LIF, life and tough times for insurers

Every life/risk adviser knows that 2021 is a crucial year not only for their business but for the broader life insurance industry because that is when the Australian Securities and Investments Commission (ASIC) will review the Life Insurance Framework (LIF).

But what has already become clear is that while the Federal Government scheduled the review of LIF back in 2017/18, much has changed since then, including the factors which gave rise to the framework in the first place – specifically commission-based remuneration and so-called policy ‘churn’.

Putting aside the impact of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and the severe market disruption caused by the COVID-19 pandemic, significant shifts had already begun occurring within both the life insurance and financial planning sectors which have to be acknowledged as fundamentally impacting the fundamentals and therefore ultimately impacting ASIC’s review process.

The factors impacting the ASIC review include:

• The balance sheets of the major life insurers have been placed under pressure by a range of factors, not least disability income insurance;
• The Life Insurance Code of Conduct has been tightened;
• Greater scrutiny applied to policy definitions; and
• The educational requirements inherent in the Financial Adviser Standards and Ethics Authority (FASEA) regime have become fundamental to how many life/risk advisers ultimately choose to remain in the industry.

On top of this, the industry needs to factor in the fact that the upper echelons of ASIC have experienced an almost complete change in key personnel. When the review of the LIF was first scheduled the ASIC chair was Greg Medcraft and the deputy chair was Peter Kell. Today, ASIC’s chair is James Shipton and he is assisted by two deputy chairs, one of whom is a Queen’s Counsel.

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What appears not to have changed within ASIC, however, is its negative attitude towards commission-based remuneration, something evidenced in one of its submissions to the Royal Commission.

In that submission, ASIC argued that the Life Insurance Framework should be allowed to run its course before it was then subject to the scheduled 2021 post-implementation review.

“ASIC will conduct a post-implementation review in 2021 to assess the impact of the reforms,” it said. “Collection of data to inform this review has commenced.”

“ASIC considers that if no significant improvement has been made on the findings reported in ASIC REP 413, there would be a compelling case to remove the exemption from the ban on conflicted remuneration currently afforded to the sale of life insurance products altogether”.

And therein lies the problem for both the life insurers and organisations such as the Association of Financial Advisers (AFA) and the Financial Planning Association (FPA) in terms of their representational efforts on behalf of life/risk advisers.

As both AFA chief executive, Phil Kewin, and FPA chief executive, Dante De Gori, made clear to a recent Financial Services Council (FSC) webinar, prosecuting the case for retaining commission-based remuneration is not going to be easy irrespective of what the data collected by ASIC ultimately shows.

The point being made by both men was that how a life/risk adviser was ultimately remunerated ought to come down to a matter of consumer choice – the selection of fee for service on the one hand, or commission-based remuneration on the other.

Hardly surprisingly, the major life insurers are similarly hopeful that ASIC’s post-implementation review of the LIF does not end with the recommendation of changes which would only serve to exacerbate the delicate situation being confronted by life/risk advisers.

The broad attitude of the major life insurers was indicated by TAL chief executive, Brett Clark, who told Money Management that the company was working with the other insurers and the industry to deliver an appropriate outcome.

But, reflecting what both the AFA’s Kewin and the FPA’s De Gori said, Clark said it was really all about consumer choice.

“We are strong advocates for providing Australians with access to quality and affordable financial advice as this plays a critical role in supporting the financial wellbeing of Australian families now and into the future,” he said. 

“We believe Australians need more access to high quality financial advice, not less. This is why the sustainability of a high quality financial advice model is vital and we must ensure that the collection of changes being made to this sector, while improving outcomes for consumers, does not reduce access to those who depend on or benefit from it.

“As we look forward to the review of LIF it is important the industry engages widely. There are many stakeholders. We are working together with other insurers, the FPA and the AFA to advocate for a life insurance framework that offers choice, access and positive customer outcomes for the long term.

“It is important that the LIF review considers a wider context of change for the life insurance industry, that consumers continue to have choice and access to life insurance advice and products; and that it avoids a narrow review of simply whether life insurance commissions are good or bad,” Clark said.

