The AFA expresses caution in relation to the Trowbridge Report, which makes wide-ranging recommendations for the life insurance retail advice market.
There needs to be careful, robust risk assessment and modelling of the effects of the recommendations before any change is enacted.
All stakeholders must question how these recommendations will help Australians access quality life insurance advice. Will the price of life insurance fall, will there be a mechanism to ensure that outcome, and will there be enough financial advisers to provide advice to those Australians who need financial protection?
We, together with the Financial Services Council (FSC), jointly convened the Life Insurance and Advice Working Group(LIAWG) to respond to concerns raised by ASIC on the quality of retail life insurance advice in Australia.
Mr John Trowbridge was appointed the independent chairman of LIAWG and given the responsibility to examine the issues raised by ASIC and make his own recommendations to resolve ASIC’s concerns – the ‘Trowbridge Report’.
We provided three members to LIAWG who had a responsibility to help the chairman develop knowledge and understanding of the life insurance industry, as well as perspective around possible solutions to the various concerns raised in ASIC Report 413.
Each of our AFA representatives has worked tirelessly over the last five months to demonstrate the role financial advisers and their licensees play in supporting Australians to get, and claim on, life insurance. It has been a thorough process. Ideally this final report would have our complete support but unfortunately, in its current form, it does not.
We are concerned that the Trowbridge Report recommendations, if adopted, are likely to increase the cost of life insurance advice to Australians.
While acknowledging that there is a growing momentum from advisers towards fee for service, particularly for comprehensive financial advice, we believe Australians will pay more for life insurance advice if these recommendations are implemented.
This is because advisers will need to charge their clients an additional fee in order to recover some of the costs of providing advice.
The Trowbridge Report acknowledges that an adviser will earn less than the cost of providing the advice.
Unless it becomes less expensive for the adviser to provide the advice, or insurance premiums reduce substantially as a result of these recommendations, then fewer Australians will be able to afford life insurance advice.
Financial advisers are responsible for arranging around half of all the life insurance held by Australians and last year the industry paid out $7 billion in insurance claims. It is important to remember this fact when considering whether a significant reduction in the number of advisers is an acceptable outcome.
The majority of advised life insurance is arranged by locally-owned small financial advice businesses. It is common knowledge that cash flow issues are the biggest reason small businesses fail. If advisers are to earn less than it costs them to provide financial advice, it is only a matter of time before they go out of business or stop providing this type of advice.
The social cost to Australia of fewer people getting appropriate insurance would be enormous. We are not being alarmist – consider what it means for government funding of disability support pensions and other forms of payments and service support.
We made our own submission to the LIAWG in response to the interim report released by Mr Trowbridge in December 2014. In that submission we called for a hybrid commission model to represent the future for life insurance advice remuneration.
A hybrid model represents an appropriate balance between the cost to provide insurance advice for an efficient advice practice and a fair payment for that work.
It strikes the right balance between removing the publicly unacceptable high upfront commissions, yet provides sufficient revenue to ensure advisers can afford to give quality, personal, strategic financial advice to each client.
ASIC Report 413 grouped hybrid and level advice together in achieving 93 per cent advice compliance. Therefore we believe it is appropriate.
Our submission to Mr Trowbridge supported the removal of high upfront commissions.
Our interpretation of the recommendations is that they will do more to resolve the sustainability issues of insurers than achieve the twin objectives of raising advice quality and increasing the number of Australians with appropriate life insurance.
We believe the remuneration recommendation in the Trowbridge Report increases complexity and costs for the consumer; will incur huge costs associated with systems change; and will have no more beneficial impact on advice quality when compared to the more equitable hybrid remuneration solution.
It is essential that a comprehensive analysis be undertaken before any commitment to support these recommendations is made.
Brad Fox is chief executive officer of the AFA