The life insurance industry has been under increased scrutiny over the last few years, beginning with ASIC’s report, the Review of Retail Life Insurance Advice (REP 413) in October 2014 and continuing today.

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REP 413 concluded that the industry was in need of reform, specifically recommending that remuneration arrangements should change to be aligned with consumer interests, to ensure that the focus was on the priorities of the client. The Trowbridge report and the Financial System Inquiry (FSI) followed, both coming to the same conclusion.

In early 2016, media reports focusing on customers’ claims experiences and insurers’ claims practises caused some insurers to make independent assessments of their processes and product definitions, to ensure that their policyholders were not disadvantaged. This work then fed into the ASIC claims report (REP 498 – Life Insurance Claims: An industry review), issued in October 2016.

In September 2016, Senator John Williams proposed that the Parliamentary Joint Committee (PJC) on Corporations and Financial Services launch an inquiry into the life insurance sector, including an examination of insurance provided through superannuation.

In March this year, we saw some of Australia’s largest life insurers appear at a number of hearings. They were questioned on a wide range of subjects, including mental health claims, privacy around medical records and staff remuneration.

A report on the inquiry will be tabled by 30 June this year, and the possible outcomes are further oversight and regulation by ASIC and APRA over life insurers.

In the meantime, we have seen many regulatory and industry initiatives come to fruition, as part of an effort to rebuild trust between the end consumer and either their planner or their life insurer. This article provides detail on these initiatives and what they mean for life insurance advice.

LIF legislation

The intended purpose of the Life Insurance Framework (LIF) legislation is to better align the interests of consumers with those providing advice. One of the potential issues identified in 2014 (in ASIC’s REP 413) was that high upfront commissions may provide an incentive to replace policies inappropriately.

After extensive lobbying efforts by advisers, licensees, insurers and consumer groups, a draft bill and draft regulations were created, prior to the parliamentary election in 2016. The election caused the bill to lapse in April 2016, which then had to be reintroduced once the Coalition Government had been re-elected. The second bill was introduced in October 2016 and finally passed in February 2017. The final regulations were issued in March this year.

The legislation itself enables ASIC to create a legislative instrument, which can be used to set the maximum commission rates payable to financial planners under an upfront commission structure (80% + GST upfront with a 20% + GST trail from 1 January 2018, moving to 60% + GST upfront and 20% + GST trail by 1 January 2020), and the clawback provisions (100% of year one commission in the first year of the policy, 60% in the second year). The legislation also places a ban on volume-based payments from life insurers to dealer groups.

The regulations provide the detail required to implement these changes, such as when clawback provisions apply. For example, a clawback will not apply to a cancellation of policy or reduction in premium due to death, self-harm, reaching expiry age, claim, reduction in risk (e.g. smoker to non-smoker), or an insurer-led premium reduction or policy retention discount.

Commissionable premium

Under the legislation, the commission caps apply to the ‘policy cost’ of a life insurance policy. This is defined as the sum of the premium, frequency loading and policy fee. Policy cost does not include stamp duty.

Generally, across the industry, it is not current practise for insurers to pay commission on frequency loadings, policy fees or stamp duty. Therefore, while the initial upfront commission rate from 1 January 2018 may be 80% (or 88% including GST), in practise, the rate may be higher if some components were not previously included in commissionable premium. See Example 1.

Example 1: Upfront commission

It should also be remembered that the ongoing commission levels under the LIF reforms are generally double the rate of current ongoing commission rates, under an upfront commission structure.

Grandfathering provisions

The regulations state that grandfathering will apply to pre-1 January 2018 policies if an additional option is added to an existing policy or a new policy commences due to an administrative error.

Grandfathering is a critical part of LIF – it will mean that increases to premiums on pre-LIF policies can still generate 121 per cent upfront commission on that increase. However, if a policy commences in the first year of LIF (i.e. 88 per cent commission), any subsequent upfront commission payable will only attract a commission at the rate applicable at the time of the increase.

Grandfathering to pre-1 January 2018 policies will generally apply to:

• increases to the sum insured;
• the addition of a rider or optional benefit;
• changing from a stepped to level premium structure;
• increasing a benefit period or decreasing a waiting period of an income protection policy;
• changing from an indemnity to an agreed-value income protection contract; or
• changing from an any to own occupation total permanent disability (TPD) definition.

There may be other examples where alterations result in a premium increase.

Lapse reporting

As part of LIF, ASIC has requested regular reporting from all insurers on lapse activity for planners who meet certain thresholds.

Insurers will be required to provide to ASIC certain details for planners who have total in-force premiums above $200,000 and a 12-month lapse rate greater than 20 per cent for the relevant period. This report is generally provided to ASIC every six months, with follow-up detailed reporting requested on an ad hoc basis for particular planners (or licensees) who have been identified as being of interest to ASIC.

In addition to this reporting, ASIC will be collecting aggregated data in 2021, which will be used as part of the overall review of the LIF reforms. If this review suggests further reform is needed, consideration would be given to the FSI’s recommendation to mandate level commissions. Regardless of whether this change takes place, planners will still be able to charge a fee for service, either in addition to or instead of a commission.

Code of Practice

The Financial Services Council (FSC) Code of Practice (Code) was released in October 2016 and developed through broad industry consultation, including consumer groups, planner groups, regulators, super trustees, legal groups, FSC members and the general public. Currently, compliance is voluntary during a transition period, however, it will become mandatory for FSC members on 1 July this year.

The Code encompasses what an insurer’s minimum customer service standards should be, in regard to policy design and disclosure, sales practises, underwriting, standards when commencing, altering or cancelling insurance, and claims and complaints procedures.

