FAAA points to advised life ‘crisis’
A series of historical facts and outcomes makes it “easy to conclude that the advised life insurance sector is in crisis”, According to the Financial Advice Association of Australia (FAAA).
The FAAA has used a submission filed with the Australian Prudential Regulation Authority (APRA) to outline all the changes which have been imposed on the life insurance sector of recent years to warn of the negative impacts and the appearance of crisis.
The FAAA outlined changes ranging from the exit of the banks, the introduction of the Life Insurance Framework (LIF), superannuation legislation, APRA’s intervention in the individual disability income (IDII) market and increased claims and has recommended the regulator collect data to track the impacts now and into the future.
It then noted: “Despite all the focus on the continuation of the payment of commissions for life insurance advice, they remain the dominant form of remuneration and even when advisers offer their clients a choice between fees or commissions, the client invariably chooses to pay for their advice through a commission”.
The consequences of all of these reforms and structural changes have been broad, however the direct consequences for advised life insurance have been significant, as follows:
- A substantial reduction in the number of financial advisers providing life insurance advice. This is often stated to be at a rate much greater than the 45% overall reduction in adviser numbers since 1 January 2019.
- The exit of advisers from this segment of the market is attributable to the reduction in commissions (LIF), professional standards reforms, increasing compliance obligations and demands of staying up to date with product changes (the IDII reforms resulted in a complete change of the products offered across all life insurers).
- A reduction in life insurance new business volumes of greater than 50% over the last five to seven years. Given increasing premiums, the reduction in new policyholders is expected to be much greater than 50%
- The reduction in new business has created an increase in price competition with the emergence of sub-optimal practices such as upfront discounting, where a discount applies for the first year or the first few years, which is then quickly removed/reversed. The consequences of this is that premiums rise more rapidly than they otherwise would, which generates great levels of client dissatisfaction and discontinuance in the second and third years.
- Due to reduced commissions and the increased cost of providing life insurance advice, financial advisers are focussing more on higher premium clients. This means that younger Australians, who would expect to pay lower premiums, are typically not the focus of advisers and will struggle to get advice on life insurance. New clients are now typically older and more highly paid, which has substantially changed who the new clients are who are going into the risk pools.
- Significant premium increases across all product types, however particularly with the IDII product. The consequence of this is that financial advisers are spending substantially more time on the retention of existing clients who are often seeking solutions to address the consequence of large premium increases and the challenge with affordability.
- Significant challenges for Level Premium products, where premium increases have been substantial and often at a greater rate than Stepped Premium products. As a result, this has undermined the long term title of “level” for these products.
“In short, it is easy to conclude that the advised life insurance sector is in crisis. This is only part of the story, as the flow on consequences for life insurance are equally important, with fewer new entrants into the life insurance pools and particularly in terms of younger lives. This will undoubtedly over time push up the average age of insured Australians, which will fundamentally change the economics of the life insurance business model,” the submission said.
Unfortunately insurers, regulators, and so called “consumer associations”, all think a crisis in advised life insurance is a good thing. They believe it will hasten the shift to direct insurance purchases, without the involvement of professional advisers who they pathologically despise.
But it will be consumers who are ultimately most harmed by the changes driven by an unholy alliance of insurer commercial interests, regulatory bias, and extremist ideology.
Consumers will end up making product choices driven by marketing and price, without any understanding or consideration of product quality. They will only find out the restrictions and limitations of their direct insurance product when they try to claim. This is why insurers prefer direct products. It’s not because they save money on commissions, that gets spent on marketing instead. It’s because they pay fewer claims.
100% spot on
It seems inevitable that the only real good thing Hayne did in the RC was killing Dodgy Direct Life Insurance.
But the vested interests along with Corrupt Canberra will see it resurface again.
If the life insurance regime being the regulator and Life companies were a profession they would be disbarred from their association for gross negligence, incompetence and failing to act in the interests of their client, the Australian Public.
The destruction of the number of insured, the quality of the insurance, the degree of cover for those that remain is reprehensible. This is compounded by the utter decimation of the professional ranks of advisers. And it wasn’t like the regulator wasn’t warned, all those inside the sector could see all of these consequential outcomes. As usual the government did not consult or listen to those that are actually involved in the provision of risk advice.
