The story so far
In October 2014, ASIC released its report into retail life insurance advice practices. The findings were pretty grim – with poor advice being more common than good, or even adequate, advice. ASIC said that advisers were motivated by the promise of commissions, not the interests of their clients. Following the ASIC report, the Association of Financial Advisers and the Financial Services Council bravely commissioned a review of the report by a working group chaired by John Trowbridge. They asked Mr Trowbridge to make recommendations on how the industry should respond to ASIC's findings. And he has.
The 'Trowbridge report' was released last month. If the changes are adopted by the industry (which might need some help from the government), they may well make a big difference.
Buying the insurance we need
The Trowbridge Report recommends a level commission on life insurance products, not exceeding 20 percent of premium. In addition, a fee for advice (an 'initial advice payment') can be paid by the life insurer to the adviser on a per client basis not more than once every five years. It should be a relatively modest amount that is intended to meet the costs of providing that initial advice. The intention is to stop advisers recommending that their clients replace perfectly good policies with new policies, but not to stop advisers, particularly independent advisers, selling life insurance. Mr Trowbridge was asked to consider how the industry could help us buy the insurance we need, as well as to come up with recommendations to improve the quality of advice.
The report does not go so far as to recommend the banning of commissions on retail life insurance. The argument is that, because we need more insurance and because we won't pay for advice about it, it is in each of our interests, and our collective interests, for insurers to pay a commission. Of course, we still pay for the advice, albeit indirectly, through higher premiums.
The same argument was successfully put by the industry when FoFA was introduced – commission was necessary because life insurance was sold, not bought. But I wonder if the argument still holds. The report notes that life insurance coverage is increasing, with group insurance and more direct insurance products. Online advice tools might also make a big dint in the underinsurance problem.
In the meantime, level commissions will make a big difference, and possibly even be a big enough change to remove the adviser's conflict – they will no longer have an incentive to persuade their client that a brand-new policy would really provide them with much greater protection than the one they bought last year. And if their client doesn't have any insurance, there is still an incentive to persuade them to buy some. But the report doesn't start and finish there.
The approved product list
Mr Trowbridge made another very significant recommendation: that approved product lists be required to include products offered by at least half of all available life insurers. There are currently 13 offering retail life insurance. Now, this is a really startling (and possibly alarming) proposition.
In the Trowbridge utopia, the adviser will not only want to sell us the insurance we need, they will also be able to recommend one of at least seven insurers. Because it won't matter a jot to the adviser whether the customer chooses policy 1, 3 or 7, the adviser will be free to recommend the product that best suits their client's needs. They do not have to undertake that most mysterious task of giving priority to their client's interest where it would be much better for the adviser to sell a product that will pay a higher commission. And there is more: in this utopia, pricing will be more competitive, and service and claims handling will be much better, as life insurers compete for customers rather than for advisers.
But is it necessary and will it fly?
It would be nice, but I am not convinced it is necessary. There is room for product sales people, just like there is room for, to use an old analogy, the Toyota car dealer. What is important isn't that the car dealer has cars from at least half of all car manufacturers, but that the customer knows they can only buy a Toyota from the dealer and that the Toyota does its job.
The customer also needs to know that the dealer will do their utmost to sell them the car because they will get a commission if they do. There is nothing hidden and there is nothing to influence the dealer to recommend one car rather than another – the dealer has only one car to sell and, if the car does what it has to do to meet the customer's needs, does the law really have any interest in whether the Hyundai would have been a bit cheaper or a bit more spacious? The quality assurance is Toyota's.
So, to return to the approved product list, will the Trowbridge recommendation be adopted? I don't think so. If the goal is to remove the conflict for the adviser in choosing between products, mandating the benefit that can be received does that on its own. If the goal is to improve the quality of advice, then there is less room for error if the adviser has a choice of one. The adviser must decide whether the product will be suitable for the client, not which product is best suited. When dealing with life insurance, the question of suitability is largely a question of fact, rather than judgment. If the client isn't eligible for cover under the policy the adviser has to sell, then the adviser can't recommend the product.
There is lots more in the report, and in its other recommendations, that makes a lot of sense, but I suspect the recommendation to prescribe a minimum number of available insurers on approved product lists won't get far. But, for the reasons discussed above, it may not matter.