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.”

Phil Kewin from the AFA, Zurich’s Gerard Kerr, The FPA’s Dante De Gori and Clearview’s Simon Swanson

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.

Strong positives

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.

2 comments on “LIF review should push beyond reforms: FPA, AFA”
  1. Avatar
    Christoph Schnelle

    I’d rather not be provocative but the LIF reforms led to a substantial drop in new cover being written. In other words you have a strong association between reducing commissions and lower cover being written. Why would you test this even further by reducing commissions even more?

    You can reduce commissions further but it actually takes about 10 years to become a good life insurance professional – this is not an exaggeration. In other words, if you force many experienced people to leave the industry you are causing lasting damage. Good that the insurance companies have realised this!

    The key is to find a way to stop the dreadful excesses where people are persuaded to take out cover that costs 100% of their super contributions or other excesses. That can be handled completely differently. Equally dealing with churning of clients.

    The insurance companies already have enough information to deal with both – they know the annual earnings of the client and therefore their superannuation guarantee contributions and they know the premium – they can have one of their tele underwriters call the client and check with the client if the client is aware of the long term wealth ramifications of such cover and only allow the cover if the client is able to give a good reason to do so.

    They could also have an FSC-wide central database that records excessive rewriting of insurance policies. Ironically, right know, a substantial proportion of insurance clients can be re-written with equal policies at 30-70% off to their current policies. What is ASIC’s recommendation on that situation to financial advisers?

    It is all very strange.

  2. Avatar
    Jeremy Wright

    There has been a plethora of expert advice that has been effectively ignored, being the most important part of the equation, the advisers.

    It is becoming an irrelevant argument in that most Risk Specialists have already made the decision to exit the Industry unless there is an overhaul of the unworkable Life Insurance Framework.

    ASIC has never understood Life Insurance advice and the fact that no-one seems to know what ASIC is doing or thinking, is an indictment on the whole process.

    Most Financial Planners who used to provide Life risk advice, are giving it away, which means that the whole purported grand plan of Australians being able to get affordable, Best Interest Advice, is going to have the exact opposite effect.

    What we are heading towards is a collapse of the advised Life Insurance Industry and what all Australians will end up with, is much more expensive, junk Insurance that will be sold direct to an unsuspecting population, who will only realise that they have junk Insurance when they go to claim.

    For all the idealists, theorists and vested interest groups who have contributed to this total fiasco, you should hang your heads in shame and you should be held as accountable as advisers are, for your actions.

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