Real churn or not, the LIF has hurt many
ANALYSIS
The degree to which the Life Insurance Framework (LIF) has wrought change in the financial planning and life insurance sectors is laid bare by the reality that the number of specialist life/risk advisers has more than halved and Australia’s life insurance gap has widened.
What is more, the Association of Financial Advisers (AFA) has acknowledged that it has been a factor in its membership numbers and financial fortunes as it approaches the final membership vote for its proposed merger with the Financial Planning Association (FPA).
The fate of the AFA is important because at the time the processes which led to the LIF began, it was the AFA which, in 2014, worked with the Financial Services Council (FSC) to address what was claimed to be high levels of policy churn in the life insurance industry.
Specific numbers were never provided about the level of churn which existed in the industry, but much weight was placed on an Australian Securities and Investments Commission (ASIC) Report 413 which pointed to the high lapse rate of policies.
It said the drivers behind these high lapse rates included:
(a) product innovation by insurers, such as changing actuarial assumptions
at underwriting or the redesign of key policy features such as definitions
and exclusions, which leads to the repricing of policies;
(b) age-based premium increases affecting affordability; and
(c) incentives for advisers to write new business or rewrite existing
business to increase commission income.
“We also found a correlation between high lapse rates and upfront commission models,” the ASIC report said.
It later said that its findings “indicate that the impact of adviser conflicts of interest in the quality of life insurance advice is an industry-wide problem. Addressing this problem will require an industry-wide response.”
Thereafter, the former Labor Minister for Financial Services, Bill Shorten, wrote to the FSC urging a “self-regulatory” approach to the churn issue – something which led to the establishment of a the Life Insurance and Advice Working Group chaired by former Australian Prudential Regulation Authority executive, John Trowbridge.
It was Trowbridge’s ultimate report that gave rise to the development of Government legislation which delivered the current LIF commission rate of 66%.
Commenting on how the LIF had impacted the sector, AFA chief executive, Phil Anderson, said it was undeniable that his organisation had been disproportionately impacted because of the high number of members who had been active in the life insurance space.
“We probably had a higher proportion of life/risk advisers than the associations,” he said.
Anderson said it followed that the impact of the LIF when combined with other factors such as the Financial Adviser Standards and Ethics Authority (FASEA) regime had contributed to a 50% reduction in new business volumes which was in turn reflected in the number of life/risk advisers over the past five years.
Not only were there fewer specialist life/risk advisers but the number of generalist advisers providing life/risk advice had also reduced.
Anderson noted that many of those life/risk specialists who remained were busy generating new business.
The future of the LIF is now tied up in how the Government chooses to react to the Quality of Advice Review and Anderson said he hopes the Government will be conscious of the consequences.
However, he said that perhaps there was reason to be grateful for the LIF in circumstances where, had it not been implemented and subjected to a planned review process, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services industry might have resulted in the total removal of commissions.
There was never any evidence of wide-spread churning to support LIF & advisers can’t afford to provide insurance advice now. Australia is more underinsured than ever. How can LIF be viewed as anything other than an unqualified failure?
The only reason anyone or any association could in any way defend the: – ASIC Churn selective lies report,
– the FSC and Life Ins co. wanting to flog dodgy direct Ins and cut Advisers out
– and the FPA & AFA supporting the whole fabricated mass Adviser Churn problem as the evil that must be stopped.
Karma is a real bitch at times and everyone associated with LIF implementation are getting their just punishment.
Except ASIC of course who never gets blamed for any of their far too common failures and Adviser killing doctrine.
It was a lie that product providers used thinking they would simply pocket the money they didn’t have to pay advisers. They were told what would happen if the pushed ahead with the LIF changes and guess what it happened. In the end the clients were worse off, advisers were worse off and ultimately the product providers too. LIF was and is a complete failure, so who is accountable and what can be done to avoid these obvious failures? It one of many examples (the royal commission, the law reform review etc) where self interest groups views are given more weight than the most important groups, clients and advisers, who are the ones who ultimately are left worse off with unnecessary regulation that benefits no one other than the lawyers who get paid handsomely to create the mess.
The reason we have a huge under insurance problem lays squarely on the shoulders of the FSC & AFA lying to the public about levels of churn in the industry.
They were also heavily influenced by industry fund lobby groups backed by the labour government to take banks out of the super industry. They have succeeded at this by targeting lack of choice in product legislation, financial advisers directly(via illegal advertising), and the falsehood around churning, but the industry funds continue to commit the same crime to this day.
The forced retirement and Suicide of many older advisers can be blamed directly on these institutions, so let’s reserve the victory speech for a moment. These institutions have little to crow about, hence their demise. They couldn’t have been more of a failure.
There couldn’t be a greater conflict of interest where industry funds fail to offer choice of fund or adequate financial planning.
They hoard investor funds so they can take a massive clip for doing absolutely nothing for their clients.
This issue is worse than when banks started charging account fees for holding peoples savings.It’s the biggest scam in the industry.
What did the FSC do the address this great robbery of peoples retirement savings.
Churn or not, the net result is a dramatic increase in underinsurance numbers, and ultimately more potential liability for the NDIS which is already struggling….. a potential unfunded national debt looms.
Should the legislators not have forseen that, for the sake of some commissions? Were policy holders/stakeholders/government not better off beforehand?
Wasn’t the deal that more people would get insurance because it would be more affordable as a result of the policy?!
Whatever they promote it WILL do, it invariably does the opposite. What these muppets are yet to understand is the natural law of life – for every action taken, there is always and equal (or greater) reaction. What they did destroyed this industry but no one will admit that or be held accountable.
It’s been great for Go Fund Me. Whenever someone is taken too soo, the Go Fund Me is launched to save their family. I wonder if there is a better way to protect the family? Not these days. Life insurance industry will need to launch their own Go Fundd me campaign soon.
