Report REP 413 Review of retail life insurance advice

REPORT 413

Review of retail life insurance

advice

October 2014

About this report

This report presents the findings of ASIC’s research into, and surveillance of,

personal advice given to consumers about life insurance.

The purpose of the project was to understand the advice consumers are

currently receiving about life insurance and to identify opportunities to

promote advice that is in the best interests of consumers.

REPORT 413: Review of retail life insurance advice

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About ASIC regulatory documents

In administering legislation ASIC issues the following types of regulatory

documents.

Consultation papers: seek feedback from stakeholders on matters ASIC

is considering, such as proposed relief or proposed regulatory guidance.

Regulatory guides: give guidance to regulated entities by:

 explaining when and how ASIC will exercise specific powers under

legislation (primarily the Corporations Act)

 explaining how ASIC interprets the law

 describing the principles underlying ASIC’s approach

 giving practical guidance (e.g. describing the steps of a process such

as applying for a licence or giving practical examples of how

regulated entities may decide to meet their obligations).

Information sheets: provide concise guidance on a specific process or

compliance issue or an overview of detailed guidance.

Reports: describe ASIC compliance or relief activity or the results of a

research project.

Disclaimer

This report does not constitute legal advice. We encourage you to seek your

own professional advice to find out how the Corporations Act and other

applicable laws apply to you, as it is your responsibility to determine your

obligations.

Examples in this report are purely for illustration; they are not exhaustive and

are not intended to impose or imply particular rules or requirements.

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Contents

Executive summary ....................................................................................... 4

A Background ............................................................................................ 9

Purpose of our project ............................................................................. 9

The life insurance industry in Australia .................................................... 9

The regulatory framework ......................................................................11

B Project scope and methodology ........................................................14

Phase 1: Understanding the industry ....................................................14

Phase 2: Assessing the quality of advice ..............................................15

C Our findings on the industry ..............................................................18

Number and types of policies ................................................................18

Assumptions made about the duration of policies .................................22

Distribution models and costs ................................................................23

Remuneration arrangements .................................................................24

Relationship between product design and lapse rates ..........................28

D Our findings on the quality of advice ................................................40

Overview of our findings ........................................................................40

Factors that affect the quality of advice .................................................41

Warning signs of poor advice ................................................................62

The challenge for insurers and advisers ................................................64

Appendix: Life insurance advice checklist ...............................................68

Key terms .....................................................................................................72

Related information .....................................................................................76

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Executive summary

1 ASIC has a focus on life insurance advice because it is of critical importance

to the long-term financial wellbeing of Australian consumers. Life insurance

is a key product through which consumers manage risk for themselves and

their families.

2 Quality financial advice helps consumers identify their life insurance needs

and find appropriate and affordable products that meet those needs.

3 This report reviews the advice consumers receive about life insurance. It builds

on other work we have done focusing on the quality of retirement advice and

advice about self-managed superannuation funds (SMSFs).

4 Consumers purchase life insurance in one of three ways:

(a) through an advice provider (adviser);

(b) directly from an insurer; or

the fund.

5 This report focuses on the first distribution channel only—that is, distribution

through personal advice. It presents the findings of our research into, and

surveillance of, advice about life insurance.

Our purpose in this project was to

better understand:

(a) how life insurance is sold by advisers;

(b) how advisers are remunerated for that advice;

(d) the quality of the life insurance advice consumers receive.

6 Conducted between September 2013 and July 2014, our research project

involved two phases:

(a) industry roundtables and a survey of 12 insurers that manufacture and

distribute life insurance products under personal advice models

(phase 1); and

(b) a targeted surveillance of advisers who give personal advice to

consumers on life insurance products, which involved a review of

202 advice files (phase 2)—our surveillance targeted advisers who sell

a large amount of life insurance products.

See Report 279 Shadow shopping study of retirement advice (REP 279) and Report 337 SMSFs: Improving the quality of

advice given to investors (REP 337).

An advice provider is a person to whom the obligations in Div 2 of Pt 7.7A of the Corporations Act 2001 (Corporations

Act) apply when providing personal advice to a retail client. This is generally the individual who provides the personal

advice. For ease of reference, we refer to advice providers as advisers in this report.

In this report, ‘life insurance’ means ‘retail life insurance’: see paragraph 37 for how we define ‘life insurance’ in this

report.

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7 This work builds on action we have taken to remove poor Australian

financial services (AFS) licensees and advisers from the industry where we

have found problems with life insurance advice. In these cases, we found

evidence of poor life insurance advice that resulted in considerable detriment

to consumers, including:

(a) evidence that advisers failed to adequately consider their clients’

personal circumstance and needs, leading to situations where consumers

received inferior policy terms, paid more for cover, had health issues

excluded and, in some cases, had claims denied where they previously

had cover; and

(b) evidence of unnecessary or excessive switching of clients between

policies to maximise commission income, with a failure to consider or

recommend insurance that reasonably correlated to clients’ personal

circumstances or objectives.

