A crisis of leadership
The Assistant Treasurer has called for leadership within the life insurance sector. Leadership requires a vision for the future, resolve to clear the path and the ability to bring people with you.
I would argue the Australian insurance industry has an even bigger problem than the need for leadership. This problem centres on trust. The Trowbridge Report has been plagued by dissent from within its working group and issues of trust manifested via leaked confidential submissions. The way this has played out, there is little wonder there is a perception of vested interests standing above the public interest.
The life insurance sector is suffering from a failure by its leaders to build trust. It is not, as some would argue, a failure of professional advice.
The Australian Financial Review reported premium increases last year for Australian Super members of 75 per cent on top of 35 per cent the previous year. Last week, Australian Super announced premium reductions across most age groups effective from the end of May 2015; as an example Life cover has been reduced by around 18 per cent, there has been no change for total and permanent disability and income protection reduced by around 32 per cent. The largest industry superannuation fund in the land does not pay commissions to advisers. One could argue that this pricing volatility is reflective of the broader issues in the life insurance market.
Life insurers have been engaged in a race to the bottom for over a decade. Since the end of "tied agent" structures, advisers now act for the client and not as a contractually bound agent of a life company. Insurers have had to build and price products in a new paradigm of transparency where independent research directly compares quality and cost of every policy on the market.
We have seen a scramble for market share with generous takeover terms and limited underwriting offered for entire books of business, en masse. This has unfortunately bred an insurance system culture that sees the market as a cake from which product manufacturers take the biggest slice possible.
At a structural level, an important shift to promote stepped premiums over level premiums also occurred. As a general theory life insurance policies sold on level premium structures should demonstrate higher retention rates for insurers. Generally, the younger the age at which the level premium policy is taken out, the greater the savings to the policyholder should the policy be held for the full term. Saying this, Australia is reported to have one of the highest concentrations of stepped premiums in the world and also ranks as one of the most underinsured developed nations.
So where do we go from here? Life insurance sustainability will come from forward thinking, sound product design, fair pricing, professional standards for advice eliminating poor practices, ethical claims management and appropriate underwriting.
According to Rice Warner, upfront costs for retail life insurance policies often exceed 200 per cent of the first year's premium (covering upfront commission, medical underwriting costs, the costs of putting the policy on the books and setting up reserves). This creates a typical break even period for stepped, upfront commission retail policies of between seven and 10 years.
On average, insurers experience improved retention for policies sold on level commission; this typically shortens the break even period by one to two years.
Graph 1 comes from Rice Warner and illustrates the likely trade-off between lapse rates and insurer profit.
It is a poorly kept secret that life insurers know which advisers "churn". If industry and the regulator were effectively working together, a hit list of "churners" could be combined with stronger and smarter enforcement. Churning blights the entire sector and not one adviser I know would be opposed to a "head on stick' approach to rid us of this issue.
What is most important is for professional advice to always be in the client's best interest. This means thinly veiled product sales disguised as "advice" to generate upfront sales commissions cannot and should not have a place in our profession.
For those arguing for prescriptive remuneration arrangements with caps to be set, it is my view that what an adviser and client agree can be charged for professional services should be left to the market to decide.
On the issue of conflict in remuneration practices within life insurance, this has been dealt with in other jurisdictions. Take Ireland as an example: the Minister has the power to reduce commission payments if they form the view they are excessive, and insurance intermediaries can only pay commissions to advisers if they are a member of a recognised professional body — this fits neatly into the professional standards framework currently being built as a response to the bi-partisan Joint Parliamentary Inquiry into professional standards, education and ethics in financial advice.
Matthew Rowe is the immediate past chairman of the Financial Planning Association.
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