Open Letter to Australian Politicians, to facilitate the discussion of opposing views on Life Insurance Commissions

Cards on the table, I disagree with the mainstream political and regulatory view, that fee for service, with no commission or brokerage (FFS/NCB) is a viable future operating model for the life insurance industry; and the purpose of this letter is to open up the discussion of opposing views in relation to this topic, and hopefully put it to bed for good, so we can all move forward with a solution that works.

Let me start by acknowledging that some Australian's do receive poor financial advice, but AFCA has recently revealed, that less than 2% of complaints received by them, relate to financial advisers/planners, and only 10% of the 2% of complaints make it to decision - so it's safe to assume that less than 0.2% of complaints relate to financial advisers/planners and the other 1.8% of complaints that didn't make it to decision were resolved amicably, fairly and respectfully. If we dig further into how few of the 0.2% of complaints relate to life insurance advice, we've got to seriously start questioning, why all the wasted time, money and bandwidth on over regulating and suffocating the Australian life insurance advice sector, which performs very well on a global stage.

It is also important to note that the very small number of Australian’s who receive poor financial advice, have access to world class dispute resolution and remediation.

Comparing the life insurance advice sector, with the sheer number of Australian’s who are physically and financially hurt by the aged care, medical, legal and other key sectors each year, leads me to ask - Is the red tape and over regulation in life insurance advice justified? and should the government and regulators be focusing elsewhere?

Don’t get me started on our country’s gambling addiction, which according to the Australian Gaming Council, generated 24,890,000,000 in revenue from Australian’s gambling loses in 2017-18 (which is roughly 40% more than the total premium receipts of the life insurance industry). Where’s the army of legal professionals, consultants and regulators standing up for the greater good here, as some of society's most vulnerable lose $25 billion per year? This point is an important one for me to make, because I have seen too many families suffer significant financial loss and even lose loved ones because of gambling, yet I haven’t seen one person or family suffer when they receive a cheque (EFT these days) that saves them from financial ruin after a loved one passes away or can no longer work. If we look at the countries gambling losses in contrast to the cost of life insurance, the amount people lose on gambling each year, would go a long way to buying their family life and disability insurance cover that helps protect millions of dollars of their future income right through to age 65 or 70, pay down their debts and cover living and education expenses for their kids, cover the costs of replacing a key person in a business, pay for out of pocket medical expenses and overseas treatments they may require, cover their spouses lost income whilst recovering, top up their supers etc, of which most of the premium would be tax deductible and also save the public purse tens of billions of dollars each year, because the majority of life insurance premiums collected are recirculated through the economy via claims payments and tax revenues; yet politicians and regulators still think we don’t provide value for money?

It is safe to say, advisers have had a gut full of being a political football and having our life insurance industry being portrayed as an unjust tax on society, when the reality is, based on the latest 2019 claims figures released by the FSC, we do an awesome job at providing $12,000,000,000+ worth of claims payments to over 100,000 families and businesses each year, with the remaining premiums that aren’t paid out in claims, all going towards jobs, small business, community initiatives, health initiatives, charity, paying income taxes, stamp duties and keeping the vital life risk pool healthy.

Prior to government and regulator tinkering, life insurers were profitable, premiums were lower for consumers, quality of benefits were better, sustainability was in check and advisers could afford to help any Australian put in place top quality cover regardless of the clients income. Post implementation of regulations such as LIF, PYS, PMIF, the industry has been on a slippery slope where new policy numbers are dropping, cancellations are at record levels, consumers are paying much higher premiums, insurers are losing money, the quality of benefits are being watered down by APRA to the detriment of policyholders, insurers are questioning their support of the Australian market and the life risk pool is sick and on the verge of collapse.

Like any industry, there is always room for improvement. The banks are all basically out of providing financial advice now and we need to stop making the provision of life insurance advice an inefficient living hell for the remaining advisers who as a whole, do the right thing. Government and regulators, please stop driving up cost and complexity for consumers by suffocating advice businesses, and please let us get on with rebuilding, innovating and improving how we service Australian's into the future.

It’s important to note, that it is likely we have now reached a point, where there are more legal professionals and compliance consultants riding the circa $800 per hour adviser persecution gravy train, than there are actual financial advisers providing advice and helping consumers. Again we’ve had a gut full of being bled dry by people, who in their professional capacity, should know better and should have understood by now, that what they are doing to advisers and their small businesses is totally and utterly wrong, and is also having a catastrophic impact on the end consumer and the industry that serves them. Maybe there will be a day of reckoning, where the gravy trainers will be held personally accountable for their conduct and made to face the music for their actions?

It boggles minds that regulators are now hiring consultants to work out why the cost of advice and life insurance premiums are soaring for consumers, and why the industry is on the verge of collapse. Regulators, come and talk to advisers and their clients, bring no agenda’s, just listen and observe, and I can almost guarantee that the answers will be obvious and will save you from needing to waste millions of dollars on consultants who have never provided advice or walked in the shoes of an average Australian.

Life insurance can be hard to understand, so let me try and liken it to a system everyone understands – Life insurance is like the income tax system, it’s the pool of many all putting in a %, for the greater good of their communities and for those less fortunate, we hate paying tax, but ultimately our taxes make Australia the great place it is to call home e.g. financial prosperity for families and businesses, security, charity, education, health care, culture and inclusion, consumer confidence and purpose, economic growth etc.

If politicians and regulators are convinced a FFS/NCB is the ideal model and it will not kill off what’s left of a valuable advised life insurance sector, before implementing the model for life insurance advice, I propose we try to apply this same ideal FFS/NCB model to the tax system, where employers don’t withhold PAYG from wages and tax payers only pay for the value they feel they receive from government services.