What we found

Industry trends

8 The most common policy type across the industry is a stepped premium

policy. The premium on a stepped premium policy increases or ‘steps up’

each year according to risk factors such as the client’s age.

9 In phase 1, we found that life insurance policies are lapsing at high rates. For

example, for stepped premium policies, we found that, in 2013, policy lapses

doubled from approximately 7% in the first year to 14% in the second year.

After the initial spike, lapse rates remain high (above 14%) for the next three

years before tapering.

10 The drivers behind these high lapse rates include:

(a) product innovation by insurers, such as changing actuarial assumptions

at underwriting or the redesign of key policy features such as definitions

and exclusions, which leads to the repricing of policies;

(b) age-based premium increases affecting affordability; and

business to increase commission income.

11 We also found a correlation between high lapse rates and upfront

commission models.

For example, see Media Release (13-019MR) ASIC cancels licences of national financial planning business and ASIC

advisory (12-60AD) ASIC accepts permanent undertaking from Adelaide adviser.

A policy lapse is when a policy ceases due to non-payment or cancellation by the client. We exclude claims and a policy

ceasing due to the insured person reaching a certain age (e.g. age 65) from our definition of a policy lapse. See

paragraphs 110–111 for our definition of a policy lapse.

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Advice quality

12 We reviewed 202 advice files as part of phase 2. Files were selected for

review from AFS licensees who were active in giving life insurance advice:

see Section B for the methodology employed for this surveillance.

13 Our sample included advice given before and after the mandatory

commencement date for the Future of Financial Advice (FOFA) reforms on

1 July 2013.

14 We rated the advice by reference to the conduct obligations in the

Corporations Act 2001 (Corporations Act) (see Table 1) that were in force at

the time the advice was given. These conduct obligations apply to personal

advice and include the obligation to give appropriate advice, to act in the

best interests of the client and to give priority to the interests of the client in

the event of a conflict of interest. If the advice complied with the law, we

rated the advice ‘a pass’. If the advice failed to meet the relevant legal

standard, we rated the advice ‘a fail’.

15 We also commissioned an independent advice review where an external

consultant reviewed a sample of files for quality checking and to ensure our

ratings were sound and consistent: see Section B for further detail on this

methodology.

16 We found that 63% of consumers received advice that met the standard for

compliance with the law, while 37% of consumers received advice that

failed to meet the relevant legal standard that applied when the advice was

given.

17 We found the quality of advice varied among the advice we rated as

compliant. We found advice that clearly met the needs of the client through

to files that were barely compliant with the legal threshold. We give some

examples of this advice in this report.

18 We have found significant room for improvement among the advice we

reviewed and we will be actively working with the advice industry to lift the

standard of life insurance advice.

19 Of the advice that we rated a fail, we found serious failings with respect to

compliance with the law.

20 We also found that the way an adviser was paid (e.g. under an upfront

commission model compared to a hybrid, level or no commission model)

Corporations Amendment (Future of Financial Advice) Act 2012 and Corporations Amendment (Further Future of

Financial Advice Measures) Act 2012.

For example, s945A of the Corporations Act for pre-FOFA advice, or the requirements under s961B, 961G, 961H and 961J

for post-FOFA advice, in addition to the switching requirements under s947D.

REPORT 413: Review of retail life insurance advice

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had a statistically significant bearing on the likelihood of their client

receiving advice that did not comply with the law: see Figure 18.

21 Of the 202 files in our sample, we found that where the adviser was paid

under an upfront commission model, the pass rate was 55% with a 45% fail

rate. Where the adviser was paid under another commission structure, the

pass rate was 93% with a 7% fail rate: see Figure 18.

22 Our findings in this review indicate that the impact of adviser conflicts of

interest on the quality of life insurance advice is an industry-wide problem.

Addressing this problem will require an industry-wide response.

23 This is because an individual insurer may change its remuneration

arrangements to mitigate the effect of conflicts of interest among advisers

selling their policies, but is likely to lose business to competitors. This is

commonly referred to as the ‘first mover’ problem where the first mover is

disadvantaged relative to their industry peers who pick up the business lost

by the ‘first mover’.

24 The appendix to this report includes a checklist for advisers, AFS licensees,

compliance consultants and insurers about relevant factors to consider in

giving or assessing personal advice about life insurance. The checklist

covers existing obligations as well as further considerations for giving best

practice advice.

