Today’s release of the final Trowbridge report signals the prospect of further reform to Australia’s life insurance and financial advice sectors, particularly around adviser remuneration.
The Life Insurance and Advice Working Group, chaired by John Trowbridge, was established in response to ASIC‘s October 2014 review of retail life insurance advice. That review urged the development of industry-wide solutions for what ASIC considered to be misaligned incentives influencing the quality of life insurance advice.
The Trowbridge report makes a total of 11 policy, implementation, and review recommendations covering four subject areas:
- adviser remuneration
- licensee remuneration
- quality of advice
- insurer practices including the introduction of a Life Insurance Code of Practice.
The headline recommendation is that changes to insurance adviser remuneration should be implemented over a three-year transition period. The report recommends a ‘reform model’ comprising a level commission set at a maximum of 20% of premiums, supplemented in some cases by an initial advice payment.
The initial advice payment would be available at a client’s first policy inception and then no more than once every five years. It would be limited to a maximum of $1,200 (or 60% of the first year’s premiums, where annual premiums are less than $2,000). In addition, the initial advice payment would only be payable where personal advice is given – no payment would be available for general advice or for direct sales (including where group life is purchased through superannuation funds).
As well as reducing advisers’ financial incentive for policy churn, the report anticipates that its recommendation would reduce the aggregate costs of life insurance protection by 5 to 10%.
The reform model recommended differs from the Financial System Inquiry report which advocated level commissions only. The Trowbridge report acknowledges this, but makes the point that in the absence of an initial payment there would be a substantial mismatch between advice costs and adviser revenue. It considers this mismatch would be ‘debilitating to the advice industry’.
The report proposes that insurers and licensees should adopt the five-year rule on a best endeavours basis as soon as possible – with 30 June 2015 as the suggested start date. Other elements of the reform model require regulation, ideally to take effect during 2016. The report recommends regulation in the form of licensing conditions imposed on life insurers by ASIC. The main alternative would be to seek an ACCC authorisation of the model, on the basis that it might otherwise be deemed anti-competitive.
Other recommendations include a requirement that every licensee should have at least half of all retail life insurance providers on its approved product list (ie at least 7 out of the current 13), and that licensees should be prohibited from receiving both monetary and non-monetary benefits from insurers that might influence recommended product choices or advice given by advisers. The justification for the first of these recommendations seems to be that, with only 13 retail life insurers, the recommendation would increase choice, competition and consumer access without imposing significant additional costs on licensees.
The report considered standardising core policy terms as a means of enhancing consumer understanding but made no recommendation on this on the basis that it could reduce competition. The report also noted the influence of ratings agencies on the advice process but made no recommendation about them.
The recommendations in the report could be implemented through a mix of both regulatory change and industry standards. The Government has stated that it will consider the report when developing its response to the Financial System Inquiry. At the time of writing, neither ASIC nor APRA have commented on the Report.