LIF helps erode insurers’ bottom line

Reduced life insurance commissions resulting from the Life Insurance Framework have played a part in reduced bottom lines for the major life insurers.

That is one of the bottom lines of new KPMG analysis, Life Insurance Insights 2019, which has portrayed a life insurance industry already struggling in the facing of difficult conditions and a tighter regulatory environment and with even more challenges on the horizon.

The analysis reveals that while life insurers are still struggling to deal with a difficult disability insurance market and the impact of the Government’s Protecting Your Super legislative package, it must now deal with the upcoming extension of the Unfair Contracts legislation to insurers.

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The KPMG analysis paints a grim picture of the Australian life insurance industry marked by a continuation of declining profitability and coupled with increasing regulation.

It said that in the first half of 2019 the industry made a loss of $86 million from risk products, worsening from the essentially break-even position in 2018, when the industry generated a total profit of just $33m.

The analysis said these results compared to an aggregate industry profit of approximately $1.5 billion 2017.

“Ordinary risk products continued to be loss making, with the product line reporting a loss of $130 million across the industry during the first half of 2019, following a loss of $341 million in 2018. In the first half of 2019 losses in ordinary retail disability income (-$499 million) more than offset profits in ordinary retail lump sum ($399 million). 

It said superannuation risk products reported a significant decline in profits, with the product line reporting just $44 million across the industry during the first half of 2019 compared to $372 million profits in 2018.

Commenting on the research, KPMG partner and head of life insurance, Pauline Light-Johnston, said the last two years had been a period of considerable challenge for the Australian life insurance industry.

“Customers and the public are increasingly asking questions about the value the industry provides.  At the same time, the profitability challenges driven by higher than expected claims payments across the industry are perhaps the greatest we have seen in a generation.  There is clearly a large disconnect between the perceived and actual value being delivered by these products,” she said.

“Unsurprisingly, the disruption to life insurance distribution models has noticeably affected revenue growth across the industry. Subdued growth rates reflect the impact of lower initial commissions due to the Life Insurance Framework that came into full effect in 2018, as well as a retreat from direct distribution models following the exposure of problems with these models during the Banking Royal Commission.”

“A well-functioning, sustainable, accessible and trusted life insurance industry is important for all Australians, particularly for the more vulnerable members of our society. Leaders in this industry must continue their efforts to reshape its customer proposition to simultaneously rebuild public trust and put the industry on a more sustainable financial footing.” 

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a round of applause for all involved

yet another example of unintended consequences.. just wait for risk sales to fall off a cliff when planners leave and FASEA kicks in!!!

Tell them, they're dreaming.
The lack of competition in the life insurance industry (very few companies to choose from) , the impact of LIF legislation coupled with almost no product differentiation with "me too " products being offered,.... why would anyone be surprised in the decline in profitability of risk insurance.
The industry used rely on advisers selling the benefits of risk insurance with some offering better contract benefits/terms than their competitors.
That is no longer the case and the issue at hand is, no one can afford to write risk insurance on about 50.0% less than they used to receive prior to 2018.
No one afford to write risk insurance with a 2 year "claw back responsibility that benefits the life company but no one else in the transaction, namely the client and the adviser.
Now with the introduction of FASEA to operate 1 January 2020 where the best part of 99.0% of risk premiums are commission based, you will no longer be able to talk to a client under Standard 3, conflicted remuneration.....unless the life insurance companies get off their collective backsides and get the government to delay/change many aspects of the FASEA standards to be imposed.
Folks, the clocks ticking, which is why over 4000 have left the industry already this year,... with a lot more to go.

You reap what you sow

I have no sympathy for the insurance companies who via the FSC spread the lies about churning in order to get legislation that meant they could pay advisers less. They bit the hand that feeds. Now they are whinging that they can't make money because no one is selling their products and the royal commission and killed their direct telephone sales channels. But don't worry the executives still got their short term bonuses while they slowly killed their businesses.

The discussions in this article are not reflected in reality with all insurance companies dramatically increasing premiums over the last four years. The only reason they would not be profitable would be ridiculous salaries paid to mediocre staff.
Given risk advisers have had to take a 40-50% cut in salaries, the simple answer to make life companies profitable would be to reduce middle management and exec salaries by the same number. This would then avoid the need for gouging the consumer to prop up poor underwriting from the past.