Recommendations

25 We recommend that insurers:

(a) address misaligned incentives in their distribution channels;

(b) address lapse rates on an industry-wide and insurer-by-insurer basis

(e.g. by considering measures to encourage product retention); and

good-quality outcomes for consumers and better manage the conflicts of

interest within those arrangements.

26 We recommend that AFS licensees:

(a) ensure that remuneration structures support good-quality advice that

prioritises the needs of the client ;

(b) review their business models to provide incentives for strategic life

insurance advice;

Note: Strategic life insurance advice includes advice on the type, level, structure and

affordability of life insurance cover based on the client’s cash flow position and which

prioritises the client’s insurance needs. Strategic advice can be stand alone or, where

appropriate, provide the framework for product advice.

(c)

review the training and competency of advisers giving life insurance

advice; and

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(d) increase their monitoring and supervision of advisers with a view to

building ‘warning signs’ into file reviews and create incentives to

reward quality, compliant advice.

27 Professional associations and training providers may wish to adopt the

checklist in the appendix to this report when reviewing their adviser training

and continuing professional development programs for their members.

Our further work

28 Where the advice failed to comply with the law, we will consider

enforcement action or other appropriate regulatory action with respect to the

individual adviser or, depending on the conduct, the AFS licensee.

29 We will engage with AFS licensees, advisers and their professional

associations about the issues they need to consider in giving compliant life

insurance advice. The life insurance advice checklist in the appendix will

form the basis for that engagement to lift the standard of life insurance

advice.

30 We will update our consumer information to provide better guidance for

consumers about their life insurance needs and important things to consider

when seeking life insurance advice.

31 We hope that the findings in this report will contribute to a more informed

discussion about the need for and access to appropriate life insurance

products and personal advice that is in the long-term interests of Australian

consumers.

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A Background

Key points

The purpose of our project was to understand the life insurance advice

consumers are currently receiving and to identify opportunities to promote

advice that is in their best interests.

This section provides some context and background to our project,

including an overview of:

• the life insurance industry in Australia; and

• the regulatory framework, including the FOFA reforms, which

commenced on a mandatory basis on 1 July 2013 and introduced new

conduct obligations for advisers who give personal advice about life

insurance.

Purpose of our project

32 Poor life insurance advice and sales practices have been an issue in ASIC

investigations and surveillances over many years.

33 The Parliamentary Joint Committee on Corporations and Financial Services

(PJC), in its inquiry into the Corporations Amendment (Future of Financial

Advice) Bill 2011 and Corporations Amendment (Further Future of

Financial Advice Measures) Bill 2011 (PJC Inquiry), made specific

recommendations about the need to monitor the quality of advice about the

sale of risk insurance.

34 The purpose of our project was to understand the life insurance advice

consumers are currently receiving and to identify opportunities to promote

advice that is in their best interests.

The life insurance industry in Australia

35 There has been media and industry commentary about the sustainability of the

life insurance industry in Australia over the past year or more, a debate

generated by some key structural challenges facing the industry, including:

(a) increasing claims arising from deteriorating economic conditions;

(b) profit write-downs by major insurance companies;

increasing lapse rates; and

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(d) changing cost structures and risks, with changes to the distribution of life

insurance products in Australia as many insurers move to a direct

distribution model.

36 As at 30 June 2013, there were 28 life insurance companies in Australia.

Figure 1 represents an aggregate overview of the life insurance industry in

Australia and the different business lines and product categories of

Australian insurers.

Figure 1: The life insurance industry in Australia

Source: Plan for Life, Group Total Inflows, Life insurance statistics, March 2014.

APRA, Insight, Issue 3, December 2013, p. 23.

APRA, Insight, Issue 3, December 2013. This figure remains current at the date of publication.

All values are total inflows of new and in force premiums as at March 2014. Values may not add up because of rounding.

Life insurance industry

($44.2b)

Group

($16.1b)

Individual

($19.8b)

Annuities

($8.2b)

Superannuation

($13.1b)

Ordinary

($6.8b)

Conventional /

investment linked

($11.1b)

Conventional /

investment linked

($0.4b)

Life risk income

protection ($0.3b)

Life risk lump sum

($1.7b)

Life risk lump sum

($4.4b)

Life risk income

protection ($2.0b)

When these policies are

sold under personal advice,

they are ‘life insurance

products’ for the purposes of

this report

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37 For the purposes of this report, we define ‘life insurance’ as those lump sum

and income stream products, such as life and total and permanent disability

(TPD) insurance policies and trauma and income protection policies, sold to

retail clients under personal advice. These policies may be held or purchased

inside or outside the superannuation environment (excluding group life

policies). These policies are represented in the light grey boxes in Figure 1.

