A fee-for-service remuneration model for life insurance is not a viable alternative to commissions, according to a senior partner at Deloitte.
Paul Swinhoe, life insurance partner at the global consultancy firm, argues a mandatory fee-based model ignores the costs financial planners face in advising on and establishing life insurance policies.
He believes this would also discourage consumers from taking out life insurance, worsening the already high levels of underinsurance in Australia.
“Most people don’t like paying a fee-for-service. [When we’re] talking about a widespread underinsurance problem in Australia, then you’re talking about the average Joe rather than the people who might be more used to paying fee-for-service,” Swinhoe says.
He uses bank charges as an example of consumers’ disdain for paying fees. “We dislike paying bank fees badly enough, and yet you’re talking about a totally different scale here [with life insurance fees]. We’re very used to people getting remuneration [for the service] out of the product that we buy.”
Referring to the report into life insurance advice compiled by the Australian Securities and Investment Commission last October, Swinhoe agrees a balance needs to be struck between over- and under-incentivising advisers to sell life insurance.
He doesn’t believe level commissions are a solution. “On the level commission debate, from a financial planning point of view, they have upfront costs, and if you don’t pay them higher commission for the work they do to sell the policy and to give the advice associated with that, then they’ll be discouraged from selling.”
On the other hand, he accepts that paying upfront commissions that are too high provides a clear incentive for advisers to ‘churn’ clients.
“Everyone likes the sound of easy money, and therefore…too much upfront commission is something to be reduced, but not so far as flat [commission], because the adviser has to essentially wait for the service they’ve provided.
“But who likes doing the work today and then having to wait a few years to get paid for it?” Swinhoe asks.
Will financial planners respond?
In the face of ASIC’s overtly negative report into life insurance advice and the Financial System Inquiry’s attention to the same issues, the onus is currently on financial planners and life insurers to outline solutions.
Swinhoe says he is above all an optimist, and hopes a self-regulatory outcome will be achieved.
“I think there’s a good chance the industry sees they need to do something, and are scared that if they don’t, the regulator may tell them to do something that’s even more draconian…the writing’s on the wall with the FSI talking about level premiums,” Swinhoe says.
He believes the risk for the industry is if it doesn’t go far enough in its response, and is seen to have not done enough.
“But the optimist in me hopes they’ll address this as a serious question and award planners appropriately for the service that they provide.”
He sees the formation of the Life Insurance Advice Working Group – a collaboration between the Financial Services Council and the Association of Financial Advisers, headed up by former APRA executive John Trowbridge, as one of the positive steps being taken.
Broader risk evolution underway
Beyond the way life insurance advisers are remunerated, more fundamental shifts from both a product and distribution perspective are also set to change the sector markedly.
Swinhoe believes life insurance products themselves will change considerably, moving away from the current system that sets premiums largely according to the client’s age.
In terms of distribution, he says: “Some life insurers have started using cheaper and more accessible ways of reaching customers, such as selling to them online.
“Where it’s a simple sale, a planner may not be needed, and planners need to be gearing their business models to reach customers.”
The process of assessing individuals’ risk levels before offering insurance is also evolving. “Technology is making underwriting an awful lot easier…it still has a way to go in terms of making that a part of the whole process and getting people to know that they can [purchase life insurance] that way, but you can.”
