For those within Australia's risk insurance industry, the federal government's proposed ban on risk commissions inside of superannuation created an uproar, and left many shuddering at the thought such a ban could wipe away close to $1 billion from the industry.
However, amid uncertainty around industry reforms, other concerns for the sector include the country's underinsurance woes, lack of consumer education, and potential issues surrounding the auto-consolidation of superannuation accounts.
"Underinsurance in Australia is now at $700 billion and this is a number that has come out through Rice Warner. What it looks at is if people were to die, what would be the outstanding funding requirements for their families?" AMP Financial Services director of corporate and IFA distribution Dan Powell says.
"This number is actually an underestimate because what it doesn't take into account is the living insurance risks, so if people get a temporary effect on their income capacity, that hasn't been taken into consideration, so there is a huge gap between what is out there and the view is in the marketplace."
Powell says one of the challenges of underinsurance is the lack of people's understanding of the issue and also the perception of the cost. He says only 24 per cent of Australians have adequate total permanent disability (TPD) cover and only 22 per cent have income protection.
"Australians do view trauma and TPD and income protection as too expensive compared to life insurance," he says.
"We really haven't educated Australians on the true cost of risk. An issue that also gets a lot of media these days, quite rightly, is mental health issues."
Since 2008, the insurance sector has experienced a yo-yo effect of highs and lows.
A report from Rice Warner Actuaries, released earlier this year, found that at June 2010, the level of underinsurance was $669 billion, compared with $1 trillion in 2005 on a like-for-like basis. Rice Warner Actuaries director and head of life insurance Richard Weatherhead says the shift was attributed to significant demographic, financial and life insurance market changes in the past six years, in particular an increased focus on personal financial risks following the global financial crisis (GFC).
Fast forward to today and despite the initial misgivings and accusations hurled at Treasury about a potential lack of understanding of the industry's workings, the barrage of association and institutional lobbying has resulted in a changed view on the matter from Treasury and Financial Services and Superannuation Minister Bill Shorten.
So much so that in August this year Shorten released a clarification on the treatment of insurance commissions within the government's Future of Financial Advice (FOFA) reforms. "Following extensive consultation and feedback from industry since this announcement, the government has decided to modify the final position such that the ban will apply to commissions on group life insurance in all superannuation products (including both default/MySuper products and choice products) and to commissions on any life insurance policies in a default/MySuper product from 1 July 2013," the clarification said.
"This means that commissions on individual life insurance policies within superannuation would only be allowable on self-managed superannuation funds and choice products."
CommInsure retail advice general manager Tim Browne says: "I think the government's decision to allow for super to pay for individual insurance contracts is a very sensible development."
Browne says he has no doubt it was the combined efforts of advisers, institutions and industry groups that achieved the government's about-turn.
"I think it's a terrific reflection that the work that we've done on behalf of clients over many years has seen the government look more closely at the issue and accept our arguments around such a ban compounding the underinsurance problem," he says.
"So we should take a lesson from this and think about tomorrow's causes and where we need to work together."
Macquarie Adviser Services head of insurance and platforms Justin Delaney has labelled the government's decision as "very pragmatic". "I think the prior proposal really didn't reflect good outcomes for the industry effectively having a tax structure determining remuneration outcomes for an adviser," Delaney says.
"It would have also impacted affordability, so anything that affects affordability is problematic."
Tower chief executive of retail life partners Brett Clark says if you look at the government's announcement in April, the initial outcome was a surprise.
"I think almost universally across the industry it was regarded as a poor outcome, it would create all sorts of complexities with the customer and the adviser," Clark says.
MLC executive general manager of insurance Duncan West says the government's current legislative take on commissions and risk insurance is the right solution. "We had a view that the solution shouldn't be based on the tax regime, inside and outside of super, but more on whether advice was required or not," West says.
"So we really welcome it and we think it's a good sensible outcome for the consumer and for advisers, which is great."
For Zurich Life & Investments chief executive Colin Morgan, the government's latest proposal is a lot more sensible in terms of the direction it is heading in.
"It was nonsensical before and the sense is prevailing there, so we're obviously a natural supporter of that and we believe commissions have always had a place for risk insurance and advisers need to be paid for the work that they do," Morgan says.
Just days after the government's about-turn on its ban, the Association of Financial Advisers (AFA) came out in support of the change in stance. "We have consistently called on Minister Shorten to take a consumer-focused approach to the Future of Financial Advice reforms and it appears that he is doing that," AFA chief executive Richard Klipin said at the time.
"We are now looking forward to seeing more detail from the government on the commissions issue."
