John Trowbridge (middle) and ASIC's Karen Chester (bottom right).

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.”

4 comments on “ASIC deflects Trowbridge’s risk advice pay warning”
  1. Avatar
    Daryl La' Brooy

    I suggest the government directs ASIC to speak to a large representative sample of consumers who have been paid out claims from individually advised policies, then speak to people who haven’t have the good fortune to have had personal risk insurance in place when the worst happened and had to claim the Centrelink Disability Support Pension. About $10 Billion a year gets paid out under individually advised risk policies every year, where would these people be if they had to rely on the Disability Support Pension? Surely this is a matter for Tim Wilson’s parliamentary committee to raise with ASIC when they next front Federal Parliament? What about international experience in comparable countries like New Zealand, the UK and Canada? Regulators like Central banks talk to their overseas counterparts on a regular basis? What about ASIC speaking with current consumers of individually advised personal; risk policies where there hasn’t been a claim yet to find out why they bought them?

  2. Avatar
    Melinda Houghton

    Who would have thought that Trowbridge would be the Risk Advice champion ? I did not see that coming in 2015. The comments by Chester do amount to ignorance and negligence. May as well say that most people in Melbourne are covered by masks, so no need to act any further.
    Good advice changes lives, and our Regulator should know that. Senator Hume and the Associations should hold this lady to account for these comments. It does explain why a lot of the information on ASIC’s moneysmart website have an anti-advice bias though.

  3. Avatar

    Just a few quick observations:
    – I’m curious where the statistic that 75% of insurance is held via super is sourced from. And is that by premium, benefit, claims or policy count?

    – This statistic – which seems to be getting used by the regulator to belittle the concerns of advisers – seems rubbery and I’m keen to see if it includes trauma insurance as well.

    – Does it also include insurance that an adviser has recommended be held within superannuation?

    – I also take it that ASIC see the incoming D & D reforms as a pathway to their goal of ‘less need for advisers’ – and therefore a good thing?

    I get that ASIC tend to only see the worst of advice – like the police tending to see the worst in the public – and that would undoubtedly colour your perspective.

    I mean, the case studies in (the deeply flawed) Report 413 are eye-opening, and if you read some AFCA determinations, it’s easy to see why the regulators are quite so negative.

    But if the police then started to pursue an agenda seemingly designed to smother the public to avoid the worst parts – an agenda powered by yet-to-be-substantiated statistics – I think we might all start asking questions.

    What a strange environment we find ourselves in.

  4. Avatar
    Jeremy Wright

    For Karen Chester to call Australians, “Punters” is a reflection of how out of touch ASIC is.

    Under-insurance is a major problem in Australia, which will cost the Government multi- Billions of dollars more than they need to pay and leave millions of Australians in a precarious financial state if they suffer an incapacitating illness or injury and need to claim for the pittance most industry fund insurance policies pay, assuming they even qualify.

    Karen Chester making the comment they are not prepared to look at or respond to the current crisis until the 2021 LIF review, also shows total contempt and what amounts to, negligence.

    ASIC are highlighting their incompetence with the statement saying there will be “less need for advisers” overall.

    Just about everybody, except for ASIC, have realised ASIC have made major errors and to this day, do not understand how Life and Disability Insurance advice works in the real world.

    Trowbridge is correct when he stated consumers do need advice.

    ASIC seem to be operating in a different realm.

    What has firmly been reinforced at the FSC Life Insurance Summit, is not new and is not a shocking revelation.

    What has occurred, has been repeatedly told would happen for years from experienced practitioners , who were ignored.

    Where we stand today, the advised Life Risk Industry cannot survive unless there are changes made.

    The changes are simple and necessary to not only retain the remaining advisers, but will put in place, a recovery process that will fix the issues.

    I have put a submission to APRA, my Federal member and the Prime Minister’s office with a 6 point plan and have sent the AFA a copy.

    We cannot wait for another year and have thousands more advisers exit the Industry.

    If ASIC do not understand the real issues, then how can they fix them. As it stands, ASIC need to be removed from the Advised Life Insurance discussions, as they are causing untold damage.

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