Regulators must proceed with caution on insurance commissions

Regulators need to tread carefully if they consider extending the proposed ban on commissions to risk insurance.

Although the ban of commissions and other incentives to sell investment products proposed in the Future of Financial Advice reforms paper released last week has exempted risk insurance, Wayne Marsh of consultancy Centurion Partners said this has led to uncertainty and debate as to whether the Government will consider it in the future.

Marsh said that regulators must be made aware that the banning of insurance commissions is not as straightforward.

“Firstly, all the statistics tell us that Australians are underinsured, and secondly the history of insurance is that it is generally sold rather than bought,” he said.

“So any impediment to creating demand for insurance would need to be carefully considered.

In an environment in which we know we’re underinsured and we know that insurance has to be sold, you wouldn’t want to literally adopt the recommendations with respect to investment products directly to insurance without considering the impact on the take-up of insurance.

“It is very hard, as a seasoned practitioner, to imagine an environment where you would ask clients to pay a fee and also pay a premium. I think that would be a very difficult sale and the net result would be less insurance take-up.”

Marsh conceded that should advisers charge a flat fee, there is a potential to lower the cost of insurance.

“But I think the trade-off would be that the coverage of insurance would decrease because the sales process would be too difficult.”

Marsh did not give an opinion about ongoing commissions, because he felt the issue of commissions should be considered as a whole. However, he suggested that one way of getting rid of conflicts of interest was to level the playing field between insurers — possibly by mandating the same level of commissions across the board.

“Then they must compete on features and benefits to the client, which is an interesting perspective,” said Marsh.