A lot of focus, rightly, has been on conversations with risk advisers on how best to engage the LIF reforms to maximise the security and longevity of a risk advisers proposition, if their model is to be adversely affected by the pending changes. I say “if”, because the reality is, that advisers who already have adopted a hybrid model, initially see very little impact if any at all, as a consequence. However there are a significant number of businesses and individual advisers who have written under the model that life insurers have provided and it is those advisers, especially newer entrants and aspiring advisers who will, (yes that’s a definite), be adversely impacted by the reduction in their income unless they adapt quickly to the changes. The questions that still need answering are: where are the positive impacts to the end client and what can be done to address the suitability and quality of strategic advice as highlighted by ASIC report 413?
In a surprise to many (if my reading of social media is correct), life insurers are not the winners from the LIF reforms. Life insurers are reliant on advisers and without a sustainable and in fact growing adviser force, life office insurance sales via advisers may fall. It’s a simple equation, less advisers equals less new business. Surely the saving grace for life insurers is the reduced commission payable?
Simple maths debunks this thinking. For arguments sake, let’s say that currently 80% of new business is written on upfront commission and that, that upfront commission averages 110% with a renewal of 10%. After 7 years the life insurer has paid out 180% of the policy premium. (It’s actually more when you factor in premium increases but let’s call it square on that point). Now take the LIF regime and let’s say that all business is written on 80/20 in year one. After 7 years the life insurer has paid out 220% of the policy premium. It’s worse for the life insurer on level commission, for at 30% the life insurer after 7 years would have paid out 240% of the policy premium. So, where are those premium savings for consumers going to come from? Reduced lapses? Possibly.
When it comes to lapses, most insurers have been working behind the scenes dealing with lapse rates at an individual adviser level. Lapse rates for some insurers are the best they have been for a while. Others are finding it difficult. Should LIF reduce lapse rates there would be some assistance towards premium reductions, mitigated by the overall increased cost of acquisition (unless that cost is improved by efficiency gains). It would be better if people didn’t claim! The reality however is that claims, especially in the disability space are increasing and should that trend continue, premiums most likely will increase.
If you are working in a life insurer at the moment, there certainly isn’t champagne dripping from the taps. However what responsible life insurers are trying to do at the moment is:
• Improve policy onboarding efficiency
• Develop new product to meet the needs of advisers and policy holders
• Provide mechanisms to assist advisers in their businesses : in regard to engaging and retaining clients and maximizing conversion rates
• Assist new advisers progress to best practice
None of the above except for the last point, deals with enhancing quality strategic advice, and for that education programmes and technical sessions are being built, assessed and placed in diaries with associated learning materials and in field tools. It’s this combination that is needed to draw advisers to dealing with the disruption: getting smarter, getting more efficient and getting deeper engagement (with advisers from the life insurers perspective and with the client from both views). It is also one that supports a growing adviser force, the key ingredient for a positive impact on consumers let alone life insurance company sustainability.
So are the LIF reforms positive? That depends on how you measure success.
If it’s from the customers view and that view is predicated on the need for dramatic premium reductions, then that is possibly not a reality. If it’s from an income perspective for the life offices or advisers, then that journey is a longer one and has the aim of long term sustainability. If it’s from a higher standard of advice through education, that is a progression and requires work on education standards and programmes.
However, if you do measure success as a progression then maybe professionalism and what I mean by that is the definition and norm associated with fee for service, then, maybe this, LIF, is a small starting point for that progression. Personally I am not sure if I agree with that definition. I can see models (and have seen) where insurance with adjunct services such as estate planning and cash flow management are highly valuable and fee generating services that clientele will be happy to pay for.
For someone however who wants an average premium to protect their family, will the remuneration without an additional fee be adequate compensation for an adviser to adhere to the tenants of quality strategic advice? My modelling suggests no (based on current advice processes), and without that adviser being able to service that client, where will that client turn to and will they get suitable advice?
That is the key worry for retail life insurers and advisers and should be the key concern for our legislators. How advisers and life offices work together on this point to find advice and product solutions that not only sustains but grows advice businesses is the real challenge and focus for the coming changes. Efficiency of engagement, application, policy maintenance and communication will win this challenge for life insurers and advisers alike. It requires collaboration and engagement between the insurer and the adviser. That’s a very positive outcome.
