The future of life after LIF
From a financial planning perspective, it is arguable that no sector has generated more change over the past three years than the life/risk sector.
From the Australian Securities and Investments Commission's (ASIC) criticism of the level of so-called "churn" occurring in the industry through the processes which led to the Trowbridge Report and now the implementation of the Life
Insurance Framework (LIF), planners involved in giving advice around life/risk products have encountered substantial disruption.
What is more, that disruption has come on top of the changes which flowed from the Future of Financial Advice (FoFA) changes.
All of the above has been magnified more recently by the claims-handling dramas which have embroiled CommInsure which have given rise to a further ASIC review and Parliamentary Committee scrutiny.
While there are still arguments about whether the events in the life/risk sector actually justified the implementation of the LIF, the reality now confronting life/risk advisers is that they must live with these changes:
Decreases in Upfront Commissions
Upfront commissions on new business written will be capped at 80 per cent from 1 July 2016, 70 per cent from 1 July 2017, and 60 per cent from 1 July 2018. Together with this, ongoing commissions will be capped at 20 per cent from 1 July 2016.
'Clawback' Periods
A two-year clawback period will be introduced, with the clawback payable being tiered over the first two years of a policy. If a policy lapses in the first year, the clawback period will apply to 100 per cent of the commission on the first year's premium.
If a policy lapses in the second year of the policy, the clawback period will apply to 60 per cent of the commission on the first year's premium.
Increased Industry Involvement
The Financial Services Council (FSC) will have responsibility for implementing the Life Insurance Code of Practice, setting out best practice standards for insurers for matters including underwriting and claims management.
In addition, industry will need to work on expanding Approved Product Lists.
Increased Disclosure
Commencing in the second half of 2016, ASIC will review life insurance Statements of Advice, including prominent upfront statements about commissions.
ASIC will also require detailed information from life insurers on life insurance policies, remuneration data, lapse rates and clawback amounts. ASIC will use this information in a 2018 review to establish whether these reforms have been effective in producing better outcomes for consumers.
Key industry executives have acknowledged the challenges the CommInsure controversy and the Trowbridge and LIF processes have posed for the industry but most believe they can be addressed via a cooperative approach.
Chief executive, Sally Loane, used a recent address to the annual FSC Life Insurance Conference to point out the importance of the life/risk sector, and TAL chief executive, Brett Clark last week told Money Management there was a need to restore public confidence.
"In life insurance in particular, leaders talk regularly about deeper consumer engagement and more engaging customer experiences," he said.
"We must work harder first on a foundation of trust and confidence in the life insurance sector. The life insurance industry has a special responsibility and relationship with the Australian community. We need to be open about the very good things that life insurance does for hundreds of thousands of Australian families every year, and we should be very proud of that."
He said a breakthrough might be achieved if the industry simplified the industry and the manner in which it operated.
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