Profit and loss in the move beyond LIF

The Australian life/risk sector is facing a fundamental reshaping as advisers move beyond the LIF and banks consider their return on investment, Mike Taylor finds.

Read a cross-section of the submissions to the current Parliamentary Joint Committee (PJC) inquiry into the life insurance industry and you will quickly conclude that a deep divide exists between a cohort of life/risk advisers and the major insurers as represented by the Financial Services Council (FSC).

The genesis of that divide was the processes which led first to the Australian Securities and Investments Commission’s (ASIC’s) highly critical analysis of the Australian life insurance industry, the political pressure applied by the former Minister for Financial Services and now Federal Opposition leader, Bill Shorten, and the industry’s ultimate response in the shape of the Trowbridge inquiry and the Life Insurance Framework (LIF).

The depth of the divisions created by this process is evidenced by the manner in which it has broken long-standing relationships in organisations such as the Association of Financial Advisers (AFA) and the continuing animus evident in life/risk adviser submissions to the PJC.

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And what became evident in the submissions to the PJC is that while the FSC perceives the processes which gave rise to the Trowbridge report and the LIF as the “gold standard” in industry self-regulation, many life/risk advisers see it as a process that was designed to do little more than enhance the bottom line of the major insurers at the expense of the advisers.

The demeanour of the life/risk advisers was not assisted by an admission made to a Parliamentary hearing that while so-called life/risk “churn” had sat at the heart of the ASIC inquiry that gave rise to the LIF, not all churn ran counter to client’s best interests.

To a degree, the financial challenges which have confronted the major insurers have given form to the claims of the life/risk advisers. 

Segments of the Australian life insurance industry have faced significant stress and new capital requirements imposed by the Australian Prudential Regulation Authority (APRA) have served to amplify those stressors.

Then, too, the major insurers have sought to ride technological advancements to better harvest the commercial benefits of providing direct insurance, placing life/risk on much the same footing as general insurance.

Given these factors, it is easy to see why many life/risk advisers have looked at the balance sheets of the major insurers, their product development strategies and their pursuit of direct channels and concluded that they have been the patsies in the exercise.

And indeed these suspicions will be given real substance if the outcome of the Trowbridge report and the consequent LIF stops precisely where it is.

Adviser organisations want insurance companies to come to the party, not least in terms of placing underwriting arrangements on the same footing across the advised, direct and group channels.

This is something which is keenly recognised by AFA chief executive, Brad Fox who has spent much of the early months of 2017 stressing that it had been advisers who had thus far done all the heavy lifting and it was time for the other segments of the industry to shape up and pull their weight.

Commenting on the passage in early February of the legislation underpinning the LIF – the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016 – he said this meant AFA members and other financial advisers “have already carried their fair share of the life insurance reform load and the focus should now be on the other players”.

Clearly targeting the processes of the PJC, Fox said his organisation expected members of the committee to be directing their questions to what else, beyond commissions, must be addressed in order to encourage more Australians to take out appropriate levels of income protection and lump sum life insurance policies. 

“We also expect the PJC to have a keen interest in the poor relative performance of the direct and group life insurance channels,” he said.

He pointed out that the LIF agreed with the Minister and other associations included obligations on life insurers, licensees and the regulator.

“We want to see the Code of Conduct adopted by the life insurers go much further than it has in order to ensure consumer and adviser protection,” he said.

“Until life insurance in superannuation is appropriately included, consumers and advisers remain deeply exposed if insurers offer inappropriate incentives in order to win business.”

Fox said direct and group insurance also need to measure up to community expectations by ensuring all underwriting is undertaken at the commencement of a policy agreement. 

“Underwriting after a death or illness occurs is unconscionable,” he said.

“Imagine the grief of a spouse who discovers that after paying life insurance premiums for months or years, a claim will not pay out on the death of their spouse – and never would have been paid out.”

Fox said the aim of life insurance reform is to increase consumer confidence and trust and therefore this kind of insurer behaviour must stop.

While it seems unlikely that the insurers are reacting positively to the AFA’s calls around placing all life/risk underwriting on the same footing, it is undeniable that the FSC and its constituents among the major insurers recognise that they have to demonstrate their bona fides on delivering change.

Confronted not only by the realities which gave rise to the LIF, the insurers are aware that they are also being closely scrutinised with respect to their claims-handling track-record amid the fall-out which surrounded CommInsure.

What is evident is that the FSC wants the Government and the broader community to accept that the life insurance industry is capable of substantial self-regulation, with FSC chief executive, Sally Loane suggesting the industry was already heavily regulated.

“Life insurance is a highly regulated industry and under law, customers benefit from a range of protections including the duty of utmost good faith, strict disclosure and capital adequacy rules, and the financial adviser best interest duty,” she said. “The FSC strongly believes further regulation would be unnecessary. Self-regulation is an efficient way to bring about pro-consumer changes in the sector.” 

“Policymakers must be careful to balance the sustainability, accessibility and affordability of the life insurance so that consumers can continue to access the cover they need both now and into the future.”

Weighing up the various submissions they have received and the reality that the legislation underpinning the LIF attracted substantial bi-partisan support, members of the PJC may be tempted to let the processes play out, conscious that commercial reality is already changing the shape of the life risk sector. 

Click here to read part two of this feature: Yes we're turning Japanese