Commissions aside, the insurance gap makes continuing the LIF vital

ANALYSIS

The newly-elected Australian Labor Party (ALP) Federal Government will need to accept the old life insurance sector premise that “insurance is sold, not bought” and the existence of a continuing substantial life insurance gap before it accepts a continuation of the Life Insurance Framework (LIF).

Because while the putative Minister for Financial Services, Stephen Jones signalled during the election campaign that he had adjusted at least some of his views with respect to life insurance commissions, the reality seems to be that his views have not changed that much.

So, if the life insurance industry is to convince the new Albanese Government of the need to continue the LIF formula of 60% upfront commissions and 20% ongoing, then it is going to have to deliver the facts.

And the facts are that the exodus of financial advisers has already been shown to have had a significant impact in coverage and this, in combination, with changes to insurance inside superannuation have created significant issues in Australia.

The most recent research on the life insurance gap was conducted by actuarial research house, Rice Warner, which is now a part of Deloitte and showed that the insurance gap had widened substantially.

The Rice Warner research, published in 2020, showed that the total sum insured across all distribution channels had decreased by 17% and 19% for death and TPD cover respectively since June 2018.

“This is a significant reduction and is driven mostly by the drop in Group insurance inside superannuation, being 27% for death and 29% for TPD cover,” it said.

When this is weighed together with the latest Australian Prudential Regulation Authority (APRA) data and the assessment by insurer, Noble Oak, that less than 42% of Australians have adequate life cover it represents a substantial problem.

This is then underlined by the latest Dexx&r data which show that in the December Quarter 2021 – Individual Lump Sum Risk new business was down 9.9% to $238 million, $26 million less than the $264 million recorded in September 2021 quarter.

Dexx&r said the December quarter sales of $238 million were 8.5 per cent lower than the $260 million recorded in the December 2020 indicating that this may a temporary reversal of a long term decline in new business.

“The December quarter decrease in new business reflects the ongoing impact of the contraction the number life companies with on sale products and a reduction in the number of financial planners following the transfer of ownership and restructuring of retail bank owned dealer groups,” it said.

What the industry needs to be telling the new minister is that resulting from any insurance gap is going to be a heavier impact on the Budget when things go wrong.