Clark’s views were substantially backed by other key life insurance chief executives, who clearly had an idea to importance of maintaining the viability of life/risk advice practices particularly as Australia struggles to fully emerge from the impact of COVID-19 on the broader economy.

ClearView chief executive, Simon Swanson, was succinct in his assessment going even further than Clark in arguing for a substantial maintenance of the status quo.

“The LIF rules should stay as they are. We believe that current life insurance commission rates do not encourage or lead to poor behaviour and poor consumer outcomes,” he said. “The life insurance commission caps under LIF are appropriate and should remain unchanged.

“It is unnecessary, and far too early, to consider tinkering with commission caps again, given the LIF reforms are only partly implemented.”

MLC Life Insurance acting chief of group and retail partner, Sean Williamson, actually signalled to ASIC that it needed to be careful how it moved on the LIF review to ensure that there were no unintended consequences.

“We believe in quality, lifelong financial advice and believe that more Australians would benefit from receiving it,” he said. “We commissioned research last year with Plan

For Life that showed that unless risk advisers can remove 20% to 25% of the current cost base for their business, advice will not be profitable, leaving many Australians to make important financial decisions on their own.

“While we support the LIF review in 2021 we fear that, without a robust alternative advice funding model, reducing commissions further will result in many Australians being unable to access the benefits of advice,” he said. “Perversely, this could actually increase the risk of Australians relying on insurance arrangements that are not optimised for their circumstances.

“We support a sustainable advice sector in which commissions continue to remain an option that supports everyday Australians having access to much-needed financial advice during key life moments like buying a home, starting a family, or transitioning to retirement.”

THE CHALLENGING STATE OF THE MARKET

None of the major life insurance chief executives are walking away from the currently challenging state of the market, with TAL’s Clark making the point that there is still some distance to go before local conditions actually stabilise.

“The life insurance industry has seen significant change and disruption for some time now, and we are not at the end of that journey,” Clark said. “Ownership structures and the competitive landscape have been re-written, with banks and AMP selling their life insurance businesses alongside other consolidation, and the implementation of regulatory reform continues to change insurance business models as a whole, along with the way consumers access life insurance.”

He said the changes to the life insurance industry itself had been significant and impacted every channel through which consumers accessed life insurance, be it through a financial adviser, through their superannuation fund or directly with an insurer.

“We have seen life insurance sales through banks effectively cease, volume of direct life insurance shrink considerably, as it will continue to do for the foreseeable future, and new retail advised life insurance reduced by 40%.

“The industry has also implemented the insurance in superannuation legislative changes during the last 12 months, which has materially impacted the group insurance model for every insurer and removed life insurance coverage for millions of Australians,” Clark said.

“This significant reduction in life insurance coverage has happened prior to the devastating bushfires and the global COVID-19 pandemic.”

“These are significant events in the lives of all Australians, and what has been made clear through these last six months, is the importance of life insurance and the essential role life insurers have in providing our customers and the community with confidence and support when faced with times such as these.”

For MLC Life’s Williamson the current situation is as challenging as he has ever seen it in his career.

“This is arguably the most testing time that life insurers have faced for a long time. However, the insurers that manage their partners and customers most effectively and invest in their core functions such as claims, underwriting and product will come through this period in best relative shape,” he said.

“We need to ensure life insurance is sustainable in the future. What makes it harder is that alongside the commercial challenges there has been and will continue to be significant regulatory disruption to the life insurance landscape, which will result in access to life insurance through banks, direct from insurers, through superannuation funds and financial advisers, becoming more limited.

“When we look at adjacent sectors like advice, we know it is not just us being tested – our partners are also having a tough time. But I remain confident that we will get through these challenging times together.”

ClearView’s Swanson admitted that these had been the most difficult conditions he had seen, “due mainly to the industry’s poor financial performance”.

