ASIC “Churn” report opens new questions on risk insurance advice delivery

This month’s tabling of the much-awaited Australian Securities & Investments Commission (ASIC) report into personal advice on risk (life) insurance sales opens up a number of issues for the life insurance industry to consider.

Indirectly, the industry has been challenged to reinforce the fundamental need for appropriate, quality financial advice in respect of risk insurance.  In the face of further investigation, it would be a shame for the life insurance industry to simply sit back and not redress the damaged reputation of its advised business.

A comprehensive and swift response to the ASIC report is necessary.

Why?  Australian consumers need quality, fairly-priced advice that helps steer them through the complexity and range of risk insurance products, underwriting terms and variations, and the top-level taxation and structural strategies that are appropriate to each person’s personal circumstances.

Even the question of whether personal risk insurance (trauma, TPD, death and disability income insurances) makes sense for an individual within or outside their superannuation account comes into play.  This is a topic Rice Warner has explored in a previous Insight post for industry.  For our assessment on the underlying economics on this topic, see Group vs Retail Gap.

However, the focus since the early October ASIC report’s release has been largely on the issue of remuneration structures and so-called ‘churning’ practices, with high upfront commissions paid to advisers again in the spotlight.  This has led to lapse rates in Australia which are far too high against global standards.

A clear question is whether people are paying too much for advice around insurance?  Rice Warner believes there is evidence of a misalignment of remuneration and some abuses of the high upfront commission system.  However, upfront commissions are justified in certain conditions because of the effort the adviser needs to put in during the initial advice process.

Product manufacturers and AFSL licensees must do more to resolve these issues through improved product design and greater attention to the standards upheld by the advisers using their products.

But above all this remains a prevailing certainty: consumers, particularly families, have a clear need for advice.  As ASIC states in its executive summary: “Quality financial advice helps consumers identify their life insurance needs and find appropriate and affordable products that meet those needs”.  While consumers can get life insurance through their superannuation fund or by buying directly marketed products, it is difficult to align needs with product without the assistance of an experienced financial adviser.

Consequently, Rice Warner agrees wholeheartedly with the ASIC sentiment.

– Thierry Bareau, Head of Life Insurance