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.

No winning in this arrangement

The clawback provision itself stems from a 2015 study into insurance by ASIC, which led to a 2016 Bill which stated the government’s concern and paved the way for reform.

“ASIC found unacceptable levels of poor quality advice, and a strong connection between high upfront commissions and poor consumer outcomes, including in situations where the recommendation was to switch products,” the Bill stated.

A 2017 legislative instrument from the regulator soon followed, which deemed a 100 per cent return of commission on products that are cancelled or reduced in the first year, and a 60 per cent return for cancelled or reduced products in the second year.

Ian Knight, the head of operations at 500-odd adviser licensee Synchron, says the clawback provision “never took into account a pandemic” and failed to include any kind of recourse for this kind of a situation.

“It’s an unintended consequence and it was never envisaged,” Knight says. “This is damaging the industry and it could potentially send advisers into a position of insolvency. Less advisers means less insurance cover. This means more angst for consumers and more strain for government purse. There’s no winning in the current arrangement.”

More breathing room

According to Phil Anderson, head of policy at the Association of Financial Advisers, penalising advisers for doing their utmost to help their clients in a tough time is “very harsh”.

Anderson says the AFA is lobbying policymakers to look at measures that could mitigate the damage to the industry, with possible amendments including a reduction of the clawback percentage and additional time being granted for advisers to repay the amounts.

Advisers whose clients only temporarily put their cover on hold could also be made exempt from the clawback provision, he says. “If they reduce the cover there could be a deferral on clawback liability until they had the opportunity to go back to their old level of cover.”

Winestone reckons advisers need a lot more breathing room.

“Just make the responsibility period shorter,” he says. “Two years is a very long time and we don’t even know what’s happening three weeks from now.”

The adviser suggests a 100 per cent clawback for the first three months to cover expenses and then 60 per cent for the remaining nine months of the first year. Any rule change, he says, could also mandate that clients must declare that the policy change is due to the financial effects of the pandemic.

According to Anderson, an amendment to the clawback provision could actually be “easier” because the rule stems from ASIC’s legislative instrument, not government legislation.

“The mechanism is a legislative instrument from ASIC,” Anderson says. “The government doesn’t set the percentages, it’s ASIC’s legislative instrument 2017/510.”

He says the actions of APRA in resetting IP insurance suggest the regulators are “looking closely” at ways to make the industry more sustainable, which could indicate change is on the table.

ASIC did have a review into LIF reforms scheduled for 2021, but announced last month that this was being deferred – along with a raft of other programs – until further notice in order to focus on the impact of Covid-19.

Tahn Sharpe is a Sydney-based financial services journalist with a background in financial planning. He writes on advice, superannuation, investment, banking and insurance issues, is a certified SMSF Adviser and holds an Advanced Diploma of Financial Planning. Contact at tahn.sharpe@conexusfinancial.com.au
4 comments on “It’s not churn, it’s a pandemic”
  1. Avatar David O'Donnell

    Christoph has it right. This is a product design feature – the commissions are only payable if the premiums for the relevant period are paid. If not paid, for whatever reason, a portion of the commission is not payable. Due to the long time accident (at least the last 40 years that I have been involved in the industry) of commissions being paid ‘upfront’, a clawback is an unfortunate consequence. The complaint about premiums rising to ensure that the business is sustainable is just astonishing. I even checked to make sure I was reading a Professional Planner article.

  2. Avatar Jeremy Wright

    This is a much bigger issue than advisers facing claw backs in the current pandemic.
    The churn investigation was flawed from day one and ASIC admitted later that churn was not an issue.
    However, those early investigations were used as evidence to push through the unworkable conditions facing Life Insurance advice practices today.
    The Life Insurers also knew that a tiny percentage of advisers churned, though were incapable of, or did not want to, fix the issue, which would have been simple.
    The evidence was and still is clear, that churn was used by vested Interest Groups to push their agenda’s, which included;
    Reducing commissions and bringing in two year responsibility periods on advisers if policy premiums reduced or cancelled, no matter what the circumstances were.
    Plus, the fiasco that is FASEA.
    Then to cap it off, an unworkable Audit regime that is strangling Advisers and Practices in theory based hyperbole that has little bearing on the real world of advice.
    Australia is facing a decimation of advisers who provide insurance advice. The numbers already are horrifying, with over six thousand Financial adviser’s having exited.
    Insurance New Business from advisers is reducing and with claims rising, there are insufficient advisers to make up the gap.
    With less than three thousand specialist risks writers and a massive Under-Insurance epidemic, Australia is in big trouble.
    30,000 risk advisers, is the minimum number needed to bring the Industry back to a position where all Australians and Australian Businesses can get quality advice at a cost effective premium.
    What we currently have is a maze of complexity and red tape that is going to kill the retail Life Insurance sector off, unless changes are made.
    Our office sent APRA and the Prime Ministers office, a simple 6 point plan to bring the industry back from the edge that would cost the Tax Payer, zero dollars.
    APRA did reply and said thank you though mentioned it is ASIC who will determine the future direction.
    The current direction is oblivion.
    Let us hope ASIC starts making positive changes, so the industry can survive and all Australians can attain quality, affordable Insurance coverage, backed up with the necessary advice and guidance from risk specialists.

  3. Avatar Graham Hutton

    the whole commission Vs fees question is vexed regardless of how you view it.
    there perhaps needs to be some kind of provision to fund a fee as part of the premium rate, this cloud be made uniform across the industry and not written back regardless. to that end the policy which lapses inside the 2 years will mean not all of the fee is paid, but then after two years the fee component stops and the life insured receives a “persistancy discount” for keeping the policy going, sure there is a write back on all or some commission, but at least”some” remuneration survives the responsibility period

  4. Avatar Christoph Schnelle

    Yes it is a pandemic but I don’t understand the argument that the insurance companies should bear a disproportionate percentage of the pain. Commissions are a substantial part of the premiums and it makes sense for them to drop if there are early cancellations, even if the cancellations are not the fault of the adviser.

    Advisers and insurance companies are equal partners in this. Many of us make a living on insurance while the insurance companies are currently making large losses – some of the losses are self inflicted through bad policy decisions, much of them through claims going through the roof. Those claim costs are borne in full by the insurance companies and not by us. Why should we not bear our part of the current wave of cancellations? There is also lots of new business happening at the moment, perhaps softening the blow.

    Conflict of interest: I have no association with or investment in insurance companies except as a financial adviser.

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