“This has been further exacerbated by COVID-19. That said, there is still enormous need for Australians to protect themselves and their families against the risk of sickness, accident, injury, and premature death. Quality life insurance advice and products are critically important, given the uncertainties of life and Australia’s record high levels of household debt,” he said.

INSURANCE INSIDE SUPERANNUATION

The insurers who have exposure to insurance inside superannuation have all taken a hit from the Government’s Protecting Your Super legislation together with its Putting Members’ Interests First legislation.

According to TAL’s Clark, the bottom line has been a reduction by a third in the number of super fund members who have life insurance through their super.

“The collective impact of the Protecting Your Super (PYS) and Putting Members’ Interests First (PMIF) legislation has been a reduction of around a third of superannuation fund members who have life insurance in place through their superannuation,” he said. 

“This has increased pressure on premiums for most members who remain insured, and it has limited the availability of life insurance for some of the more vulnerable sections of community who may otherwise not be able to access or afford life insurance cover.

“What it has also revealed most importantly, and what has been brought into sharp focus for the future, is the importance of member experience and of ensuring there is understanding amongst members of the benefits and value provided by insurance through superannuation.

“Yes, we need to better engage with superannuation fund members. We have been talking about this for some time. Engagement is a function of how we communicate, but also, and more importantly, what members experience. Together with our fund partners, our strategies can deliver a step change in member experience.

“To ensure we are playing an active role within that, TAL established a dedicated Member Engagement team which has been working with our fund partners on a number of initiatives to support superannuation funds in better engaging their members in the future. This will be further supported by ongoing investments in digital capabilities to support a more seamless and integrated member experience.”

VIABILITY AND DISABILITY INSURANCE

All of the major life company chief executives acknowledged the difficulties with bringing disability insurance back into profitability and the manner in which this has affected the industry’s overall bottom line.

MLC Insurance’s Williamson noted that the latest statistics revealed that life insurers had recorded a loss of $1.8 billion for the year ending March 2020, noting that life insurers were having to take significant steps to ensure their sustainability.

“The situation has been exacerbated by COVID-19, which will likely cause higher unemployment and underemployment as well as an increasing prevalence of mental illness following government restrictions,” he said.

“To date, we’ve already provided premium relief to more than 1,300 customers.”

“In coming months and years, we expect insurers will also be receiving and paying an increased level of claims that will be a result of the economic impacts of COVID-19.

This will impact a life insurance industry already under pressure and place it at further risk,” Williamson said. “As far as the impact on premiums and renewals for retail policies, I think it is still too early to say what this might look like.”

Swanson also acknowledged the challenges, particularly around disability income products.

“It is a very challenging time for the industry. A large part of this can be attributed to issues surrounding the profitability of Income Protection (IP),” he said.

In doing so, he noted the product development work that ClearView had undertaken in an effort to get a cost-effective offering into the market.

“ClearView has launched a sustainable IP product, LifeSolutions Indemnity 60. This option, which is available alongside our existing IP indemnity product, can cover up to 60% of a client’s income (up to 75% for six months if the Income Support Benefit applies) at a reduced premium.”

TAL’s Clark was forthright on the sustainability issues in the area of disability income insurance products, noting APRA’s March 2020 data showing that, collectively, the industry lost $1.8 billion in the year to 31 March 2020.

However, he made clear that disability products were not something insurers could simply walk away from.

“Disability income insurance products meet a critical consumer need to provide income replacement where a customer is unable to work as a result of illness or injury, and the industry must step up and get this right to ensure disability income products remain accessible, affordable and sustainable for consumers,” Clark said.

“APRA has intervened in an unprecedented way; however, it is up to life insurers to directly address these issues. There must be a better industry response to the current disability income challenges than simply increasing prices. This critical industry work needs to ensure the long-term sustainability of income protection products for Australian consumers now and into the future.

“All of these factors are substantially reshaping the life insurance industry in Australia, along with consumers’ access to life insurance and choice of channel. It is critical that the life insurance industry manages itself well through this period of change, to ensure our products remain good value, and that we can continue to meet our long-term obligations to customers.”