LIF will drive consumers to poor policies

Regulations are expected to have negative outcomes for consumers if passed without being revised.

16-Mar-2016

By Sarah Kendell

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The life insurance framework (LIF) bill in its current form would drive increasing numbers of consumers toward poorly designed insurance policies sold through the direct channel as the cost of risk advice rose and large numbers of advisers exited the industry, according to the Association of Independently Owned Financial Professionals (AIOFP).

In its submission to the Senate Economics Legislation Committee’s review of the LIF laws, the AIOFP claimed the industry’s focus on commissions during the negotiation process around the bill came at the expense of examining the real issue contributing to poor insurance outcomes – that consumers were purchasing sub-standard policies through the direct channel whose terms they often failed to understand.

“The massive consumer issue is the preference for institutions to now sell policies directly to consumers via telemarketers and websites,” the submission said.

“The Financial Ombudsman Service records and market anecdotal evidence confirms the rejection rate for these policies exceeds 50 per cent.

“When this scenario is compared to the less than 4 per cent rejection rate of policies managed by independent advisers, you can see why institutions want to go directly to consumers – greater profits and no commission payments to advisers.”

The AIOFP said it supported the reduction in upfront commissions from 120 per cent, but recommended a more sustainable level of 80 per cent so independent advisers would not be put out of business, reducing consumer access to professional advice around insurance.

“The institutions are trying to do what the oil companies and large retailers have done to small business operators in the past, driving them out of the market, leaving consumers with no distribution choice, poorer service levels and ultimately higher pricing,” the association said.

Independent dealer group Lifespan, which represents 110 practices nationally, agreed with many of the AIOFP’s claims in its own submission, inferring the LIF could reduce the current rate of claims paid by insurers by 15 per cent, and add $750 million to the government’s welfare bill as a result of increasing underinsurance and lack of insurance.

The group also surveyed 277 advisers within its network and found 90 per cent believed the laws would sharply reduce consumer access to expert life insurance and assistance with claims.

Further, 71.8 per cent of respondents did not believe changes to upfront commission arrangements would address poor adviser behaviour in the industry, while 92.3 per cent believed a combination of education and disciplinary action would better address those issues.

The results also revealed the laws could discourage smaller-balance clients from seeking risk advice, with 91.4 per cent of advisers agreeing the LIF would make smaller policy placements uncommercial and potentially unaffordable for the client.

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