Wide range of negative effects
The removal of life insurance commissions would have a wide range of negative impacts.
It would add to the underinsurance problem, prevent many Australians from accessing appropriate risk advice and impact on an industry that provides families with dignity at times of illness or bereavement.
On 26 October, Financial Services Minister Bill Shorten announced Labor's intention to introduce new standards that providers of MySuper products must meet, including a removal of risk commissions and conflicted remuneration structures in relation to retail distribution and advice in line with the government's financial advice reforms.
If risk commissions are removed, this will limit consumer choice for advice.
Generally consumers do not make a conscious decision to buy life insurance. Life insurance is sold through advisers who are able to educate clients about the frailties of life, provide an in-depth analysis of a client's exposures to risk and come up with a solution.
Life insurance is different, and Australian consumers would feel it's simply easier to pay for it as part of the premium.
Australia needs an independent advice industry and to support the sustainability of that industry.
Asteron's position is that we recognise advice businesses have different models, from full fee-for-advice, including risk, through to taking level, hybrid and upfront commissions.
It is not our place to mandate which model is best. However, I do have a view for:
1. Consumers:
. To facilitate insurance through an adviser will provide the best outcome to navigate the complexity of insurance.
. Middle Australia is doing it tough. Without appropriate levels of insurance, and something going wrong, the burden will fall back on the community or government.
. There's a clear difference in value between an investment product and a risk product. In an investment contract, commissions erode the value of that contract. With risk, the commission is built into the price of the contract, so advisers should continue to get remunerated on the product.
2. Advisers:
. The industry needs to remove any commission arbitrage and any bias towards product for commission.
. When replacing clients' policies from one insurer to another, the level of commission should come from the level of advice offered and the tenure of the policy. If an adviser rewrites a client after a year, they should not get paid upfront commission again. Alternative commission terms should be offered, depending on the time the policy has been in force. Obviously any increases to existing policies should attract normal commission rates.
. Remuneration models need to reflect the ongoing service a client requires and in many instances this is now being demanded by consumers. This will protect revenue streams and business values.
Industry reform needs a coherent approach
What we must remember is that in order for any industry reform to take place, Cooper and other reviews need to be pulled together in a cohesive package or, in the words of Shorten, "we risk regulatory fatigue".
Overall, we must ask ourselves, what is it we're trying to achieve for the life insurance sector through industry reform? In my view, it's the appropriate alignment of behaviour of all participants in the value chain. And risk commissions are a key part of that chain.
From a public policy, consumer and industry perspective, the removal of risk commissions will have overwhelmingly negative implications.
So the government should have as its policy objective the following elements:
1. Sustainment of an independent advice industry. The impact of banning commissions would increase Australia's level of underinsurance, and if people don't understand that, they should not be having any influence in this debate.
2. A level playing field for all the different providers of that advice. And we're a long way off that, but there is a serious risk in the current policy environment that this might not be an outcome.
3. Opportunities for advisers to provide differential types of advice, not just full-service, or 'some' advice. Therefore, the government needs to fill in some of the gaps left by the Financial Services Reform Act of 2002, which imposed a single licensing regime for financial sales, advice and dealings in relation to financial products. Currently we have full-featured service/advice and direct 'no-advice' products, but nothing in between except for intra-fund advice.
Therefore, the industry needs a tiered advice model that's available inside and outside super, that allows many properly regulated market participants, like Australian financial services licensees (AFSL) and super trustees to provide tiered advice.
If we see risk commissions phased out, this will work to the detriment of the advice industry in Australia - in particular independent advice - and concentrate even more power into the larger vertically integrated financial services institutions.
This would not be a pretty picture for competition in Australia.
The original driver behind some of these government inquiries into financial services reform was the damage to investors from the demise of advice outfits like Storm Financial and Westpoint. However, the same principle cannot be applied to the life insurance industry - no-one has lost their life savings because of buying life insurance, for example.
An appropriate remuneration model starts with customers
Commissions are a valid choice and part of a positive future for the advice industry.
If the government removes risk commissions, there would be no logic behind that.
The life insurance industry is worth $3.6 billion in in-force premium (in annual policy payments) in the independent financial advice market. If that industry disappeared, so too would the value of small businesses, individual clients and future sales to life insurance manufacturers. «
Written by: Jordan Hawke, Asteron executive general manager
The need for trauma risk advice
In the past couple of months consumers have received a call to action from charity initiatives to support Pink Ribbon Day to raise money for breast cancer research and Movember, supporting the Prostate Cancer Foundation of Australia and Beyond Blue.
With increased public awareness of how cancer affects individuals and their families, it is surprising how many Australians are unprepared financially should the unexpected happen.
It is the role of financial advisers to help educate clients on potential risks and the importance of adequate protection should these become a reality.
And it is up to the industry to take a stand against any steps that undermine this role.
This includes a ban on commissions for insurance through super, as proposed in the Cooper review.
It's important consumers are offered choice as to how they pay for advice, including through commissions.
While some clients might pay a fee for advice, others will not be comfortable with, or able to afford, a lump sum payment, stopping them from seeking advice and consequently individuals may have insufficient insurance in place at claim time.
To put things in context, one-third of women and a quarter of all men will suffer cancer at some stage in their life - more than half will live for longer than five years after diagnosis, according to the Cancer Council. This highlights the great need for trauma insurance to give clients peace of mind that they could pay for medical bills, make modifications to the home, or cover the mortgage should it be required.
The physical and emotional trauma of dealing with cancer is known, but people rarely discuss the potential financial trauma.
When it comes to cancer, one of the biggest financial impacts on individuals and families is the loss of income, and this will vary depending on diagnosis, treatment and type of cancer.
Often the only people with the expertise to discuss the potential financial risk associated with cancer are financial advisers who specialise in risk insurance.
