The Royal Commission hearings have highlighted what we at Synchron have always believed to be true – that direct life insurance is barely worth the paper it’s written on, that direct insurers will do almost anything to make a sale and that they will do almost nothing to honour their policies at claims time.
Nothing could better demonstrate how much consumers need advice when purchasing life insurance nor how valuable advisers are at claims time than the Royal Commission.
Statistics released by the Australian Securities and Investments Commission [ASIC], prepared for the Royal Commission reveal:
- One in five direct life insurance policies were cancelled in the cooling-off period
- One in four direct life insurance policies that remained in force beyond the cooling-off period were cancelled within 12 months
- Three in five direct life insurance policies were cancelled within three years
This tells three things. Firstly, that consumers clearly did not highly value the policies being offered to them, otherwise they would not have been cancelled.
The second thing these statistics might tell us, is that the policies being offered were actually not of much value.
The third thing these statistics tell us is that advised life insurance is essential to the sustainability of the lifestyle of future families.
Synchron has always argued that life insurance advisers play an essential role in the protection of families and businesses against human risk.
In our submissions to Trowbridge we stated that, “It is important to consider the traditional function of the IFA adviser in ‘field underwriting’. Experienced advisers get to know and understand their clients and recognise and explore potential medical issues in advance. This assists in acceptance and reduces incidents of non-disclosure. A fundamental issue in life insurance is the more that is known about a risk; the more accurately it can be priced.”
The Life Insurance Framework [LIF] legislation reduced adviser commissions by up to 50 per cent on the pretext that it would make life insurance more affordable for consumers, which would in turn improve the level of underinsurance and therefore help relieve the burden of burgeoning social welfare debt on Australia. In reality, premiums have actually risen since LIF and as a result of premium increases and the direct insurance debacle now being played out in the Royal Commission, trust in the industry has eroded.
This has potentially disastrous implications for Australia which faces two critical economic issues - underinsurance and welfare debt.
A recently published ANZ Insurance paper based on a survey by Rice Warner found that there is a $1.8 trillion gap between what consumers will need to maintain their current lifestyle until retirement if a key breadwinner dies or becomes disabled.
Nearly 90 per cent of personal income tax paid by Australians is used to fund the nation’s ballooning annual $155 billion welfare bill, according to then Treasurer Scott Morrison in an interview with news.com.au in February last year.
These two critical issues demonstrate that Australia needs a competent work force of appropriately educated and experienced advisers to help people manage their financial affairs and properly protect their lifestyles, not institutional telemarketers selling questionable policies.
Will we have a competent work force of appropriately educated and experienced advisers? As a result of the remuneration ‘reforms’ associated with LIF and now the educational ‘reforms’ proposed by the Financial Adviser Standards and Ethics Authority [FASEA], it doesn’t look like it.
The problem with FASEA is that it treats all advisers the same. However, advisers tend to specialise in different forms of advice – for example, risk (life insurance), aged care, retirement/Centrelink strategies, etc. The proposed FASEA exam will cover all facets of advice, including Chapter 7 of Corporations Law, which is largely irrelevant in the day-to-day operations of a financial advice practice.
It is estimated that around 10,000 advisers will leave the industry over the next four years as a result of LIF and FASEA. Most of those are experienced advisers, over the age of 50, many of whom have specialised in the sale of life insurance products for many years. Without them, consumers will have little choice but to buy life insurance products direct, if they buy at all. Which, going by the ASIC statistics, they probably won’t.
It is vital that advisers have the education, training, knowledge, skills and attitude to provide highly professional financial advice to consumers. But let’s not make it so difficult for advisers to be in business that we throw the baby out with the bathwater. Let’s not leave consumers with one of two poor choices: to purchase grossly inferior financial products direct from the companies that manufacture them, via a process that does not consider their best interests, or, to have no life insurance at all.
Michael Harrison is chair of life/risk focused dealer group Synchron.