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The life insurance industry in Australia is in trouble

The Royal Commission's recommendation that life insurance sales should not be rewarded with a commission or a payment from the product provider to the person doing the selling show just how far out of touch regulators and the commission itself actually are.

There is a view among the legal intelligentsia and commentators that people can get something for nothing. However, legal services also have conflicted remuneration, including (but not publicly disclosed) retainers.

Is the advice provided to the clients by legal services providers who operate on retainers and subsequent further billings, conflicted remuneration and are they acting on the client's best interest? How do the clients know?

Where is the comparative pricing? Where are the continuous disclosures?

Clearly the sale of life insurance as a product is highly complex, but not well understood by lawyers.

Life insurance does not provide risk cover for real property or equipment; it provides risk cover for human bodies. It is not easily underwritten car or boat or house cover.

The assessment of risk is therefore the assessment of the human body being insured.  It is subjective and intrusive; always has been and always will be.

There is also a belief everyone should have life cover, regardless of their drug affected body, mental health, or muscular skeletal deficiencies. What a great idea! But who pays?

They essentially take the view the insurer must provide cover to all of these people in the community, and run an open program of claims, where the investigation of claims to detect insurance fraud should no longer be a priority.

Indeed the movement to protect young workers between 16 and 25 years old from having default cover was applauded by lawyers.

The cause and effect algorithm immediately kicked in, and prices for the balance of the insurance cover of the industry super fund member base went up substantially; in some cases, I am reliably informed, around 40%.

The trustees of the industry super funds were not happy.

The loss of the premiums for people who rarely make claims in the 16 to 25-year-old segment, impacts upon everyone else within that group life risk insurance policy.

The pricing is based on the actuarial reality, not social engineering ideology.

I am sure it won't be long before most of the life insurers in Australia walk away from group life, or impose upfront underwriting, rather than provide cover without evidence of health.

They will increase the proliferation of the decreasing term life insurance so the cover expires when the member reaches 55 years. This reduces risk and cost.

Equally, the profit share paid by the life insurance companies from the life insurance premiums (paid by its members) to the funds is quite substantial, being in the many millions of dollars, which is of course undisclosed to those members.

This will now continue to fall, and means the funding of sporting teams and huge payments to trustees might need to be reduced.

ASIC has a significantly different view of competition to the Australian Competition and Consumer Commission and it will be interesting to see how the regulation of sales proceeds.

Currently, the regulator is trumpeting its huge win over the life insurance industry last year with the capping of commissions. A further statement from the regulator said it agrees with the Royal Commission, and commissions on life insurance should go to zero to ensure there is no conflicted remuneration, is of interest.

Firstly, ASIC is not APRA, with the latter now seeing substantial falls in cash flows on the number-one funds of each life insurer in Australia. Alarm bells are ringing.

In 2018, APRA stated it is concerned disability income insurance is not commercially sustainable in its current form.

Retail life insurers have tended to offset continual losses in disability insurance against their lump-sum business which includes death, trauma and TPD covers.

In 2016, the industry made an after tax profit of $914 million for the lump-sum businesses, however this crashed to $324 million after-tax profit in 2017.

It is unlikely the 2018 profit would be any different, and indeed probably less. Disability claims are accelerating as the insured age.

Concerns are now growing the cash flows on the number one funds of all life insurers, as at 30 December 2018, were substantially lower than similar cash flows in December 2017.

A lot of Australia's life insurers are international companies and all of the re-insurers are. It will not take them long to cut their losses.

Industry experts are concerned that, with increased mental health claims for the individual disability insurance products, we may not see them being offered in the future without simplification - tighter definitions, benefits to promote return to work, and substantially increased pricing.

To some degree the disaster that appears to be looming with this product has been driven by ASIC with its overemphasis on the comparative process of product to product with customers or clients, and this drives industry proliferation of more options into the market.

Indeed in Australia, every state government milks a stamp duty of 10% of the premium paid on new and renewed life insurance contracts every year.

This stamp duty is now falling rapidly as ASIC's views and downward pressure on commissions impact sales.

It will be down some 30% YTD and this may increase by the end of 2019. I am sure the states at the next Council of Australian Governments meeting with the Treasurer will be unhappy with ASIC.

When sales fall, so does profit, and thus company tax payments from the insurers is now down 70% on what they were four years ago.

Treasury will also be unhappy with ASIC.

This is a huge win for ASIC in that it's crushed government revenues in this sector and, by its policy of reducing commission to zero, will drive the profitability of the industry to the same level.

It will be interesting to see the 30 June 2019 figures from each life insurer showing the impact of commission reductions commenced last year.

Secondly, it will be interesting to see how many financial advisers bother to sell a life insurance policy with an annual premium of $1000 of which they will receive maybe $600. Keeping in mind they have to sustain the cost of the Statement of Advice, time spent with the client, and the complex documentation of a life risk case.

One in four risk cases fail to be underwritten mainly due to non-disclosure, and an unhappy client is unlikely to pay a fee for service for something that never happened.

They will instead choose not to take the client and the liability of a clawback that sits in the deal for two years.

