Before we discuss the meaning of Life Insurance Framework (LIF) for each stakeholder group, it’s worth reviewing how we got to LIF. Several reports, beginning in 2014, highlighted the need for reform of the life-insurance sector and provided recommendations to achieve this. The reports included:
- ASIC Report 413: Review of Retail Life Insurance Advice
- Trowbridge Review (Review of Retail Life Insurance Advice)
- Financial System Inquiry
Each report highlighted issues with upfront commissions and churn within the retail advice sector. This was particularly the case with ASIC Report 413, where the review found 45 per cent of cases involving upfront commission did not meet the legal standard for financial advice. The recommendations these reports provided varied from reduction of upfront commissions (Trowbridge Review) to the abolition of upfront commissions and a move to level commission arrangements (Financial System Inquiry).
Following the tabulation of the three reports and industry consultation, then-assistant treasurer, Josh Frydenberg announced the LIF in June 2015. It included a 14-point plan covering adviser and licensee remuneration, transitional arrangements, quality of advice and insurer practices, better enforcement and monitoring, and industry efficiency.
After consultations with stakeholders on some outstanding issues, the Minister for Small Business and Assistant Treasurer, Kelly O’Dwyer, announced the final reform package in November 2015. This package included a revised commencement date of July 1, 2016, and a change to the clawback period from three years to two.
Following further industry consultation, an updated bill was introduced in the Senate in March 2016. The updated bill outlined grandfathering for remuneration arrangements entered into before July 1, 2016, updated commission structures, including a phased move to a maximum of 60 per cent upfront/20 per cent ongoing (both excluding GST) from July 1, 2018, a two-year clawback period for upfront commissions, and a ban on volume-based payments. The LIF also required the development of a Life Insurance Code of Practice and an ASIC review of the changes in 2018.
The proposed bill introduced in March 2016 lapsed when Parliament was prorogued. The bill was reintroduced in November 2016. The reform start date has subsequently been revised to January 1, 2018, with a phase-down period of three years for upfront commission rates to meet the 60 per cent/20 per cent limits mentioned above.
Given all of the reviews, consultations and adjustments, what does it mean for customers? Advisers? Life insurers? ASIC and the government?
When the LIF reforms were introduced, it was hoped that customers would receive the benefit of a reduced cost of insurance. This is not necessarily the case. While a reduction in upfront commission alone would allow insurers to pass on savings to customers, the increase of ongoing commission to 20 per cent (excluding GST) may allow little room for insurers to provide cost reductions to customers.
A significant benefit to customers is the development and release of the Life Insurance Code of Conduct, which is binding on all life insurers from July 1, 2017. The code provides customers with a set of standards by which to judge their insurer. If an insurer does not meet the requirements of the code, customers will be able to dispute this.
Customers will probably have increased access to information and open disclosure of commission arrangements. Advisers, licensees and insurers are investing in systems to make the life insurance purchase, maintenance and claims process more transparent. Customers will be able to engage with their life insurer in ways that were previously not available.
Advisers and licensees
Following the announcement of the LIF, a number of advisers and licensees voiced concerns over the sustainability of life-insurance advice following a reduction in upfront commission to 60 per cent (excluding GST). This is only part of the equation for advisers over the next few years. Other requirements being placed on advisers include:
- Compulsory education requirements for both new and existing financial advisers
- Supervision requirements for new advisers
- A code of ethics for the industry
- An exam that will represent a common benchmark across the industry
- An ongoing professional development component.
The above requirements, along with a reduction in available upfront commission, will provide challenges to advisers. This may lead to a major reduction in the number of advisers, as more decide to leave the industry. The potential reduction in numbers may lead to reduced access to life insurance offers, thereby creating a worsening of Australia’s underinsurance problem. It should be noted that group risk will continue to address the underinsurance problem but without advice, it will be difficult to close the gap any further.
There are several costs to be considered for advisers due to the LIF. Advisers will need to spend time and in some cases money to understand the LIF remuneration and clawback arrangements. Implementation costs associated with updating IT and other systems and monitoring compliance with the new regulations are just a few. Additional costs for meeting ongoing education requirements must also be considered.
Advisers will need to develop a pricing model that works for their practice over the long term. There are several options available, including commission only, fee-for-service or a hybrid of commission and fee for service. Moving to a new pricing model such as fee-for-service will be difficult for a number of practices, the key will be to show the value of the service they are providing.
Advisers will also look to reduce their cost to serve a customer. To do this, advisers will need to invest in technology and require product, process and technological improvement from insurers. Innovative product design from insurers that leads to further engagement between customers and advisers will be beneficial for all stakeholders.
The impact of the LIF on insurers is not insignificant. They will need to update internal policies and procedures, policy and adviser remuneration technology. They will also have to provide added assistance to advisers and become more transparent with policyholders. They will focus on increasing engagement with customers and reducing the cost to serve for advisers.
Insurers will attempt increased engagement with customers through innovative product design, including incentives to meet with advisers and the introduction of ancillary benefits such as health and wellness programs. There has already been movement in this space since the introduction of the LIF in 2015. Insurers will also increase the transparency of premiums and policy terms for customers to improve understanding.
Assistance provided to advisers will be at the forefront of insurer initiatives in the wake of LIF. For many insurers, advisers are the key channel, and they will be desperate to maintain this. Insurers will provide advisers with back-office assistance where possible and work to improve processing and management of applications and claims to enhance the customer experience. The aim for all insurers will be to increase the ease of doing business for advisers.
Reporting the impact of the LIF changes to ASIC is a significant undertaking for insurers. Expect investment in reporting tools to ensure ASIC compliance.
Finally, the Financial Services Council has issued a Code of Conduct that is binding on its life insurance members. It does not include group superannuation but ASFA, AIST and the FSC will jointly develop a further code for insurance claims within superannuation. The code is voluntary and unenforceable by ASIC but it is a start.
Following the introduction of the LIF remuneration changes on January 1, 2018, the Government will probably take a back seat and wait for ASIC to report on the impact of the remuneration changes. The government has requested ASIC conduct a review in 2021 to consider whether the new industry arrangements for life insurance advice have better aligned the interests of firms and consumers. If the government is not satisfied that the industry has shown enough improvement, further changes will be expected, such as a move to level commissions or no commissions for life insurance advice.
The government has estimated that the increase in annual compliance costs for the life insurance industry amount to $27.8 million. However, with the need for insurers to improve their technology, the figure is probably higher.
Meanwhile, the reviews are not finished. ASIC will follow up on several issues it identified, including high rates of declined claims and lengthy claims-processing times. Further, the Senate is now holding an inquiry into the life insurance industry as well.
The outcome of that activity will no doubt be more industry changes.