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.