The Life Insurance Framework was far too focussed on the remuneration of advisers and failed to address key issues plaguing the industry, according to a panel including CEOs from the Association of Financial Advisers and the Financial Planning Association.
Both the AFA’s Phil Kewin and the FPA’s Dante De Gori agreed that the corporate regulator’s scheduled 2021 review into the effectiveness of the reforms will need to take a broader view of the industry’s issues and focus on more than the way insurance advisers are paid.
Speaking on a panel at the online Financial Services Council Life Insurance Summit, De Gori said APRA’s 2019 intervention to improve the sustainability of the insurance market in light of “ongoing heavy losses” is evidence that the LIF reforms failed to address key issues.
“The LIF in itself was a little band-aid on something that needed a bigger fix,” De Gori said.
The chief executive noted the failure of regulators to properly address the need for a “simplified SoA process” as another indication that the LIF reforms erred in targeting remuneration reform over other critical areas.
“There was meant to be a commitment around a simplified SoA process,” De Gori said. “That issue has been ticked off technically as ASIC has produced a regulatory guide that looks at a simplified life insurance SoA, but I haven’t seen any reports or data to show that has assisted the advisers in any way shape or form in reduced costs. In fact, what we’re seeing is clearly the opposite.”
The 2018 LIF reforms – triggered by the Trowbridge Report, an ASIC report (413) into retail advice and the Financial System Enquiry – culled upfront commissions to 60 per cent and ongoing commissions to 20 per cent, as well as introducing two-year clawback provisions and a ban on volume-based payments.
Also on the panel was Zurich’s head of life, Gerard Kerr, who implored ASIC to take more into account in its scheduled review than money.
“The LIF [review] should not just be focussing on that commission piece, it’s way bigger because it’s about a service and it’s about support to the community,” Kerr said. “LIF needs to take all those things into consideration.”
Judging success carefully
According to Kewin, the regulator should be careful how it judges the success of the reforms.
In mid-October last year Commissioner Danielle Press said ASIC was conducting surveillance of risk advice by looking at “representative and random samples of life insurance advice”, and indicated that any failure in the reforms to achieve their objectives would be met with a harsher pullback on commissions.
“If we think the reforms have not been effective, we will consider recommending to the Government that the cap on commissions be reduced further,” Press stated.
The dilemma for ASIC, Kewin reckons, is that it can’t view the success or otherwise of the reforms in isolation given the other significant events – including the pandemic – that are influencing the market.
“If you look at the key measures that were originally set out; lower lapse rates, reduced premiums, better customer outcomes… we know we haven’t achieved that but is that primarily due to the Life Insurance Framework or is that due to the much broader issues impacting the market?” Kewin posed.
Both the associations are trying to get front-run the narrative leading into the review, which ASIC have so far indicated will go ahead regardless of the pandemic. Part of that plan involves challenging the regulator on the way it judges the success of the reforms.
“What does success look like? What are the metrics? That’s part of the work the FPA and the AFA are looking at as part of our joint task force to try and get in front of in the LIF review,” De Gori said.
Despite its failings, Kewin concedes that the LIF had some significant, albeit largely unintended, positive outcomes.
Other than the fact that we do have a framework in place, he said, the LIF acted as a buffer to further and possibly harsher reform stemming from the Hayne royal commissions.
“By having the LIF in place and having a review scheduled for 2021 I think that helped to avoid a potentially disastrous recommendation from the royal commission,” he noted.
The other “strong positive” is that is brought the industry together on key issues.
“Collectively we worked out that if we want to get a good result for the consumer we need to work together,” he said.