Australia Life Insurance Changes

Potential changes to life insurance commission caps could see up to 87% of financial advisers stop providing standalone risk insurance advice, decimating the life insurance industry. Around 67% of financial advisers would stop providing standalone risk advice and a further 20% are unsure if they would continue if life insurance commissions are subject to further changes.

The Life Insurance Framework (LIF) has had no material impact on advice quality since its introduction in 2018 and has only quashed the ability of advisers to service clients with relatively simple needs.

Instead, the ongoing separation of product and advice — leading to the breakdown of vertical integration and the institutional exodus from personal advice — has had the biggest impact on lifting standards, followed by higher education and training requirements. Only 5% of advisers believe LIF has had a material impact on advice quality. The LIF deals with adviser and licensee remuneration as part of reforms introduced by the government.

Dependence on life insurance commission - The advice industry is heavily dependent on life insurance commission revenue, with 94% of advisers accepting life insurance commissions. Furthermore, 70% of advisers do not plan to change the way they charge for life insurance advice and a further 17% are unsure.

Almost 70% of advisers do not believe consumers will pay a fee for risk insurance advice, with a further 16% unsure.

Since the introduction of LIF, 30% of advisers often turn clients away and 42% of advisers sometimes turn clients away because their needs are too simple and it is impossible to profitability service them, under the current regulatory regime and reduced commission caps. Less than a quarter of advisers believe that current commission caps (60% upfront and 20% ongoing) are appropriate while 73% of advisers believe they are inadequate.

The COVID-19 pandemic also highlighted the problem with rigid two-year clawback provisions with 62% of advisers indicating that 1-10% of new risk insurance business had been subject to a clawback, due in part to clients suffering financial hardship linked to the pandemic.

Advice processes - The Treasury are advised to simplify advice processes and avoid tinkering with life insurance commission rates to improve advice accessibility, affordability and quality. LIF is not perfect but it is better than some of the alternatives that have been suggested including a complete ban of commissions. Further changes are unnecessary and would have many potential unintended consequences including fewer people seeking professional advice, fewer advisers providing life insurance advice and the financial cost of caring for the sick and injured falling back on families, society and the government.