An industry-led investigation of problems in the life insurance industry has conceded that the current up-front commission model must be replaced but says doing so will be impossible without a single industry-wide initiative.
Late last year, the Life Insurance and Advice Working Group (LIAWG) released its interim report, also known as the Trowbridge report after its Chairman, John Trowbridge.
The LIAWG is a reaction to a damning ASIC investigation into the life insurance industry, which found more than a third of life advice was so poor it did not meet minimum legal standards and laid much of the blame on large upfront commissions.
Trowbridge has outlined five possible remuneration models, including hybrid commissions, but says there is a clear ‘first-mover’ disadvantage at play.
“This essentially prevents any individual insurer from “breaking the cycle”, no matter how interested the insurer may be in rationalising its commission arrangements,” he writes.
“To interrupt the cycle would therefore require an industry-wide initiative, whether taken by the life insurance industry itself or by government intervention.
“It is acknowledged that support of the ACCC would be required for such an industry-wide self-regulatory response to be achieved.”
Trowbridge has also stirred some controversy by suggesting problems with policy churning could also be addressed by lengthening the clawback or responsibility period.
Currently, financial advisers operating under the hybrid commission model face no financial penalty if a given policy lapses at least one year out from inception. The report raises the possibility of increasing this period to up to four years.
Financial Services Council CEO Sally Loane says: “The process is working well and we are looking forward to the next stage.
“It is important that consumer trust and confidence in financial advice and life insurance products is strengthened to ensure Australians are protected by sufficient life insurance cover.”
Submissions to the report must be received by the end of the month.