Ian Knight, Sue Laing and Morris Winestone

As clients continue to reduce or cancel policies due to the economic effects of the pandemic, advisers are pressing policymakers and regulators to reassess clawback provisions that unfairly penalise them for helping clients make these adjustments.

The clawback provision, introduced in 2018 as part of the Life Insurance Framework to curb the practice of recycling or ‘churning’ insurance policies, is instead forcing advisers to return commissions to insurance companies in cases where clients have legitimately asked to reduce or cancel their cover.

According to Melbourne risk specialist Morris Winestone, the issue is getting worse as the economic impact of the pandemic deepens.

“In the first month of lockdown I was getting 10 to 15 contacts a day from clients panicking and looking to cancel their policy because it’s too expensive,” he says.

Despite the client driving the policy amendment, the adviser is penalised.

“If the client reduces their premium from $10,000 to $6,000 because they need to cut costs but I’ve talked them into retaining some premium I still lose 100 per cent of the commission,” Winestone says.

Risk advice consultant Sue Laing says there has “absolutely” been a rush on cancellations since the pandemic started. “The advice that has been given to these clients, which was sound to begin with, is then being reversed by clients that have no choice,” she says.

Laing reports that advisers are doing their “damndest” to retain some level of cover for clients, even though the adviser is aware they’ll likely have their commission stripped.

The situation has been exacerbated by the rising cost of premiums, Winestone adds, especially since APRA introduced a raft of “sustainability measures” on income protection insurance products aimed at increasing the profitability and sustainability of the industry.

“The minute they turned the switch IP rates went through the roof,” he says.

Winestone acknowledges that some people believe the solution to the problem is for risk advisers to charge on a fee-for-service basis, instead of via commission.

“But fee-for-service won’t work in the insurance industry,” he says. “The ones that say it will work are the ones that don’t specialise in risk or cross subsidise with the investment work.”

Any viable solution would also need to retain a strong deterrent for churning. Laing, however, says the danger of churning is not as great in the current economic environment.

“Now is the time when advisers are least likely to churn because underwriting has stiffened up markedly in this environment,” Laing says.