Looking at it simplistically, most tax payers would likely form a view as per the dot points below, and the whole Australian economic pool would collapse:

• Didn’t get sick this year, not paying my Medicare.
• Didn’t get broken into or invaded in the last 12 months, not paying for law enforcement or defence either.
• Didn't need welfare this year, not paying that bill.
• Didn’t drive on that road this year, not paying for that too.

In other words, it would be a disaster and result in only the top 5-10% of people being able to afford essential government services when they need them and it would throw the economy and country into chaos and turmoil; which is exactly what’s happening in the life insurance industry, where only higher income earners can afford to access the advice and cover they need and as a result, the entire life risk pool is collapsing on everyone.

One last question, are we being na?ve of the bigger picture, and maybe it’s as simple as government and regulators only wanting Australian’s dealing directly with insurers, without the help of intermediaries like advisers? But history constantly shows us that this direct to consumer model will never work as the primary method of life insurance distribution, because the little guy (consumer) very rarely trusts the big guy (insurer), and without the adviser/intermediary advocating for the little guy and building a foundation of trust, the little guy will never truly understand the need/value and never want to purchase/keep the valuable and essential life insurance policy the big guy offers. This paragraph is not a dig at the life insurers (Australian life insurers for the most part are world class), the big guy/little guy dynamic is just human nature and the way the world works, especially when death or disability won't happen to me, right?

There is a reason why a report published by NMG Consulting earlier this year, identifies roughly 70% of new business and 40% of the existing in-force market was looked after through the advised retail channel in 2019, this is because advisers do a bloody good job for their clients and deliver immense value for the commission/brokerage they receive, hence the low, almost non-existent complaints in the life insurance advice sector. Commission/brokerage is 100% in the best interests of the end policy holder, because all insurers pay the same, and in addition to the top line benefits that I’ll mention in the next paragraph, commission/brokerage enables advisers to find and recommend the best possible deal for their clients and keeps the insurers as competitive and as honest as possible, just like it enables mortgage brokers to do the same for their lending clients.

Without commissions/brokerage, the big guy/little guy issue is compounded by the 90-95% of consumers not being able to afford and/or not willing to pay advice fees on top of their premiums, to cover the cost of their adviser providing advice and support services under a FFS/NCB model. It is a fact, commission/brokerage ensures consumers have access to quality life insurance and advice that is affordable. Commission/brokerage also simplifies and de-risks the transaction for the consumer too, because the life insurance adviser is incentivised to do the right thing and does not get paid if they do a bad job, if the consumer cannot get cover they are not out of pocket, the consumer can review their cover in line with their changing needs anytime without the worry of incurring advice fees, and at claim time, the consumer can focus on recovery without being charged exorbitant fees, because their adviser does all of the paperwork and manages the insurer without having to charge a fee. These top line benefits are just a few of the many that advised life insurance consumers enjoy when they fund their insurance advice needs using commission/brokerage.

And let’s face it, if a policy holder no longer see’s value in their policy or no longer requires their cover, they can simply stop paying it and that is that; the life insurers will even give them a 2 month free grace period, in case they change their mind and decide they don’t want to cancel or would like to continue with a lower level of cover. The advised retail life insurance market in Australia is built on a consumer first foundation and is designed to protect the consumer, it keeps the consumer in control with guaranteed renewability and delivers maximum value to the consumer when compared to other distribution methods such as direct to consumer distribution. The retail advised market is able to function this way, because of the great work advisers do advocating for their clients every step of the way and working tirelessly to simplify the whole process, which can be quite complex to someone who doesn't work in the industry everyday. Advisers don’t work for insurers, we work for our clients, and without our clients, we no longer have a purpose or a job for that matter.

For the record, I'm ok with having a fee for service, no commission/brokerage model as a choice for consumers to compare and select from, but it should not replace consumers having the choice to use life insurance commissions/brokerage as a viable/affordable method of funding their life insurance advice, policy implementation, reviews, administration/alterations and most importantly, claims services.

There are approx. 3,000 advisers providing consistent levels of life insurance advice, the millions of Australian consumers who need advice deserve better access than this, we need 30,000 life insurance advisers to really start making inroads on the underinsurance crisis this country is facing, and yes, I’m not exaggerating, it is a crisis!

I’m happy to run anyone through the value of life insurance advice, and the physical and financial experience of a consumer who chooses to transact their insurance through an adviser using commissions/brokerage, versus the physical and financial experience of a consumer who chooses either FFS/NCB with an adviser, or wants to deal direct or decides to rely on any automatic cover in their super. I’m also happy to share my vision of how the life insurance industry needs to evolve and move forward as a valuable and efficient essential service, for all Australian’s.

Let’s open up the discussion, unite and rebuild together, not continue to smash and destroy. All stakeholders within industry and government, need to focus on simplification, sustainability and providing value to new and existing policy holders, delivered through efficient and cost effective advice and distribution channels.

I’ll finish with this statement – The top end of the life insurance and advice sector has proven over the last 5 years, that they are not able to work with government and regulators to find a viable solution to the crisis we are in the middle of, and as a result, our industry has been a ship without a rudder; which is why the solution must come from the bottom up, with advisers and their clients at the heart of the rebuilding process. The bottom up approach will work, because small business and consumers don’t get paid to play politics and create complexity, their survival relies on keeping it simple, getting the job done and moving forward for the benefit of their families, businesses and communities.

Kind regards,

Brett Wright (specialist life insurance adviser and technology creator in my 30's, with 35 years to run in the industry, focused on the best interests of Australian's and the future viability of the life insurance sector that serves them).