ASIC should not be the ultimate arbiter of the future of the LIF

The Australian Securities and Investments Commission (ASIC) should not be the ultimate arbiter of the future of the Life Insurance Framework (LIF). The decision must ultimately rest with the Government, not the regulatory bureaucrats.

As we have written elsewhere in this edition of Money Management, ASIC will next year complete its post-implementation review of the LIF based on the brief handed to it in 2017 but in the intervening period many things have changed.

Indeed, since ASIC was handed its post-implementation review brief there have been at least two different ministers covering the Financial Services portfolio, a significant personnel change within the upper echelons of ASIC itself with a new chair (James Shipton) and two new deputy chairs and the exit of at least 6,000 financial advisers, many of them life/risk specialists.

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Given that the development of the Life Insurance Framework (LIF) was predicated on largely unsubstantiated allegations of high levels of policy “churn” with consequent impacts on premium pricing, two questions arise: What was the real level of churn in 2017/18 and what is it now? Is there any evidence of increased life/risk adviser failure to meet regulatory standards?

There is, too, the more pertinent question of whether advice around life insurance should be viewed differently because life insurance is a financial product which most industry veterans agree is “sold, not brought”.

Allied to the reality that life insurance is a financial product is that in a still largely under-insured Australia, the evidence continues to suggest that most consumers are more than happy to have life/risk advisers paid by way of commission rather than the consumers being forced to reach into their pockets to pay via fee for service.

So the threshold question for the Government in looking at the LIF is whether it accepts that the holding of life/risk insurance delivers an important benefit to the economy, and that life/risk advisers are, ultimately, involved in assisting clients to select the most appropriate product to meet their needs.

It is entirely appropriate for ASIC to analyse the data around life policy lapse rates and the conduct of life/risk advisers, but it is not appropriate for a regulator to make or have undue input in a policy decision about the nature of life insurance as a product and the economic benefits it may or may not deliver.

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was clearly leaning towards recommending ending commissions in the life insurance advice sphere, but it must be remembered that with the trialling of the LIF already on foot it was never within the Royal Commission’s brief to make such a finding.

It was also clear from statements made by senior ASIC officials in the aftermath of the Royal Commission that the regulator remained similarly ill-disposed towards commission-based remuneration. But it must be remembered that ASIC provided much material to the Royal Commission which arguably substantially helped shape its views.

For all of these reasons, the future of the LIF must not be a purely regulatory decision. It must be a pragmatic political policy decision reflecting the realities of the life insurance industry in 2020, not the agendas of half a decade ago.

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Here is a summary of my experience:-
1/. consumers do not ring an Adviser "asking" for Life / TPD / Trauma / Income Protection insurance (it is a "Grudge Purchase" like buying tyres for your car)
2/. consumers generally do not understand the need for Life / TPD / Trauma / Income Protection insurance until an Adviser has taken the time and effort to fact find and educate them as to why it is needed
3/. consumers are not prepared to pay or cannot afford to pay what it costs an Adviser to deliver the service on a Fee for Service basis
4/. The current 60/20 structure is "marginal" at best, which is why many have exited that space
5/. if the regulators abolish commissions, most, if not all, Advisers will no longer offer the service, more Advisers will exit the profession which will lead to under-insurance, high lapse rates, insurers further increasing premiums to make up for the lapse rates, more lapse rates again and eventual collapse of some insurers resulting in the retrenchment of insurance staff.
This is what happens when salaried PAYG Public Servants and Politicians who have never mortgaged their home to run a business and who have never had to make a weekly payroll make such decisions. ASIC.........think carefully about how you pontificate about this because the ultimate consequences of how this plays out will be on you.

employees of ASIC have already contemplated. they will be working for the big institutions afterwards anyways and there is no accountability for making the wrong decision anyway so who cares what happens to advisers. it's not like they are named and shamed like we are.

so the moral of the story is they could care less. remember this, ASIC is still trying to figure out how the cost of advice has gone up and they don't understand why advisers and licensees flat out refused to use their reduced regulatory RoA's for clients affected by covid19.

need I say more, muchacho?

Michael, I take issue with the first part of your sentence:
"life insurance is a financial product is that in a still largely under-insured Australia, the evidence continues to suggest that most consumers are more than happy to have life/risk advisers paid by way of commission ...
while I tend to agree that many consumers would be happy with paying life/risk advisors by way of upfront and trailing commissions, your claim of a "still largely under-insured Australia" smacks to me of industry jargon designed to influence a particular policy response.
What independent evidence do you have that Australia is "largely under-insured"? The similar claims I've seen appear to be authored by those with a vested interest in selling income protection and life insurance as part of a superannuation product.

It's pretty obvious when you work in the industry as most people I see only have default cover via their super. This is very rarely the "correct" amount based on their individual needs. Something is better than nothing though but can also lead to complacency. But here is a link to a decent study done...

Ian Neuhaus would you please put some context around your comments.
Would you please identify yourself, your position and experience and why you possibly doubt the issue of under-insurance and why you may think it is being used as a catalyst to drive the volumes of new insurance business.

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