The retail and risk insurance market could be decimated if the government banned insurance commissions paid to financial advisors and fewer Australians continued to receive professional financial advice, according to a new report.
A report by research firm NMG Consulting, commissioned by the Financial Services Council, predicts the size of the advised life insurance market – or policies recommended by a financial advisor – to plummet 17% by 2026 due to the dwindling number of advised clients, according to The Australian Financial Review.
If commissions paid by insurers to advisors were banned, that number would explode to a 28% hit to the sector. Advised sales are believed to traditionally account for at least a third of the life insurance industry’s revenues, AFR reported.
The report shows why the Life Insurance Framework (LIF) reforms enacted by the Turnbull government should remain in place, the FSC said in its unpublished submission to the Treasury’s Quality of Advice review.
“The LIF, which includes an amended exemption to the ban on conflicted remuneration, must be retained to continually improve the quality of risk advice Australians receive and to prevent the collapse of the life risk market,” the FSC said.
Those reforms were negotiated on the heels of the corporate regulator’s finding of epidemic mis-selling and “churning,” or placing clients in new policies for the sole purpose of receiving an upfront commission. The reforms exempted insurance products from a 2012 ban on financial product commissions, AFR reported. However, upfront commissions were capped at 60% of the upfront premium.
The Hayne royal commission recommended a review of the LIF settings. That review will be conducted by Allens partner Michelle Levy as part of a broader review of advice affordability and quality. Levy is due to report her findings to the government by the end of the year.
Since the royal commission in 2018, the share of Australians receiving financial advice has fallen from 13.9% of the population to 10.1%, while the median cost has spiked by 40%, AFR reported.
Over the same period, the number of advised life insurance policies fell by 4% to hit 3.6 million last year, according to the NMG report. The number of licensed advisors has tumbled from 24,800 in 2017 to 12,700 in 2021 – of which only half are active writers of life and risk insurance policies.
The NMG report found that instances of churning have fallen, with re-brokering of products dropping from 59% of new business premiums in 2015 to 43% in 2021.
According to the NMG report, the drop in advised sales has worsened under-insurance, with 15.6% of Australians under the age of 35 having no income protection insurance in their default superannuation cover.
About 9% of Australians under 35 have an average gap of $300,000 between the death and total and permanent disability cover included with their superannuation and their actual insurance needs, AFR reported. Self-employed people and single parents were found to be disproportionately more under-insured than other groups.
“There has been an increased underinsurance gap among Australians caused by both reduced accessibility and affordability which in turn affects the sustainability of the industry, due to shrinking risk pools driving up prices and reinforcing the adverse selection spiral that will see relatively healthy consumers with a perceived lower risk of choosing to cancel their cover,” the FSC said in its submission.
The research comes on the heels of about 20 insurers and reinsurers leaving the FSC and establishing the Council of Australian Life Insurers (CALI) to forge new relations with the Albanese government, according to AFR.
The FSC submission, which argues for the LIF terms to be retained, was reportedly backed by key life insurance industry players before they announced the launch of CALI.
AMP, which sold its life insurance arm in 2020 but remains Australia’s second-largest financial advisor, went even further than the FSC, arguing in its own submission that life insurance commission caps should be “increased slightly.”
The Association of Financial Advisers and The Advisers Association, which is aligned with AMP, have called for maximum commissions to be increased from 60% to 80% of upfront premiums to underwrite consumer access to advice, AFR reported.
But other voices, including Industry Super Australia, which represents 13 not-for-profit retirement funds, and consumer advocacy group Choice, have called on Levy to ban insurance commissions.