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Life insurance advice on life support… but can it be saved?
There is hope several factors are coalescing to form the faintest breath of a tailwind for life insurance advice.
The issues that plague the industry, however, are considerable, with the number of pure risk advisers in Australia declining from a few thousand to a couple of hundred in the last decade.
Education standards took a considerable toll when they were raised across the industry in 2018; the new adviser exam was tailored to holistic wealth advisers, with little accommodation for specialist risk advisers in possession of a different skill base and knowledge set. For 6 years professionals trained to guide people through the process of acquiring life insurance have been required to pass an exam focussed on wealth management.
On the income front, remuneration was capped as part of the Life Insurance Framework (LIF) laws back in 2017, which the current financial services minister intends to retain. The change, designed to curb the practice of advisers ‘churning’ clients into new policies (which it did), also turned many advice practices away from offering risk services.
In terms of product, Individual Disability Income Insurance (IDII) had been so mismanaged by providers it required APRA’s intervention in 2019. Due to what the regulator called “flaws in design and pricing”, collective losses from IDII in the five year leading to that point totalled a staggering $3.4 billion.
Higher premium prices due to regulatory intervention have been compounded by an increase in mental health claims, as well as broader economic factors like inflation and cost of living pressures. Combined, this price expansion has led to more people opting out of life insurance (including TPD, Trauma and Income Protection), or even in some cases self-directing towards cheap, ill-fitting insurance options.
In a recent submission to APRA on its life insurance data collection exercises, Financial Advice Association Australia (FAAA) policy lead Phil Anderson noted that new business for life insurance is down more than 50 per cent over the last five to seven years. This has created a host of secondary issues like upfront discounting, he stated, which only serve to inflame “client dissatisfaction and discontinuance”.
Anderson believes it is “easy” to conclude that the life insurance sector – advised or otherwise – is in crisis.
“This is only part of the story, as the flow on consequences for life insurance are equally important, with fewer new entrants into the life insurance pools and particularly in terms of younger lives,” he tells The Inside Adviser. “This will undoubtedly over time push up the average age of insured Australians, which will fundamentally change the economics of the life insurance business model.”
A sustainable path
Charting a path back to sustainability for the industry begins with acknowledging that despite its problems, the life insurance advice sector remains profitable.
“Specialist risk advisers that have good referral arrangements have remained successful by focussing on high-income families with lifestyles that necessitate insurance because of high debt and expenditure,” Anderson says. “That cohort is doing reasonably well.”
Vast swathes of the Australian public fall outside this group, however. These people are being marginalised because servicing them within a sustainable business model isn’t viable now.
Yet that’s where a major hope for the industry’s salvation lies. The Quality of Advice Review proposals include a number of regulatory changes aimed at reducing compliance and the overall cost to serve, including a “modernised” best interests duty and shorter statements of advice.
“The QAR should lead to cost reductions by reducing the effort and cost involved in providing advice of all kinds,” Anderson says. “Removing the obligation to provide lengthy SOAs will have a significant impact.”
The proposals should also make it easier for advisers to provide affordable scoped advice, which would greatly assist pure risk advisers.
“Advisers are always concerned that narrowing the scope of advice will breach Standard 6,” he says, referring to the industry’s Code of Ethics requirement that advisers consider the “broader effects” of the advice given. “The government has said they want to give advisers greater confidence in providing scoped advice by clarifying how much data you need to gather and document.”
Combined, these factors have Anderson optimistic about the level of cost reduction for insurance advice, assuming licensees are willing to reduce their level of conservatism. “But licensees are the ones that will have to implement those changes,” he notes.
Another cause for optimism is that the measures taken by APRA to fix IDII product design issues seem to have done the job. In a 2022 note APRA reported that while the product had 6 out of 7 unprofitable quarters leading up to September 2021, it had 5 profitable quarters in succession after the mandated changes. “There may well be a light at the end of the IDII tunnel…” the regulator said.
Advisers back on board
While reducing the cost to serve should in itself bring advisers back into the industry, further measures are required to reduce the massive deficit in personnel.
Here, an answer may have already been provided by the ‘experience pathway’ proposed by the government, which will see the requirement for a relevant degree waived for advisers with 10 years’ experience and a clean record. It’s likely an outsized proportion of the advisers taking advantage of this change will come from the older, risk-focussed adviser set.
More importantly, the government is also looking at making the education standards more flexible, which could mean that risk advisers will have a more tailored education program, (though it’s unlikely this would extend to the adviser exam). “That should be really beneficial for pure risk advisers,” Anderson says. “Why should they be studying derivitives?”
The final development Anderson notes as a potential tailwind for the industry is APRA’s Life Insurance Data Transformation consultation, which has the regulator looking at different ways it can improve its data collection activities for the general and life insurance sector.
“Any uplift in data collection practices that focus on what needs to be fixed can only benefit the industry,” he says.
