, that the three-year clawback for small financial planning business owners appears harsh and difficult to manage.”
Fox believes the proposed arrangement unreasonably shifts the burden of responsibility from the insurance business to the financial planner. “This has been brought to us by our members,” he says.
He says the AFA has been giving more thought to the way in which clawbacks might apply. He refers to data the Australian Securities and Investments Commission (ASIC) used in preparing its report into the correlation between high upfront commissions and policy churning by risk advisers.
This states that a range of conditions were not to be considered lapses in the context of the report. These conditions were:
A / A claim on a policy
B / A policy ceasing due to the
insured person reaching a certain
age (for example, age 65)
C / A change in ownership of a policy from individual ownership to SMSF ownership, with the same underlying insured person and risk
D / A policy being unconditionally reinstated on payment of an outstanding premium, after non-payment has occurred for a period
of time
E / A policy owner electing to discontinue one of the benefits the policy commenced with (for example, the original policy had life, TPD and trauma cover, but the policy owner chooses to discontinue the trauma cover, while continuing with the life and TPD cover)
F / One person under a policy that covers multiple people ceasing to be insured, but the policy remaining in force for the other person or people.
“There’s a consideration there, [and] if that’s the closest thing that we have to an industry consensus on
what constitutes a lapse, maybe that’s a reasonable starting point,” Fox says. “It potentially doesn’t go far enough, but I think it’s a reasonable starting point to move forward from.”
Among some of the external circumstances that could lead to a policy lapse, and which are outside planners’ control, he highlights the example put to him by an AFA member, a planner who works with fly-in, fly-out miners in Western Australia.
In line with the decline of the state’s resources sector, a number of these clients will face lay-offs, which would likely lead to the cancellation of income protection and possibly life insurance policies.
“There are those sorts of circumstances which are hard to cater for in something like this,” Fox says. “We would like to see a level of protection [for advisers] where an insurer has made significant increases in the premium of a client and perhaps in consecutive years, [which] leads the client to say ‘I’m not paying this’ and cancelling.
“And in that case, should the adviser wear the pain, or should the insurer share the responsibility?”
