Daily Bulletin

The Conversation

  • Written by Gail Pearson, Professor, Business School, University of Sydney

The proposed changes to commissions for selling life insurance may just tip the system back in favour of the customer. For years paying life insurance advisers by commission was not seen as a conflict of interest, even when it incentivised bad advice and continuous changing of policies.

The changes will reduce the incentives for upfront commissions and allow better monitoring of the cost of the policy relative to the commission, however there is still no legislative cap on total commissions payable.

Problems with the current system

Life insurance covers death, illness, injury and disability. The consumer pays the insurer for their policy and then the insurer pays the adviser who gets a proportion of the premium as a commission.

Up-front commissions can be up to 130% of the first year’s premium followed by 10% of subsequent premiums. “Hybrid” commissions (which sit between upfront and “level” commissions) usually amount to 80% of the first year premium and 20% of subsequent premiums. Level commissions are about 30% of each year’s premium.

The upfront commission is an incentive for advisers to switch clients from one life insurance policy to another in order to keep collecting the high commission. They may churn clients from a suitable life insurance policy, to one that may let them down when they most need it.

Sometimes the policy life insurers recommend is not in the best interests of the client. Some advisers act outside the law.

ASIC has found a high correlation between high commissions and lapsed life insurance policies.

People are holding the same life insurance policy for fewer years and ASIC also found more than a third of life insurance advice didn’t comply with the law ensuring its quality.

Advocates arguethat commissions are about preserving the value of the business, not guarding against under-insurance and the risk to the client.

There are rules to protect consumers from conflicts of interest and conflicted remuneration. However the life insurance industry was successful in securing exemptions from the conflicted remuneration rules in the Future of Financial Advice reforms.

The exception to the exemption from the ban, is a group life policy for a superannuation fund or an individual policy for a member of a default superannuation fund.

How the government plans to fix this

At the time of these reforms the parliament recommended monitoring life insurance and subsequent ASIC studies identified problems. This led to an industry commissioned report.pdf) which put forward concrete measures to minimise conflicts of interest such as a fee for service model and competitive approved product lists.

The (Murray) Financial System Inquiry recommended level commissions, that is, the same commissions on each year’s premium, arguing that the upfront style commission should not be greater than an ongoing commission. In its response to the Murray Inquiry, the Government said it would address this by the end of 2015.

The current bill, which was before parliament prior to the election, removes the exemption of life insurance commissions from the definition of conflicted remuneration, effectively banning these commissions. But it then reinstates these commissions in two circumstances.

Commissions can be paid if the benefit and the cost of the policy is the same for each year, that is, level. It changes the timing of the commission, putting a cap on upfront commissions and evening out payments over the life of the product.

In another circumstance, if the first year plus subsequent years commissions are less than an ASIC determined fair ratio between the commission and the cost of the policy, more commissions can be paid. In fact there is an obligation to repay it if the policy is cancelled or if the cost of the policy is reduced.

The claw back applies only if the insurer gives the adviser an upfront commission. It’s designed to prevent the incentive for switching or churning through policies.

ASIC will have the power to determine an acceptable fair ratio and extra commission, effectively setting the allowed amount of commissions.

The Trowbridge Report.pdf) proposed an initial capped payment for advice that could be paid, only once every five years, plus level commissions capped at 20% of premiums.

There is ongoing debate about fee for service payment for product advice and whether consumers are prepared to pay. The problem is how much does it really cost to prepare advice and how much is it really worth?

The proposed bill gives the life insurance industry further time to reform itself. However the industry has been on notice from at least 2012 that it needs to change and the question is whether it has now been given too much time.

The ASIC review in 2018 could recommend banning all life insurance commissions.

Authors: Gail Pearson, Professor, Business School, University of Sydney

Read more http://theconversation.com/more-scrutiny-needed-on-commissions-paid-to-life-insurance-advisers-62898

Writers Wanted

Physical Therapist Talks About This New Massage Gun On The Block - The HYDRAGUN


Too much information: the COVID work revolution has increased digital overload


Ammonite: the remarkable real science of Mary Anning and her fossils


The Conversation


Prime Minister's Remarks to Joint Party Room

PRIME MINISTER: Well, it is great to be back in the party room, the joint party room. It’s great to have everybody back here. It’s great to officially welcome Garth who joins us. Welcome, Garth...

Scott Morrison - avatar Scott Morrison

Prime Minister Interview with Ben Fordham, 2GB

BEN FORDHAM: Scott Morrison, good morning to you.    PRIME MINISTER: Good morning, Ben. How are you?    FORDHAM: Good. How many days have you got to go?   PRIME MINISTER: I've got another we...

Scott Morrison - avatar Scott Morrison

Prime Minister Interview with Kieran Gilbert, Sky News

KIERAN GILBERT: Kieran Gilbert here with you and the Prime Minister joins me. Prime Minister, thanks so much for your time.  PRIME MINISTER: G'day Kieran.  GILBERT: An assumption a vaccine is ...

Daily Bulletin - avatar Daily Bulletin

Business News

Getting Ready to Code? These Popular and Easy Programming Languages Can Get You Started

According to HOLP (History Encyclopedia of Programing Languages), there are more than 8,000 programming languages, some dating as far back as the 18th century. Although there might be as many pr...

News Co - avatar News Co

Avoid These Mistakes When Changing up Your Executive Career

Switching up industries is a valid move at any stage in your career, even if you’re an executive. Doing so at this stage can be a lot more intimidating, however, and it can be quite difficult know...

News Co - avatar News Co

4 Costly Mistake To Avoid When Subdividing Your Property

As a property developer or landowner, the first step in developing your land is subdividing it. You subdivide the property into several lots that you either rent, sell or award to shareholders. ...

News Co - avatar News Co

News Co Media Group

Content & Technology Connecting Global Audiences

More Information - Less Opinion