All professional financial planners have two clear responsibilities. First, to act in the public interest, as required by their profession; and second, to act in the best interests of clients, as required by the law. Any obligation to protect the interests of their employer/licensee and product manufacturers – even when those entities are one and the same – comes further down the list.
The federal government must ensure that laws and regulations as they apply to financial planners are consistent with those obligations.
But penalising financial planners for complying with the law (the best interests duty of the Corporations Act) and for acting in the public interest (addressing the nation’s chronic underinsurance problem) is exactly what the Life Insurance Framework appears to be doing in some instances. Financial planners are being reported by insurers to the Australian Securities and Investments Commission (ASIC), citing unacceptable “lapse” rates, after very significant premium price hikes either lead clients to stop paying premiums. In some cases, premium increases have been more than 40 per cent. And where advisers have sought to find cheaper alternatives and switched clients across, they have been labeled as “churners”.
All of these issues should be addressed by the Life Insurance Framework (LIF), formulated by the industry and backed by the Assistant Treasurer (who at the time of writing was still Josh Frydenberg), but if they are not, then the LIF must be re-examined closely and addressed – quickly – if it is leading to widespread problems and disadvantaging consumers, either by leaving them with inadequate cover, or locked into uncompetitive products.
To act in the client’s best interests
Financial planners must maintain the right and the ability to do the best thing for their client – to act in the client’s best interests – by shopping around for the best cover at the best price – and not be unfairly penalised if they take advantage of a better deal. They must not be forced to look a client in the eye and say, ‘yes, we know there is a much cheaper alternative out there, but if we take it up we’re going to get smashed’.
Professional Planner understands the commercial necessities for insurers, and recognises that setting insurance premiums is a fine art, and often can be influenced by factors outside the insurer’s direct control. But the LIF needs to strike a balance between protecting those interests and not disempowering consumers and their advisers. As things stand, the balance can tip too far against the interests of consumers.
It underlines one of the main problems raised concerning the three-year clawback period as set out in the LIF. A policy “lapse” within 36 months, even (or especially) if it is to to a massive premium hike, results in the clawback of commission. A solution may be to outlaw clawbacks in circumstances where premium increases exceed those forced by age and CPI. This would have the added benefit of encouraging life insurers to price their products as accurately as possible rather than discounting to win market share and then hiking up premiums afterwards. Better still, premums could be frozen for the duration of the clawback period.
Examples seen by Professional Planner leave no doubt that the catalyst for financial planners seeking to move clients to new policies has been premium increases, not a desire to churn policies. The increases in question have exceed what might be expected for CPI and age adjustments alone; it at least one case outlined to Professional Planner, it seems clear the insurance company misjudged the market 18 months to two years ago, and grossly underpriced premiums.
Reluctance to speak out
The Association of Financial Advisers (AFA) continues to speak publicly about its concerns with the LIF, but a notable characteristic of the current situation the reluctance of licensees and advisers themselves to speak out, for rear that going public will lead to commercial retribution by the powerful life insurance industry. That’s already starting to happen: the table below had to be amended so that the specific licensees and advisers involved can’t be identified. Professional Planner normally avoids publishing anonymous or “disguised” information; but in this case the concern of the entities involved was compelling.
The scenario unfolding in the risk space is also an argument for advisers ditching commission on risk business altogether. If an adviser’s fee were paid by the client, and no commission were received from the insurer, then there would be nothing for the insurer to claw back, and advisers would be free to move clients when and where they deemed necessary. That’s possibly an argument for another day; as long as commissions remain, so will this problem.
The clawback provisions in the LIF might have been designed to prevent churning, and Professional Planner supports that aim. But the result in practice is that some clients face being locked into products that can quickly become uncompetitive. It’s understandable when they refuse to continue paying premiums. Financial planners should not be held responsible for lapses of this nature. And those who act in their clients’ best interests should attract neither the unwanted attention of the regulator, nor the ire of the life insurance industry.
Insured | Insurance Type | Sum Insured Increase | Premium Increase* | Price Increase |
Mrs A |
Term life | 5% | 35% | 30% |
Trauma cover | 5% | 25% | 20% | |
Income protection | 5% | 40% | 35% | |
Business expense cover | 5% | 45% | 40% | |
Mr B |
Term life | 5% | 25% | 20% |
Trauma cover | 5% | 25% | 20% | |
*Increases over a period of approximately 18 – 24 monthsNote: Figures are for illustrative purposes and have been altered to protect the identities of licensees and advisers. |