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By Helen Blackford, Chief Executive Officer, Millennium 3
While the payment of commissions in the life insurance industry for the moment still exist, there is a popular view that commissions are always ‘bad’.
This is because commissions are associated with cases where salespeople have aggressively placed their clients in unsuitable products because the existence of a commission proved too strong an incentive for them to resist. The evidence against commissions in certain industries is clear and persuasive, however, I believe the use of commissions in the life insurance industry is appropriate and generally leads to good outcomes for all parties.
In this article I explain how the cloud of pending commission removal could easily lead to the problem of underinsurance worsening. This could ultimately mean higher social security costs which will need to be met by the Australian taxpayer.
The Royal Commission made the following recommendation:
Interestingly, the recommendation provides an opportunity to retain commissions if there is a clear justification for doing so.
The Government has said it will wait until after the Australian Securities and Investment Commission’s 2021 follow-up review into whether the changes they have already made to commissions have worked before deciding whether to reduce commissions to zero. While this might seem to provide some breathing space anecdotal evidence suggests otherwise. Many of the most experienced and capable risk advisers are not prepared to endure the uncertainty of having to wait until 2021 to know what the future holds for their businesses. They are making decisions now about changing their business models or even retiring and closing them down. The exodus of experienced risk advisers means a deep pool of talent will be lost which will not be easy or quick to replace.
A balance needs to be struck between the desire of the regulator for a compliant and professional insurance industry, which adds to costs, while allowing risk advisers to run profitable businesses. Excessive regulation and onerous compliance requirements can make it unprofitable for risk advisers to operate their businesses. This will inevitably lead to fewer Australians being appropriately insured.
Despite the fact there wasn’t a single case at the Hayne Royal Commission where life insurance commissions were linked to poor outcomes for consumers, there is still a perception that commissions are bad. This is probably related to high-pressure, unsolicited, telephone-based sales of unsuitable or poor value insurance, such as credit protection insurance or funeral insurance. This type of insurance was often sold to unwitting people who had not sought nor expressed any need for it.
There is a large difference between this type of poor value insurance and the type of cover and policies a risk adviser would recommend for a client. Unfortunately, the reprehensible behaviour of salespeople not regulated as advisers, who sold poor value insurance means some people view all insurance commissions as negative.
Historically, there has been evidence of churning in life insurance as some unscrupulous risk advisers took advantage of the commission system. The already implemented Life Insurance Framework (LIF) requirements and obligations for advisers to adhere to the best interest duty has already largely dealt with this issue. A further reduction of commissions won’t serve to change the behaviour of advisers not adhering to the current requirements, but it will disadvantage clients through an inevitable reduction in the availability of advice.
I believe this is because of a combination of effective lobbying from mortgage broker associations and the special place owning a home occupies in the minds of Australians. Politicians are able to understand the arguments in favour of commissions for mortgage brokers, but the insurance industry and their commission structures can be more complicated. Owning a house is part of the Australian dream so politicians are reluctant to do anything which looks like making the achievement of that dream more difficult. Insurance is also quite unique and tailored, making quick and easy comparisons between insurance policies considerably more complicated than comparing mortgages.
The other factor is that insurance is a ‘grudge purchase’ because if it works properly the ‘benefit’ only occurs after something bad like illness, death or an accident happens. This pall of doom and gloom is another factor in making politicians less inclined to advocate for the industry.
One of the effects of removing commissions for insurance will be that fewer people will be able to access insurance. This is because the cost for an adviser who is not receiving any commissions to provide a client with standard and uncomplicated risk advice is around $3,000, which rises as complexity increases or more underwriting is involved. Many people will not want to, or be able to, pay $3,000 and will therefore remain uninsured.
When people who are uninsured or have poor value insurance are injured or die and leave their families destitute it’s the taxpayer, via social security, who will bear the cost. The financial value of the support these people will receive from social security will be much less than they would have received if they were insured – making this an unsatisfactory outcome for all.
An unintended consequence of risk advice costing around $3,000 may be to increase the number of people who buy insurance online or via telephone directly from insurance providers. This is worrisome because of the way people judge the value of insurance. Rather than thinking through all the terrible things that need to happen in order for the policy to pay a benefit, people often short-circuit this mentally painful process and focus solely on price rather than features. They will assume that all the features are much the same across different policies and will then choose the cheapest policy to buy. Sadly, the cheapest policy is often not the most suitable nor the best value. People who buy direct insurance will also not have any help navigating through the policy features, exclusions and assessing the likely claim experience to help them make an informed decision.
Risk advisers consider a wide range of factors when deciding which insurance policies to recommend to their clients. These include the terms of the policy, stepped or level premiums, waiting periods and how efficient the claims process is. Most clients would not be able to evaluate policies in this way without advice. In a world with fewer risk advisers it’s reasonable to presume that more clients would buy unsuitable, poor value insurance – to the benefit of no one, except perhaps product providers.
Risk advisers generally act as brokers not as product distributers which means they search for the best insurance policy for their client. This process of ongoing evaluation leads to product providers introducing new features which are beneficial for clients. Without risk advisers pushing for these features, it’s unlikely they would exist. The knowledge risk advisers accumulate during their career enables them to exert a powerful influence on product providers to offer features which are valued and to remove those which aren’t. The fact that advised claims have better acceptance rates than unadvised claims also underscores the value a risk adviser can create for their clients.1
There is a perception that risk advice is merely an uncomplicated extension of financial advice, but most advisers of both types would disagree. Risk advice is highly specialised and many financial advisers outsource their client’s insurance needs to a specialised risk adviser rather than try and do it themselves. It’s a bit like the difference between a plumber and an electrician – superficially they may seem similar, but in reality, they’re very different.
All industry participants need to continue to work together to lobby policymakers to retain commissions in risk insurance. In an ideal world a decision to retain commissions could occur before the ASIC review in 2021. This would reduce the damage that’s already occurring as risk advisers exit the industry because they can’t see anyway of carrying on their business profitably in the absence of commissions.