ASIC has released a Review of retail life insurance advice (REP 413)
Conducted between September 2013 and July 2014, ASIC’s review looked at:
•how life insurance is sold by advisers
•how advisers are remunerated for that advice
•the drivers behind product replacement advice to consumers, and
•the quality of the personal advice consumers receive.
ASIC reviewed 202 advice files from large, medium and small Australian financial services (AFS) licensees. It found that 63% were compliant. However, more than one third (37%) of the advice consumers received failed to comply with the laws relating to appropriate advice and prioritising the needs of the client.
ASIC’s report sets out the various commission models that are used to remunerate advisers in the life insurance sector. The report found that high upfront commissions are more strongly correlated with non-compliant advice, including in situations where the recommendation is to switch products. Of the 202 files in the sample, ASIC found that where the adviser was paid under an upfront commission model, the pass rate was 55% with a 45% fail rate. Where the adviser was paid under another commission structure (e.g. a hybrid or no commission model), the pass rate was 93% with a 7% fail rate
ASIC’s report includes cases where clients were recommended insurance cover that was likely to be very difficult to afford given their financial circumstances.
The report notes the high rate at which life insurance policies are lapsing. For example, for stepped premium policies, ASIC found that, in 2013, policy lapses doubled from approximately 7% in the first year to 14% in the second year. After the initial spike, lapse rates remain high (above 14%) for the next three years before tapering.
ASIC recommends that insurers:
(a) address misaligned incentives in their distribution channels;
(b) address lapse rates on an industry-wide and insurer-by-insurer basis (e.g. by considering measures to encourage product retention); and
(c) review their remuneration arrangements to ensure that they support good-quality outcomes for consumers and better manage the conflicts of interest within those arrangements.
ASIC recommends that AFS licensees:
(a) ensure that remuneration structures support good-quality advice that prioritises the needs of the client ;
(b) review their business models to provide incentives for strategic life insurance advice;
(c) review the training and competency of advisers giving life insurance advice; and
(d) increase their monitoring and supervision of advisers with a view to building ‘warning signs’ into file reviews and create incentives to reward quality, compliant advice.
ASIC has included a useful life insurance advice checklist in the appendix to the report.
