THE life insurance and financial planning industries won't give up the thick end of half a billion dollars in commission without an almighty fight - yet life insurers themselves are primarily to blame for a rorted system that monumentally fails consumers and cries out for further reform.
Most planners and the insurance giants are already looking for ways around the new rules proposed by Assistant treasurer Bill Shorten, while mounting a rearguard action through the delicately poised federal Parliament. The longer reform is delayed, the more chance Labor won't be in power to do it. The immediate response of the opposition is to oppose, singing the industry's tune.
Meantime, surprise, surprise, your financial planner won't be so interested in encouraging you to take out life insurance through your superannuation fund (the most cost-effective method). There will no longer be up-front commission as high as 128 per cent of the premium with a trailing commission averaging 10 per cent a year.
If the Shorten reforms become law, expect many planners to simply "scope out" life insurance - they will exclude consideration of it from their duty of care, as clients will rarely be prepared to pay for the time required for a 22-page statement of advice, arranging underwriting, chasing up any medical issues and ensuring premiums are paid. Never mind that scoping out insurance effectively betrays the broader fiduciary responsibility now to be expected of planners.
But the commission game will continue outside superannuation, where most life insurance is still written despite the tax advantages of doing it through super.
And this is where the story gets dirty. Life-insurance premium costs are inflated by as much as 25 per cent through the industry's poor structure that allows planners and brokers to churn clients at the expense of all consumers and fails to reward those clients whose advisers opt for lower up-front commissions or are prepared to buy insurance themselves without being "sold" by a planner.
The current system provides an overwhelming incentive for independent agents to churn their clients, moving them from one major insurer to another to pick up those big up-front commissions.
The agent can rationalise that the client is no worse off for the churning - that the cover and premium would stay the same if he stuck with one company or moved - but it builds extra costs into the industry that are reflected in unnecessarily expensive premiums.
MLC, CommInsure and AXA offer agents alternative flat commissions instead of the big up-front come-on - about 30 per cent of each year's premium every year, a bit more than that from MLC. Offering only flat premiums would remove the incentive to churn, reducing costs. The insurer also benefits from not taking the initial commission hit and by having use of the premium to invest. Given the number of life policies that lapse after a few years, that should be a powerful incentive.
One insurance source reckons banning the big up-fronts, only offering the flat trailing commission, could reduce premiums by as much as 25 per cent. It would also encourage building an ongoing client relationship.
Which gets to the bigger problem of Australians being underinsured. The industry has lamely tried to claim that the big commission is necessary because risk products have to be "sold", Australians won't just buy them.
It was predictably trotted out by AMP, our biggest insurer, in response to the Shorten reforms. AMP financial services managing director Craig Meller said:
"The proposal to ban commissions on life insurance within superannuation is ineffective public policy, because it will inevitably exacerbate Australians' chronic level of underinsurance. Without the encouragement and support of a financial planner, many people do not appreciate the necessity to arrange adequate insurance. Arranging insurance can be complex and confronting for many people and financial planners make it easy for people to get the cover they need."
Spot the inherent contradiction - Craig says we're chronically underinsured, so the commission-driven sales-pitch approach simply isn't working anyway. Little wonder the industry is ripe for reform.
Maybe it's time to concentrate on simpler, more affordable products and less paperwork.
Michael Pascoe is a BusinessDay contributing editor
No comments:
Post a Comment