Almost two months on from that statement, the AFA has released a FOFA tranche one kit to its members.
The association used the kit to address its concerns over FOFA, in particular the association's view that it believes the "game plan" has been hijacked by certain groups for political gain.
The association said its key FOFA concern was how important issues fare from the legislation. "Our view is that on the key strategic issues the FOFA draft legislation has failed consumers," it said.
However, in regards specifically to the ban on commissions for insurance inside super, the association cautiously welcomes the change. "Whilst the AFA welcomes the change with respect to allowing commission on insurance inside superannuation for self-managed superannuation funds (SMSF) and choice funds, our position is that we believe that commission should be allowable for all cases where advice is provided," the association said.
The issue of churning
Another concern for the AFA and the industry is the government's proposal to enforce by 1 July 2013 that the industry unbundle disclosure so the dollar and percentage value of commissions are disclosed for all new and renewed policies.
"A claw-back provision enables life insurance companies to recover some or all of the commission paid if a policy turns over early," the government said.
"The government will work with industry and consumer groups to introduce uniform claw-back provisions to remove the incentive for some advisers to shop around for the most generous claw-back arrangements."
Weatherhead says the government's changes to its risk insurance reform bring back the concern about churning. "There is still something to play out in that area," he says.
He says his firm has suggested that if the industry does what the government did with consumer credit insurance, it could cap commissions. "You'd actually force the industry into a level commission environment, but the downside from a planning practice is you don't get the finance upfront to enable you to start up your business," he says.
Morgan remains unconvinced the issue of churning is at such levels to warrant such high-level action.
"I'm not sure where this is at the moment. We are a supporter of the FSC [Financial Services Council], where they recently came out and said we would get rid of takeover terms, but we would also have an additional claw back on business that had been replaced in the second year," he says.
He says in the first year there is now a full claw back of commission, but the FSC wants it extended so that there would be a 50 per cent claw back in the second year if it were to move. "So we're supporters of that although I'm hearing there may be a notion of moving to level commission only on all replacement business," he says.
"We [Zurich] would be major opposer of that because in the end you have to get into what constitutes replacement business and if a client generally had been with a particular cover and product for some time and an adviser does all of the work and concludes that it should go to a different environment, well then they should be compensated for that."
Morgan says the issue of churn has become a political football with trade-off discussions going on.
Browne says the government's concern about churning offers a strong message to advisers and manufacturers to concentrate on addressing the insurance needs of new clients or existing clients who don't have sufficient insurance in place. "I think it's consistent with our lobbying around the underinsurance problem and it's a logical extension that we concentrate our activities on fulfilling those unfulfilled needs," he says.
"We certainly support helping more clients that haven't got insurance in place getting that in place. As far as the FSC [proposal], I don't have a comment to make as I haven't seen the detail."
In August, before the release of the first FOFA draft legislation, FSC chief executive John Brogden released details of a new council standard in regards to churning.
"While this practice is not widespread, it is significant enough an issue to warrant industry action," Brogden said at the time.
"The FSC board has approved the development of a binding FSC standard to address churning. This standard will be developed in consultation with the industry, government and regulators.
"We aim to have a standard finalised in 2012 with an implementation date consistent with the commencement of FOFA."
Auto-consolidation of super accounts
Another concern for the industry outside of FOFA is the possibility of auto-consolidation of superannuation accounts under the government's Stronger Super review of the country's superannuation system.
In June, the Association of Superannuation Funds of Australia (ASFA) estimated the consolidation of retirement savings accounts that are not required will save around $250 million a year in fees.
The estimate was determined as part of the association's new research paper, "Multiple accounts and superannuation: the likely impact of auto-consolidation".
Morgan says the issues surrounding auto-consolidation of accounts are complex.
"I think it is a good move for the industry to be more efficient and overall benefit members to reducing unnecessary fees that they may be getting through a whole variety of super funds all over the place with small balances, so I think there is good intent to consolidate people's accounts," he says.
"The tricky part is clearly going to be though where those members have some form of insurance in different places and there is a big challenge."
He says it is easy consolidating the investment balances and fees, but the insurance piece is very tricky.
"Should it be on an opt-in basis or should it be on an opt-out basis? There are a lot of pros and cons for each of those and I don't think the industry has landed yet on an agreed basis," he says.
West agrees the issue is complex and complicated. "We're working with government to work through the issue to ensure that it works for all parties and we don't leave customers underinsured and we don't exacerbate any issues," he says.
"It's not a complicated theoretical position but it's quite a complicated practical solution to it."
In Delaney's view, the automatic rollover is positive if it helps increase awareness of insurance.