The Code is principles-based, meaning that not everything will be stipulated in the Code. Rather, the insurer needs to adhere to the ‘key code promises’ by acting honestly, fairly, transparently and in a timely manner; with a particular focus on communicating with customers in plain language.

There will be many practical outcomes stemming from the Code, such as obligations for internal sales staff and external distributors to ensure that only suitable products are sold to each customer, including ongoing training of such staff. Further, specialist training and teams may be required to deal with additional-needs customers, such as older individuals. This may be more applicable to direct insurance, as planners already have obligations to cater to their clients’ individual circumstances.

Another example is using simple clear language in product disclosure statements (PDS), so that the client has a good grasp of cover that is, and is not, provided. Some insurers may adapt their current practice and take direction from suggestions made by the FSC regarding standardised trauma definitions. The FSC’s suggestions include a proposed format for the text, using an explanatory heading, a brief description of cover, and specifically what is, and what is not, included.

The Code does not currently apply to superannuation trustees. However, it is intended that the second tranche of the Code will. A ‘Statement of intent’ issued by the FSC, together with a number of superannuation groups, was issued just prior to when the Code was published. It states that “super trustees and group insurers must work together to achieve the most suitable benefits for members”.

The Insurance in Superannuation Working Group (ISWG) has now been set up for this purpose, with involvement from the Australian Institute of Superannuation Trustees (AIST), the Association of Superannuation Funds of Australia (ASFA), the FSC, Industry Funds Forum (IFF) and Industry Super Australia (ISA), some life insurers and superannuation funds, and consumer advocates.

The ISWG has released its first discussion paper (Account balance erosion due to insurance premiums), for which submissions were taken up to 7 April. Over the coming months, further discussion papers will be issued for industry consultation on claims handling, improving member communication and engagement, benefit design, use of technology to enhance efficiency, and a good practice guide for trustees in relation to meeting
the obligations of the Code.

Widening APLs

This initiative has not yet progressed to a point where the industry knows what the minimum requirements will be. It will probably be set up as a membership standard by one or more industry bodies. Many licensees are already doing the background work, to determine which insurers are suitable, and can therefore be added to their approved product list (APL) when the requirements are released.

Advice businesses with single-insurer APLs will be the most affected by this change, as the minimum requirements may be very different to current arrangements.

Policy longevity strategies

The result of many of the above initiatives is that there will be renewed focus on policy retention. Therefore, we now turn our minds to what strategies can be utilised to help with the longevity of policies. We can view this from two perspectives:

1. What policy features/benefits should planners look for before commencing a policy to ensure that it can be amended as the client’s needs change; and
2. How planners can help to ensure that the policy remains affordable over time.

Below we discuss these two points in more detail for both existing and new policies.

Existing policies

Reduce excess cover
Often calculators are used when determining the needs or sum insured of a client. As calculators have certain default assumptions, where these are simply accepted and not tailored to the individual client, the result can be a recommendation that is not aligned with the client’s personal circumstances. Analysing the client’s actual needs through a conversation with the client may produce a sum insured that is lower than what is obtained through a calculator.

Reduce overlapping cover
Calculators will also often view different types of cover in isolation. However, a planner will provide a comprehensive insurance solution, where a particular policy is tailored to work in conjunction with other policies. For example, instead of covering full income within a TPD or trauma policy, it may be more pragmatic to only cover the remaining 25 per cent of income not covered in an income protection policy.

Reduce cover as needs decrease
While the sum insured for many insurance policies will be indexed to the Consumer Price Index (CPI), this may not be in line with the client’s requirements. For example, if part of the cover is to extinguish debt, it is likely that debt will reduce over time as repayments are made, rather than increase.

New policies

In addition to the above mentioned strategies, the premium structure and policy features should be considered prior to commencing a policy.

Premium structure
Once the appropriate amount of cover has been established, the planner can correlate the time period in which particular needs exist, to premium structure. This is because stepped premiums are cheaper over a short timeframe compared to level premiums.

While there may be other factors to consider such as affordability, generally short-term needs align with stepped premiums and long-term needs may call for level premiums.

For example, if cover is to remove debt, the need will often be long-term, even if the sum insured reduces upon review. Therefore, structuring a portion of this cover under a level premium structure may mean that total level premiums are less than total stepped premiums.

Policy features
Features that are critical throughout the life of the policy include generous definitions. For example, insurers, such as BT, have begun including a future advancements definition in their medical glossary, to state that if any new and comparable diagnostic methods become available, they will also be considered. Or for income protection (IP) policies, choosing either an agreed value or indemnity contract will allow flexibility with defining pre-disability income, to keep up with a client’s changing income.

IP and TPD policies with liberal total disability and total and permanent disability definitions, will remain suitable throughout the client’s lifetime.

Features that become more important as the policy continues, include the future insurability benefit, late expiry ages and continuation options.

Future insurability benefit
The future insurability benefit (FIB) allows the insured person to increase their sum insured or monthly benefit upon a trigger event occurring, without medical underwriting. Generous policies will have 10 or more trigger events for lump sum cover, which include a number of life events, plus a periodic increase every three or five years. This becomes more important for older clients, as their health may deteriorate as they age. Therefore, it is also important to note the expiry age of the benefit.

Expiry ages and continuation options
A late policy expiry age will mean that the insured person can remain covered for a longer period of time. There may also be options to continue occupation-based IP or TPD cover past the normal expiry age if the insured person is still working on a full-time basis in a specific occupation class.

Alternatively, IP cover may be extended past the normal expiry age under a general cover definition, without providing medical evidence.

Other options may include transferring to a non-super policy where the insured person is no longer eligible to contribute to super, or if they have closed an aligned platform account, all without underwriting.

All of the above options provide flexibility and choice to ensure appropriateness and longevity of cover as a client’s circumstances change.