The Sale Of Life Insurance: The Trowbridge Report.
Legal News & Analysis – Asia Pacific - Australia – Insurance & Reinsurance
20 May, 2015
On 26 March 2015, John Trowbridge released his eagerly awaited report to provide recommendations to the life insurance industry, particularly with regard to the sale of life insurance (the "Report"). The Financial Services Council and the Association of Financial Advisers engaged Mr Trowbridge to participate in the Life Insurance Working Group to provide independent recommendations on the best way forward.
The Report states that its recommendations are intended to address the alignment of interests through the complete value chain from insurer to licensee to adviser and consumer. In particular the Report focuses on remuneration structures, which are the element of the current arrangements which give rise to the most significant misalignment between adviser's and licensee's interests and those of the client. The need to address this misalignment has been driven by recent incidents which have affected consumer trust and confidence in the life insurance industry, together with the release of ASIC’s Review of Retail Life Insurance Industry in October 2014.
The report calls for transformational change by the implementation of six policy recommendations, four implementation recommendations and a review recommendation.
- Policy Recommendation 1: The Reform Model for adviser remuneration (a system of level commissions supplemented by a capped Initial Advice Payment (capped at AUD 1,200) available at a client’s first policy inception and then no more often than once every five years) be adopted by the life insurance industry with progressive application through a transition period.
- Policy Recommendation 2: A three year transition period where the five year rule is applied on a best endeavours basis immediately and from 2016-2018 the industry operates according to the current hybrid commission arrangements with a cap on initial commissions.
- Policy Recommendation 3: That licensees be prohibited from receiving benefits from insurers that might influence recommended product choices or the advice given by the licensees’ advisers.
- Implementation Recommendation 1: ASIC to impose set of licensing conditions on life insurers to give effect to Policy Recommendations 1-3.
- Policy Recommendation 4: A requirement for every licensee to include at least half of the authorised retail life insurance providers on its Approved Product List to increase competitive access and choice. The Implementation Recommendation 2 recommends that this proposal is implemented by all individual licensees as soon as practicable and that ASIC review APL practices in order to give suitable guidance to licensees in this area.
- Policy Recommendation 5: That all licensees, in conjunction with their advisers, re-examine their culture, behaviours and practices regarding the advice process to raise consumer understanding of life insurance, ensuring informed consent from clients and reducing the advisers' administrative burden.
- Policy Recommendation 6: That a Life Insurance Code of Practice aimed at setting standards of best practice for life insurers, licensees and advisers be developed. The Implementation Recommendation 4 was that such a code be developed by the life insurance providers in a consultative process that embraces licensees, advisers and consumers.
- Implementation Recommendation 3: That a task force representing professional associations, licensees and advisers be established to explore and make recommendations to the advice sector, in conjunction with ASIC, for improving the advice process and associated documentation.
- Review Recommendation 1: That changes made in the life insurance industry as a result of the recommendations in this report be reviewed in 2020 to assess their effectiveness and, if then appropriate, to make further changes for the benefit of the industry and consumers.
The report recommends that the changes be implemented over a three year transitional period.
The recommendations, if adopted by the industry, represent a good opportunity for the reform requirements called for by the Australian Government, regulators and consumers to be addressed without the industry being subjected to significant further regulatory changes.
Further, the changes to remuneration structures recommended by the Report, while significant, actually retain the ability to pay some up front and ongoing level commissions, a position which does not now exist for other financial products following the introduction of FOFA. In other words, these proposals would be in our view less disruptive to the sales of life insurance than would be the case if the industry was required to ban upfront commissions entirely. Industry commentators have already stated publicly that the recommendations of the Report are supported by the major life insurers in Australia.
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