To this day, I don’t know what the REAL reason was for deliberately sabotaging an entire industry through the LIF Reform but I know it was an unmitigated disaster and failure for all parties concerned in hindsight. The only thing that was a success was the plan to do exactly what they did.
I will never forget (or forigive) Peter Switzer and John Trowbridge for the blatant misrepresentation they both perpetrated and the lies they told on Foxtel’s ‘Switzer’ nightly finance program back in 2013 when they discussed on national tv how advisers could write a $10,000 policy and get 120% commission – then do the same thing the 12-months later. The amount of information they deliberately left out of their point was infuriating for me as Risk Adviser (back then, now) yet it no doubt contributed to what has now been accepted as being completely false and the failure that is the LIF Reforms.
We deserve to know the truth here as advisers; we were lied to by so many, unfairly treated and everyone in the industry has suffered – bar a few grubs who’ve ridden off into the sunset without a care in the world or any retribution for their enormous failures. Trowbridge is and will ALWAYS be one of those culprits in me eyes.
The truth is simple, the Banks & Life Companies wanted to sell mostly via Dodgy Direct Life Insurance and hoped to increase profit in multiple ways:
1) No Adviser Commissions.
2) Higher premiums for worse policies
3) Less claims paid due to worse policies and no adviser to support claims.
The $$$$$ signs said it all and Frydenberg along with ASIC were more than happy to help the Banks / Life Companies and further Kill Advisers.
But in short time after LIF the RC uncovered the truth of Dodgy Direct Life Insurance sales and policies.
Then the wheels fell off.
Bubble bubble toil and trouble! What a mess – an industry on its knees because of absolute stupidity and the ideology of ASIC and some federal politicians with prior careers in banks who found themselves in positions to reduce competition for those banks in their advisory businesses when competing with small business advisers. ASIC have always hated commissions in life risk in particular. ASIC saw an opportunity when a certain insurer handed a group of advisers in an AFSL controlled by that insurer over to ASIC for investigation when a new CEO arrived. Everyone in the industry knew that that particular AFSL contained a number of persons in that dealership who purposely engaged in twisting policies, and were well rewarded by their parent company – small cruise boat cruises on the Med etc. ASIC was handed “heads on a plate” and suddenly had information they’d never had before about a level of “churning”, which of course they never really defined. There are a variety of legitimate circumstances where policies can be replaced in the best interests of the client. Report 413 fed the “chooks” in all the fringe lobby groups pertaining to act for consumers, but in reality those groups were always seeking an ideal that was never ever possible in a commercial world. Is it just a coincidence that both ASIC and most of the consumer groups are populated by lawyers, most of whom have never had a practicing certificate?
By 2015, I believe most of hard heads on the bank boards had decided to leave “advice”: even then, there a foreboding on boards that bad bank “wealth” advice could involve massive reparations for dud advice down the track, and the board’s wanted to sell their insurance businesses and fund managers. What a gift – the banks convinced the idiots at the FSC that they could piggyback on Report 413 and then argued to a series of receptive Minister for Financial Services that reduced commissions MUST reduce “churning”. In reality, the banks had discovered that return on investment in life insurance in Australia was around 8%, whereas most of their other activities returned at least 12% or more. They HAD to sell their insurance arms, and they did so, “dressing up” those life insurance businesses into attractive packages by convincing government it was a good idea to adopt this thing called LIF and reduce commissions to advisers, and distribution costs across the board.
Think of it this way, if you are a Japanese company buying an insurer that used to be owned by one of the top four banks, would you be more interested in the purchase if the seller was able to inform you that they had convinced the government that life insurance distribution costs could be halved by 50%. What a deal!
But wait, there’s more. There was an ill-conceived idea about professionalism called FASEA, with an absolutely incredibly difficult University standard exam, which stumped competent advisers who had not been to university for a couple of decades. The FASEA code contains some very interesting new standards, and one of those standards, which most people originally ignored, was Standard 5 – the set of rules that apply to communication between advisers and their clients.
Along comes another set of ideologues called APRA, who are supposedly the regulators of life insurance companies AND banks. (Surely there is an inherent conflict in any regulator trying to control both of those diverse entities, with significant cultural differences). Apra, without any meaningful consultation, sought to inform the insurer’s that income protection wasn’t profitable, the cross subsidization between insurance lines must cease, and introduced a horrendous new set of rules regarding income protection.
It seems, in their dreams, Apra expected advisers to literally drown their clients with offers of slightly cheaper IP contracts, which while purporting to save premium, essentially drastically reduced contractual-right-to-claim between an income protection policyholder and the life insurer – insurers suddenly had a bucket-load of discretion gifted in their favour when handling claims. But those advisers and AFSLs not owned by insurance companies suddenly realised they were on a hiding to nothing with Standard 5, if they failed to efficiently and effectively communicate the pluses and minuses to that particular client of recommending a replacement income protection policy, and could prove the “Reasonable basis”
Yet somehow no one seems to understand why new business is down about 40%, and IP new business is probably down somewhere north of 50% and why there are at least 1500 less risk only advisers on the FAR. And recently Apra seem to be hinting that the insurers had failed in their duty to promote the replacement IP contracts, somehow seemingly forgetting that in today’s environment we no longer have “tied” agents – the majority of advisers are self-employed, holding the business risk.
And frankly I despair if there will be any benefit for risk only advisers and 50 page SOAs in the much hyped QAR
BOOM, spot on Old Mate Risky
Thanks Old Risky, always enlightening to read your missives. The last part, about IP, sickeningly spot on. In my view what they did with IP was criminal and subversive. Screaming shame nobody will ever be brought to account.