The architect of the 2015 Retail Life Insurance Advice Review, John Trowbridge, has criticised the government for not following his recommendation to include an advice fee in the Life Insurance Framework, saying the omission has led to “something of a crisis” in the industry today.
The assertion was given short shrift by Karen Chester, ASIC’s deputy chair, who pointed out that the vast majority of life insurance is unadvised and taken through super anyway, and that the regulator will address the issue at the government’s behest as part of the scheduled 2021 Life Insurance Framework Review.
Speaking as a panellist on the Financial Services Council’s Life Insurance Summit webcast this morning, Trowbridge said the government has failed to adequately remunerate insurance advisers for servicing the lower end of the market.
“The issue here is that advisers today do not get paid enough to advice the smaller clients,” Trowbridge said.
He believes the failure of the government to implement an ‘advice fee’ to offset the reduction in commissions has made the provision of advice to lower-paying clients commercially untenable.
“What we recommended in the review of 2015 was that commissions come down but that there be an advice fee,” Trowbridge said. “What they did is simply halve the front-end commissions and increase the renewal commissions. That is not what we recommended.”
While the report’s other recommendations including staggered commission caps, capped trail commissions, clawbacks and the banning of volume-based payments were adopted as part of the Life Insurance Framework reforms, Trowbridge charges that the advice fee was essential to flattening out advice remuneration across the premium scale so low-end insurance advice remained viable.
“The outcome of the government going halfway as it were on these commission reforms has created a big part of the problem in advice.”
While the initial recommendation was for a flat advice fee of $1,200, Trowbridge says that “a higher number would be appropriate” today.
Sticking to the review schedule
The “big question”, Trowbridge reckons, is whether government and regulators will agree to restructure the remuneration arrangement for risk advisers. The question itself was directed squarely at ASIC’s Chester, who was also on the panel.
“Firstly, it’s important to remember 75 per cent of insurance for the punter is through superannuation, so the financial adviser isn’t typically the intermediary; it’s the super trustee working with the insurer,” Chester responded, before noting that 24 per cent of those insured within super aren’t even aware of it.
With regards to frameworks and incentives, Chester said, that will have to wait until the scheduled 2021 LIF review.
“We’ll be looking at how the industry has responded to the changes and whether there is a better alignment of interests such that the government can make a decision on whether any further reforms are required with respect to the arrangements,” she explained.
Chester added that the incoming Design and Distribution obligations would both make it easier for advisers by honing product market determinations, as well as helping with “less need for advisers” overall.
Trowbridge’s assertion that the government got the LIF reforms wrong echoes thoughts expressed by advice industry association heads on Monday, who said the reforms failed to consider the broader problems facing the industry.
Advisers key to distribution
Central to the importance of the remuneration issue is the role of advisers in life insurance distribution, Trowbridge argued. Without proper compensation there are no advisers, he said, and without advice the insurance sector will struggle to meet the market.
In other services such as telecommunications or even general insurance direct distribution works because you’re providing commoditised products, he explained, so consumers can “readily work out what they need and buy it from a supplier”.
“But in life insurance that doesn’t work,” he said, adding that the Hayne royal commission had made the direct distribution of retail life insurance “even more difficult”.
“The problem is that life insurance needs to be accessed properly by consumers and does need advice,” he said.
“Distribution in financial services is key to success both for the consumers and the suppliers, but what we’ve seen is a large decrease in the numbers of advisers in life insurance in the last couple of years,” he continued. “And this means there is a lot less access to life insurance advice than there was.”