The government’s final changes to the Life Insurance Framework address some concerns cited by risk advisers, but leave a number of questions unanswered.

Last Friday’s announcement from Assistant Treasurer Kelly O’Dwyer revised the responsibility period for a clawback of commissions from three years to two. It also confirmed other recommendations including broadened approved product lists and better facilitation of fee-for-service arrangements.

What constitutes a policy lapse still remains unclear, although O’Dwyer’s statement indicates insurers will need to take a more active role in monitoring lapses and the reasons for them.

Monitoring of policy lapses

“That is something that insurance companies will need to do, and to have better reporting of that, with a view to ASIC undertaking a review at the end of two years,” says Mark Rantall, chief executive officer, Financial Planning Association (FPA).

He refers to a number of areas where the FPA and others lobbying the government have been successful in shifting the changes from those originally proposed in the Trowbridge Report to this ultimate outcome.

“We were able to negotiate that for the calculation of commissions, policy fees and any loadings would also be included for calculating the 60-20 cap, which is quite significant. Depending on the premium, this can add up to a 5 per cent difference to the ultimate pay out.

“We were also able to negotiate [so] that there would be no carve-out for general advice, and I think the FSC made it quite clear where they were heading – to remove commissions altogether,” Rantall says.

In terms of the definition of a lapse, he says the LIF proponents – including the FPA, Association of Financial Advisers and the Financial Services Council – were able to negotiate from a three year responsibility period down to two years.

“With the definition being quite clear that lapses would include everything other than where there was a claim on the policy or a suicide event, that makes it very clear and makes it easier to administer,” Rantall says.

“The thing to be clear about is that even today, there is a clawback of 100 per cent of commissions where the policy lapses in the first 12 months. We’re only talking here about another year [added to the] responsibility period, at 60 per cent.”

Where do insurers sit?

“There’s been a lot of focus on the revenue impacts, with no less than 12 recommendations … all of these things will provide a better platform under which insurance can operate.”

While John Trowbridge, David Murray and former Assistant Treasurer Josh Frydenberg have suggested reducing commissions would lead to lower life insurance policy premiums for consumers, this remains uncertain.

“We’ve been calling for insurance companies to be fair about this and to pass on savings to consumers, with a view to reducing consumers’ costs. The market will determine that … we’ll be watching the trends in this area, and that should be something that should be part of a review at the end of three years,” Rantall says.

A number of commentators have suggested scenarios where it remains unclear whether a policy lapse is legitimate under the new regulations; for instance, where a client cancels or switches a policy after substantial premium increases within the first two years.

Insurers’ perspective

Noting this as a causative factor, Asteron Life, has said it will not increase premiums within the first two years of its life insurance policies.

“We’re promising not to reprice a new customer during the clawback period of a policy. We know that affordability can often be a key driver for lapses, and by making this commitment, advisers can give their clients certainty without the concern of trying to manage a premium increase that wasn’t anticipated,” said Mark Vilo, Asteron Life executive manager, in a statement issued on Tuesday.

In further comments made to Professional Planner, he says Asteron has worked with advisers and licensees to “understand and manage lapses with their own portfolio”. He also indicates the insurer will take on greater responsibility for lapse reporting, as requested by Assistant Treasurer O’Dwyer.

“We’ll continue to do this, and we’re currently working through the mechanics of how we get a consistent way to report on this from an industry perspective,” Vilo says.

While another insurer, TAL, avoids referring directly to its role in reporting policy lapses, it notes the need to address “inefficiencies and waste in the industry”.

“While much of the discussion has focused on remuneration outcomes, collectively, the industry must now move forward with speed in addressing inefficiencies and waste in the industry, which get in the way of high-quality consumer outcomes and [create] excess cost.

“New technologies and process redesign must be at the forefront of our thinking to move forward in a meaningful way to demonstrably benefit consumers. That is where TAL will be focusing its energy and commitment now that we can move on from the remuneration discussion.”

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