Bring on cover on morning tv, we’ll have plenty of useless cover for a family of 4. $250k will be enough right?
@ Wildcat.
Correct on every level.
A handful of recalcitrant advisers was the “blueprint” for the introduction of the Life Insurance Framework (LIF) and was enthusiastically supported by the Life Insurance industry (FSC)
Why, because it enabled the Life Insurance industry to market inferior risk products “direct” to the public.
That all came unstuck when it was found under the Royal commission into Financial and Banking services that the Life industry was relying on the unsuspecting public to buy their products that virtually covered very little.
And “direct” marketing was subsequently banned.
As has always been the case, from subsequent stupid legislation, when you bite the hand that feeds you, why would anyone want to enter that arena again.
The current inferior products offer very little benefits to consumers and the lack of competition and product differentiate appeals to no one involved in the advice business, especially the consumer.
It won’t matter no one cares. Nothing in it for them. It’s as simple as that.
What is often overlooked, is that financial advisers have had a gutful of increasingly difficult underwriting and the extraordinary lengths the life companies go to, to avoid paying claims. On top of everything else, these issues have made life insurance advice unprofitable and hugely frustrating. Being forced by stupid bureaucrats to sell substandard products, which won’t pay out for many clients when they need it, was the final straw for many of us.
Like a lot of my colleagues, I still write risk, but I avoid it wherever possible and my new business flows have dropped through the floor. I am happier and making more money. I feel sad for Aussie consumers, but the blame for this lies with Treasury, ASIC, APRA, the life companies, Labor, Liberal, Hayne, Trowbridge, Choice and the journalists who swallowed the nasty, anti-adviser rhetoric hook, line and sinker.
Not sure what their measure of success is, but this has been a joke. An absolute joke.
This is a perfect example of the government, regardless of party, and their bureaucracies decimating ‘productivity’ (which they always go on about as if it is private enterprises’ job to improve) and essentially destroying an industry. And Australians are much worse off for it.
The solution from Stephen Jones will be that life insurance companies employ people who sell policies on their behalf; the fact this is taking things back 20 years is lost on the idiots in charge.
Why are we saying “it’s in crisis” as if there is some chance of saving this endangered species called the Risk Adviser. Sorry but it’s dead and buried.
The legal and compliance obligations required in providing risk advice make it unviable & not feasible. My last risk advice was written in 2018-2019. Even last year I sat and listened to a highly experienced private compliance operator, after representing a risk adviser in a complaint with ASIC, strongly recommend any person operating in that space to leave or re-consider their career choice.
Hold the presses. FAAA discovers life insurance might be in deep #@!*&^ .
Thinking advisers have been screaming about 25% upfront discounts with big kicks in the tail for the client, otherwise known to Apra as “duration based pricing” for at least four years. In 2020 Rice Warner did some research on this phenomena, and surprise surprise, concluded it was a total disaster for consumers.. Did AFA/FPA ever get a copy?
Gouging of premiums for existing business continues unabated. This gouging on pre-LIF legacy policies has been going on now for nearly 5 years since the sale of Comminsure. What happens over there at AFA/FPA, are they listening to risk advisers or they submerged in the cone of silence.What is CALIs role in this nightmare?
FAAA is correct on one comment – the data collection focus should be on new clients into new policies, rather than CPI increases to existing policies as there clearly is a major distortion. But one of the apparently unpredictable consequences of LIF was that experienced advisers with large books chose to increase existing policies on old commission rates, rather than take the risk of being underpaid by 50% on upfront commissions AND face a two-year potential claw-back on their investment of time and money, if they chose to write new policy business under LIF.
Remember this – the then AFA/FPA” waived through” LIF and had never really explained why they never took up arms against government on behalf of its members – risk advisers. LIF reduced new business in a number of ways and it’s time the FAAA went and banged on Mr Jones’s table to demand that LIF be significantly reversed.
I await the day when the FAAA is able to demonstrate that the umbilical cord to life insurers of many years s has been disconnected.
Can anyone hear a fiddle and smell the smoke?