on October 11, 2014 by admin in Insurance Industry, Comments (0)

‘Unacceptable level of failure’: ASIC report damns life insurance industry

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Australian Securities and Investments Commission deputy chairman Peter Kell emphasised the report found an "unacceptable level of failure", and the industry should consider itself "on notice".

It is estimated that about 1.5 million Australians hold life insurance policies bought through a broker or financial planner.


But ASIC stopped short of recommending policy changes, instead warning the industry to get its house in order or risk tougher enforcement action.

"We will be very unhappy if the insurance companies continue to point the finger at the advice industry while the advisers blame the underwriters, which fails to serve the public interest," Mr Kell said.

There are a range of issues the life insurance industry needs to address, but inappropriate " 'churning' is definitely one of them", Mr Kell said.

Churning is where advisers recommend customers switch policies simply so the adviser can pocket lucrative commissions worth around 100 per cent of a year's premium.

Mark Draper, financial planner and director at planning group GEM Capital, said while the current model profited many advisers, it is unsustainable in the longer term.

"Yes, I think the current remuneration models need to be looked at – but I don't think fee for service payments are the answer either.

"Commentators say that the amount [paid on] upfront commissions will have to come down and ongoing commissions will be higher – I think that's the reasonable outcome. You do, however, need to get reasonable remuneration for the work you do," he added.

Matthew Rowe, financial planner and managing director of Hood Sweeney, agrees the current remuneration models are not sustainable for the profitability of the life insurance sector.

"There needs to be an overhaul for the entire value chain of insurance – from the products themselves to the advisers' [pay]," said Mr Rowe, who is also the chairman of the Financial Planning Association of Australia.

Federal Finance Minister Mathias Cormann echoed the call for industry-led action.

"I expect financial product and service providers as well as their professional and industry associations to step up, take responsibility, and ensure compliance with the law," Senator Cormann said.

The Future of Financial Advice reforms that banned commissions throughout the bulk of the industry did not extend to individual life insurance sales.

Opposition financial services spokesman Bernie Ripoll said Labor would not call for a ban on commissions in the life industry.

Association of Superannuation Funds of Australia chief executive Pauline Vamos said the ASIC report highlights the problem of advisers selling people new policies without adequate consideration to what coverage they already have through their super fund.

"I'm not surprised by this – there's an incentive there to recommend higher levels of cover," said Sean McGowan, a financial adviser with WLM Financial who is calling for fee-for-service models to be adopted.

"I absolutely think there needs to be an overhaul, but there is a lot of resistance because it's been so profitable for so long."

Mr Kell said ASIC could still take direct action against those already identified through the probe as breaking the law. Investigations are ongoing, and he refused to speculate on how many bans or prosecutions might be forthcoming.

The deputy chairman also revealed ASIC is in the process of assigning more staff to its financial advice team in a bid to beef up its powers to discipline and prosecute the alarmingly high incidence of financial advisers who, motivated by hefty upfront commissions, are providing inappropriate advice to sell life insurance products that are not in their clients' best interests.

"Now that we've published this report, we don't want to let this issue drop," Mr Kell said.

He also flagged that if the industry does not respond to the report with a credible effort to clean up its act through self-regulation, then ASIC may move to recommend legislative changes.

"The ball is now squarely in the industry's court to act first," he said.

The two main peak bodies for the financial advice industry, the Association of Financial Advisers and the Financial Services Council, said they plan to co-operate on a response.

"The ASIC report requires a serious response from the industry. We have formed a working group to achieve this," Financial Services Council chief executive John Brogden said.

Initial responses from Australia's biggest life insurance companies, including Suncorp, AMP and Zurich, were muted and failed to address allegations of flawed commission and product structures.

Australia's biggest life insurer TAL conceded that the ASIC report highlights "a number of issues that it believes the industry needs to address".

Many of the country's biggest life insurers have previously pointed the finger at the financial advice industry for "churning" consumers into new policies to win sign-on fees.

Mr Kell stressed that ASIC wants the insurance providers to step up and review the incentives it provides.

ASIC wants the life insurance providers to review both their commission and product structures, Mr Kell said.

"Lower upfront commissions is definitely something ASIC would expect them to consider," Mr Kell said.

The FSC said that it could not provide a figure on the overall value of the life industry in Australia, but said claims for death and disability insurance paid to Australian households in the year to March 2014 totalled $6.7 billion.

Most people get their life insurance through their superannuation fund.

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