In the past few months, advisers have told me stories of their clients who have benefited from the expert advice they have provided.
In each case, they have said the client would not have paid, or could not afford, the additional fee-for-service that would have been charged if a commission was not paid to the adviser, highlighting the importance of commission-based advice.
The danger of self-insurance
The disability support pension paid more than $10.9 billion to more than 750,000 Australians in the 2009 financial year, according to Australian Bureau of Statistics figures.
This benefit pays less than $19,000 a year and only to individuals who have no chance of returning to work within the next two years.
In only the most severe cases would someone be eligible for a disability support pension. If this is the only form of assistance someone is relying upon, then it will replace a mere fraction of their normal income.
Without appropriate advice, the number of people relying on the disability support pension, the cost to the taxpayers and the cost to society will increase.
Commission should not be considered a dirty word. It is an alternative remuneration method that suits the needs of many individual clients.
There are a small minority of clients who are willing and able to pay a fee for risk insurance advice.
The majority of individuals who need insurance most are normally unable to afford the additional cost associated with a fee-for-service arrangement.
This would result in the individuals not receiving appropriate advice, not purchasing appropriate types or amounts of insurance and not having the necessary financial resources to assist them when a debilitating disease such as cancer strikes. «
Written by: Tim Browne, CommInsure retail adice general manager
Commissions in risk
I have just returned from a national adviser conference, where the most popular sessions featured a futurist talking about new technology and media, and a business consultant explaining how to sell financial advisory practices.
This neatly sums up the current spectrum of adviser sentiment; at one end, those looking to the future with confidence and excitement, at the other, those less bullish about the future and looking to get out (in many cases because of the proposed banning of commissions).
While a final decision hasn't been made on the treatment of commissions in risk insurance, the Treasury representatives who also presented at the conference made it clear the issue is very much still in play.
As a longstanding partner of financial advisers throughout Australia, I felt it was important to articulate Zurich's view on the matter.
For several reasons, we believe commissions on risk insurance should not be banned.
First, we reject the notion the use of commissions in risk insurance necessarily drives a conflict of interest.
As a global insurer, Zurich UK has recently witnessed changes to permissible adviser remuneration in a similar vein to those proposed here. There, the Financial Services Authority recognised commissions on 'pure protection products' do not necessarily drive poor consumer outcomes. In Australia, there are structural forces that minimise the chances of customers taking inappropriate risk solutions. Statement of advice processes, ratings software, commission parity, business development manager support and underwriting practices all lower the likelihood of poor product choice or inappropriate sums insured.
Second, we need to take the consumer view.
People are generally most indebted in their late thirties and forties, with mortgages, personal loans and other living costs all adding up. Conversely, household savings and disposable income at this time are generally at their lowest.
If a hypothetical parent were given the choice of paying $200 a month for a life insurance portfolio (estimated premium for a 40-year-old taking a mix of death, total and permanent disability, trauma and income protection cover, based on Zurich averages) or could pay a reduced premium of $150 a month (for illustration only and assumes a 25 per cent discount on premiums for removing commissions) and an upfront fee of $1600 (the cost for an average financial plan based on FPA research), their likely choice is obvious.
Furthermore, if they weren't given this choice - because commissions were banned - many would simply not take cover at all, further exacerbating our chronic underinsurance problem.
A further concern we have around the banning of commissions has to do with the language and methods used by the government in dealing with the issue. Our submission to the UK Financial Services Authority put the view that "mandating processes that go against the grain of a strong relationship between firms and customers may ensure compliance with the letter of the rules but not necessarily encourage more professional behaviour".
A healthy, well-respected financial advice industry is in the best interests of a government tackling underinsurance and low financial literacy. We believe the level of government intervention should respect the ability of markets to self-regulate and also be sensitive to negative public perceptions of our industry that such intervention can create.
We believe the interests of consumers would be best served by the government taking a positive - partnership-based - approach to the proposed reforms, and more should be done to showcase the increasing level of professionalism within our industry.
The advisers who come through the Zurich-sponsored Association of Financial Advisers Adviser of the Year award are a credit to our industry and the community more broadly. If there were more focus on, and acknowledgement of, the quality of the advisers operating, consumers would be more willing to engage with them. The government and our industry should be working hand in hand to make this happen.
Another topic of widespread industry debate is that of the actual amount of fees advisers charge, rather than the actual payment mechanism.
We believe advisers should be remunerated fairly for the service they provide, which includes not only the provision of the advice but also prospecting costs and - more importantly - the help they provide to clients at claim time, the 'moment of truth' in life insurance. Denying this service at claim time could result in lengthier claims, to the disadvantage of claimants. Charging a fee for service at claim time would be extremely insensitive, and adviser preference that this be factored into commission costs is understandable.
Of course, this discussion would not be complete without further acknowledgement of the underinsurance problem in Australia. Swiss Re research shows Australia has the third lowest level of life insurance among industrialised nations. The insurance 'gap' is estimated to be $1.4 trillion. While this is a concern for our industry, it is the government that should be most concerned. Every death, illness or disability without insurance cover simply means more financial stress and more people relying on social security and the public health system. Accessible, affordable advice relies on a plentiful supply of qualified advisers. That in turn relies on advisers being paid fairly for their services and on consumers being able to pay for their services, often at a time of maximum stress on the household budget.
In conclusion, we believe that to some extent the debate around commissions has been driven by populism, disconnected from consumer preference and based on views of our industry that may have held true 20 years ago, but not now. Financial Services and Superannuation Minister Bill Shorten has promised widespread engagement with the industry before the position is finalised. As a longstanding partner of financial advisers throughout Australia, it is an offer we intend to take him up on. «
Written by: Colin Morgan, Zurich Life Australia general manager