Browne says he intends to remain watchful on the issue. "I support the principle that if there is a sweep of accounts that any insurance that was in place either remains in place with the existing insurance or is replaced with the new insurer," he says.
"Anything short of that is likely to compound the underinsurance problem and as such we should work as an industry to look for a way to make that happen."
The only way is up
In a positive for the sector, Morgan says data from research firm DEXX&R, released earlier this month, provides a clear indication the market has slowed. However, he believes the slowdown is driven by reforms and uncertainty within the insurance sector, with improved growth levels on the horizon.
"Lump sum new business for individual has only grown 3.5 per cent and if you look back to June 2009, which is a few years ago, it was up as high as 21 per cent," he says.
"Income protection only grew 8 per cent and again it was 22 per cent back a couple of years ago.
"I think they are absolutely indicative of an environment that's created extended government intervention that creates a lot of uncertainty for people who work in that environment, particularly distributors, running small businesses and I think that's made them very distracted and fundamentally not being able to get to as many clients as possible to make sure they have the right protection in place.
"I think longer term if you look at this industry, it will continue to grow quite strongly."
West also is optimistic about the growth of the sector. "The life risk market is relatively high growth, we tend to see 13 per cent to 14 per cent growth compound anyway, and I think the next six months will continue to see growth," he says.
"What tends to happen, and we've seen it numerous times, we saw it through the GFC, is that when investment markets are more volatile we tend to see more growth in life risk as people begin to worry about the environment and some of the things that can happen to them that actually causes more people to buy risk insurance.
"I think we'll see the next six to 12 months be a relatively high growth period for the market, which is good and encouraging."
Axa Australia has also invested in its own insurance offer, Elevate.
Axa individual life senior product manager John Ashton says the group has enhanced cover updates to income, trauma, TPD and life insurance plans.
"The latest enhancements . highlight our commitment to the ongoing development of our products to meet the needs of advisers and their clients," Ashton says.
He says a keen focus on ensuring Australians who had chosen to work beyond the age of 65 had access to affordable cover is behind the move. "As we have seen with the development of our North products, the need to address longevity risk is one of the key challenges this industry faces over the next 30 years," he says.
"Earlier this year, we extended our income protection plans to identify with the reality that many Australians will work longer.
"Today, we have now gone a step further becoming the first life insurance company to offer level premiums to age 70 for life, TPD, trauma and income insurance."
As well as making changes to Elevate, the company has also introduced a new split premium that allows insurance to be structured in a more cost-effective manner.
"Trauma is the contract that most people find expensive, especially as we age," he says.
"So being able to make this part of your insurance a fixed cost using our new split premium feature can help clients maintain their insurance needs into their older ages, providing them maximum protection and flexibility when they need it most."
Clark says another path for growth for the sector is a trend towards enabling efficiencies in terms of the advice process.
He says the industry needs to turn its focus on continuing to develop innovative products that are designed to meet client needs and deliver value.
"I think you'll also see an increased level of activity from life companies continuing to really expose more people to the benefits of life insurance and we've seen that from the benefit of the FSC life wires," he says.
"From our perspective, we're really focused on making sure we are true to label in terms of helping advisers help their clients through enabling advice."
West says another trend is people starting to position themselves for a post-FOFA world, both from an adviser point of view and a company perspective.
"As things become clearer, people will start positioning themselves for what it actually means for their business and how will they all be wanting to run their business," he says.
He says in terms of FOFA, MLC has been doing a lot of thinking about what it wants to do in a post-FOFA world.
"Obviously it's a little dependent on where FOFA finally lands and I think once there is a degree of certainty over that, then I think you will see people and ourselves included taking our thinking to the next level and move that through to actually delivery of a range of solutions over the next six to 12 months," he says.
Technology is another way forward for the sector, according to a number of participants.
Delaney says Macquarie rolled out its Macquarie Life Active product just over a year ago and it's still gaining strong momentum. "What is going to come out of FOFA is that it's going to force advisers and their practices and their dealer groups to become more efficient in the distribution space," he says.
"I think that's going to be a good thing because if you get efficiency across the industry, then it enables in the end for the ability to go to the end client with better, more cost-effective solutions in a quicker way."
Morgan says innovation is definitely the key. "I personally think innovation primarily through technology is going to be something quite significant over the next years to come," he says.
"We've already seen it historically over the last few years, we've seen it more in the manufacturing space. I think the manufacturers have become more efficient."
While the government's second FOFA tranche will help unveil further details on commissions for the risk insurance sector, it's becoming very clear that regardless of the outcome, the sector is ready for change. «