Maybe the Life Insurance members of the FSC should have stood up for the advisers during the LIF rather than the vast majority of them remaining silent in the hopes that the proposed changes would deliver a windfall for their bottom line and their shareholders.
If I recall, only ClearView and Zurich were prepared to at least speak out and against the proposed validity of the LIF changes whilst the others who had accepted quality risk business from advisers over many years chose to ignore the repetitive calls for support.
Andrew Bragg was representing the FSC policy at the time and was a very strong supporter of Trowbridge and the reduction to Level commission only or alternatively, a complete commission ban then.
The architects of the mess including ASIC, Trowbridge, FSC , Kelly O'Dwyer and the complicit insurers who looked at a possible opportunity to cut the adviser cost of doing business are the players in what now is a declining business under pressure without the experienced, quality advisers who specialize and understand this business and who have a genuine concern for their clients well being and the relationships of trust that use to exist between the adviser and the insurers they worked with.

As predicted the FSC are starting to line up the stats to now lobby to increase commissions. Nothing like losing 50% of new business to "help" them see the mistake they made.

Lets remind ourselves of the history:
1. ASIC need funding, review 200 files of targeted advisers with higher lapse rates. Create fictitious report 413.
2. FSC jump on this and see the dollar profit by reducing advisers commission. Don't defend advisers with correct market lapse data because if they can get rid of advisers they can sell more junk direct insurance.
3. After the LIF passed ASIC request market lapse data, FSC members provide this. ASIC admit they got it wrong on churn.
4. FSC members start hitting existing customers with huge increases in premiums stating this is because of high claims.
5. Royal Commission happens. FSC member plans for direct junk insurance falls off a cliff.
6. Banks start exiting Risk Insurance. Less competition.
7. FSC members continue to increase existing customers premiums but realise they now need advisers again. Start reducing premiums for new business only for the very same products making a loss. Try to encourage churn with advisers, a problem that wasn't there before the LIF.
8. This doesn't work, new business rates fall off a cliff. FSC members start seeing higher lapses, big reductions in profit.
Next step FSC members start to lobby for sensible commission rates.
Take a bow FSC your scam LIF has been a disaster for customers, advisers and now you.

The most irritating factor in all of this mess was the solution to any previously poor business practices could have well and truly have been handled easily.
Retain the previous levels of Upfront, Hybrid or Level commission options, restrict any replacement of business placed in the previous 2-3 years to Level commission only option to remove any incentive to possible churn and have all insurers to sign a memorandum of understanding to agree to report all incidences of repetitive replacement of business to a singular body, thereby restricting offending advisers to a Level commission only model for all business or removal from the industry entirely.
This model would have preserved the profitability of quality adviser's businesses, delivered high quality risk business to the insurers and removed the incentive for other advisers to replace business on a regular basis.
This would have worked if all had been on the same page.
However, because of misaligned agenda's, ideology and manipulated and conflicted positions, it has destroyed the possibility of this occurring and reduced adviser's trust and self esteem to such a base level , the damage is severe.
It could have been easily managed and we could have at least still had a thriving risk business with high quality advisers delivering large volumes of quality business with good claims outcomes for clients.
If you consider the negative impact across the board for all concerned, including the consumer, it has achieved absolutely nothing at all.
And remember, all Kelly O'Dwyer could say was it would "enhance consumer outcomes ".
Well Kelly, I don't it enhances consumer outcomes if there is a massive exodus of specialist risk advisers, if premiums are through the roof and if many of the experienced and caring advisers are no longer around to assist their clients at claim time.
Unintended consequence?? a very very poorly executed hatchet job for all the wrong reasons.

Interesting that the UK went through the same ridiculous charade from 2012, but now there up front commissions are up to 220%, as their new business premiums collapsed. There appears to be a lot of employees in Govt, FSC etc, on fortnightly salaries, who think new business will just happen for less than the cost of production. Welcome to the real world people... INSURANCE SIMPLY NEEDS TO BE SOLD BY SALESPEOPLE WHO WON'T DO ALL THIS RED TAPE FOR FREE.

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