When the cash flows continue to fall and staff is made redundant at an increasing pace, and when the tax revenue for both state and federal government diminishes substantially, we will be able to look back and say this was an incredibly successful public policy exercise.

In the end, the regulators are going to discover the market and money is like water - it will find its own level.

If nothing changes and commissions are reduced further then the life insurance industry will collapse, and the fault will be entirely and properly laid at the door of ASIC for not understanding the market.

7 comments so far
  ASIC is nothing but a secret tax collector. In net terms no funding is provided at all, rather ASIC provides a windfall gain to consolidated revenue aparently around $600 million per annum. And this before the new Industry Funding impost. Every commercial enterprise is faced with conflict of interest, their own interest and the interest of customers and this is a fact of free enterprise that must be managed not regulated into oblivion.

Thank you Mervin.

I agree with much that you have said in your article with the exception of your comments on commissions.

I have been nominating Hybrid Commission on all cases since early 2000's and rebating 25% on large submissions.

I believe somewhere between 60%-70% (plus GST) with a 20% +GST renewal is realistic and commercially viable for a life risk practice - what are the life offices doing with the commission savings and the likely improved policy retention outcomes?

MICHAEL MOONEY  |  1 APR 2019   8.53AM

Well said, Mervyn.

What a calamity! The ruination of a vibrant, socially and economically vital industry by government appointed regulators, who seemingly (obviously?) have no regard for the essential role of life and disability insurance in our society. And who are oblivious to the well-established (200 years in the making) fact that life insurance is sold, not bought. And certainly not bought having to pay someone a fee for having it sold to them.

Regulators - and, may I say, industry bodies and even the insurers themselves - seem to have lost sight of the fact that insurance sales people have historically been paid commission as a fee for procuring the business for the insurer. What is wrong with that? Was Hayne not paid for his services? Were not the lawyers who revelled in their lucrative roles in the RC? Isn't everyone who works for a living?

Hopefully, insurers will wake up, industry bodies will wake up, and join forces in pursuit of common sense, and possibly salvage what is left of a once magnificent, socially just and necessary industry. Perhaps adopting as their mantra that of the original AMP Society: "Founded for the benefit of the widows and orphans of Sydney Town."

JACK WELLINGS  |  1 APR 2019   8.56AM

Well written article Mervyn, the best summation of what is happening to the industry that I have to date read.

I also agree with Michael Mooney's comments on hybrid commissions. I too have used the hybrid model since 1995 and it is a sound way to build a business, as you are paid enough ongoing to be able to proactively service your clients. You may sometimes take a hit in year one, but after around five to seven years you will have received more remuneration overall compared to the now gone upfront model. The banning of upfront commissions will long term cost the life offices more.

GRAHAM JENKIN  |  1 APR 2019   9.20AM

I disagree with some points by Michael Mooney, but only in so far as the rate of commission needs to be higher, set at 80% + GST, because smaller sized premiums will deliver commission barely sufficient to cover off the Compliance costs let alone advice costs. This will be particularly worse for Specialist Risk advisers.

I do agree however that if this were part of a more holistic advice service (Fees) then the 60% - 70% level is sustainable. there are of course more issues with Life insurance other than the obvious, years of poor management by Banks have seen life offices scrambling for market share by reducing premiums, and providing unsustainable terms and conditions in (specifically) Income protection business. this will all end in tears as the Life offices struggle to remain profitable, forcing premiums up and as a consequence higher lapse rates.

because of the "Best Interest" duty, any reintroduction of older style IP polices with split benefit periods (Sickness Vs Accident) is fraught, the first claimant who wanted change based on price and feels duded based on terms and benefits will end up in court with the adviser on a hiding to nothing. to paraphrase Stan Laurel " this is another fine mess you've gotten us into..."

Once again votes and ideology have interfered in a process which should be more logical and thoughtful.

GRAHAM HUTTON  |  1 APR 2019   10.01AM

All of these well thought-out comments come from those who know what they're doing. As Mervyn said, companies pay retainers to lawyers yet what sort of compliance and reporting issues do they face in this practice? As well, their fees for winning litigation cases are massively excessive, but what best interest duty must they report and to whom?

Attracting new advisers into our industry, especially those who want to specialise in risk, seems now unlikely. The level of compliance, the repetitious disclosures and massive SOAs which no one reads and even fewer understand, is simply beyond the pale. All of this has effectively killed off an industry which has held an honourable place and provided a reasonable living for thousands of advisers in our society for over 150 years. What a sad and shameful mess!

PAUL HERRING  |  1 APR 2019   1.09PM

When I first entered the life insurance industry in 1970, it was explained to me that part of the commission which I received was for the work that I must do for the client, inclusive of regular reviews and claims advocacy, when applicable. The balance was for "finding the client", in the first place.

Those of us who have been fortunate enough to develop mature Risk Practices may no longer need to "find" our clients, but those younger advisers, aspiring to develop a successful Specialist Risk Practice, must still overcome that basic obstacle. How are they to be reimbursed for investing the requisite time and energy to develop a Risk Practice in the first instance?

Not only are some practitioners being squeezed out, there remains minimal incentive to start up!

TERRENCE BRAIN  |  8 APR 2019   1.51PM
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