38 The total premium value of individual life risk policies without an

investment component is $8.4 billion. This figure includes both policies sold

under personal advice models, and policies sold directly or under general

advice or no advice models. As at March 2014, the individual life risk

policies sold under the combined models (personal, general, no advice)

represented about 19% of the life risk insurance sector. While there is no

comprehensive breakdown of the value of policies under advised sales

channels compared to the other channels, for historical reasons advised

channels remain dominant, although direct and online sales have seen

significant growth over recent years.

Note: In Plan for Life’s data, the category of ‘ordinary’ life insurance includes life

insurance purchased through an adviser and life insurance purchased through a direct

channel under a general or no advice model. The data does not distinguish the value of

those policies that relate to policies distributed through personal advice from those sold

under a direct distribution model.

The regulatory framework

39 As set out in Table 1, life insurers and advisers are subject to the statutory

standards and requirements of:

(a) the Corporations Act;

(b) the Australian Securities and Investments Commission Act 2001 (ASIC Act);

(d) the Life Insurance Act 1995 and the Life Insurance Regulations 1995.

Life insurers are also regulated by the Australian Prudential Regulation

Authority (APRA).

Table 1: Regulatory framework for life insurers and advisers

Legislation/regulation

Overview of requirements

Corporations Act:

s763A, 766A, 912A,

Pts 7.7, 7.7A and 7.9

A retail life insurance product is a financial product. Insurers and advisers must hold

an AFS licence, or be the representative of an AFS licensee, as they deal in a

financial product (insurers) and provide financial product advice (advisers).

AFS licensees must comply with various obligations under the Corporations Act and

other financial services laws, including (but not limited to):

 the general obligations in s912A to:

− provide financial services efficiently, honestly and fairly;

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Legislation/regulation

Overview of requirements

− manage conflicts of interest;

− ensure representatives provide services competently; and

 the financial services disclosure obligations in Pt 7.7 if the licensee is the

providing entity.

Part 7.7A introduced new conduct obligations for the provision of personal financial

product advice to retail clients, such as the best interests duty and related

obligations.

Part 7.9 includes the product disclosure obligations.

ASIC Act: s12CA,

12CB, 12DA and 12DB

The consumer protection provisions in the ASIC Act operate to protect consumers

from misleading and deceptive conduct or unconscionable conduct by AFS

licensees and representatives in the provision of financial services.

Insurance Contracts

Act: s13 and 29

The Insurance Contracts Act regulates the content and operation of insurance

contracts. It requires both the insurer and the insured to act towards the other, in

respect of any matter arising under or in relation to the contract, with the utmost

good faith.

The Insurance Contracts Act also sets out what consumers must do when applying

for an insurance policy, including their duty to disclose to the insurer all relevant

information about the risks the insurer is accepting. Section 29(3) allows an insurer

to avoid a policy within the first three years where the insured fails to comply with

their duty of disclosure.

The Insurance Contracts Amendment Act 2013 amends the remedies available for

insurers in cases of non-fraudulent non-disclosure under s29, so the insurer can

alter the sum insured (s29(4) and (10)) or retrospectively vary the contract in such a

way as to place the insurer in the position it would have been in if the non-disclosure

or misrepresentation had not occurred (s29(6), (7), (8) and (9)).

APRA Life insurers are also regulated by APRA, which supervises life insurers under the

Life Insurance Act 1995 and the Life Insurance Regulations 1995.

The FOFA reforms

40 The FOFA reforms introduced a suite of changes to the regulation of

personal financial advice for consumers. These changes included:

(a) a ban on conflicted remuneration (Divs 4 and 5 of Pt7.7A);

(b) new personal advice obligations, including:

(i) to act in the best interests of the client in relation to the advice

(s961B);

(ii) to ensure that the advice provided is appropriate to the client (s961G);

(iii) to warn the client if the advice is based on incomplete or inaccurate

information (s961H); and

(iv) to give priority to the interests of the client in the event of a

conflict of interest (s961J);

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(s962H); and

(d) an extension of ASIC’s licensing and banning powers (s913B, 915C

and 920A).

Life insurance: Exemption from the ban on conflicted remuneration

41 The FOFA reforms did not extend the ban on conflicted remuneration to

individual life insurance sales under personal advice. That is, commission

payments for life risk insurance products (with the exceptions in

paragraphs 42(a)–42(b)) are exempted from the ban on conflicted

remuneration. Commission payments are the predominant remuneration

structure in the industry (see paragraph 89 for a description of the different

commission structures typically used in the life insurance sector). The

Corporations Amendment (Streamlining Future of Financial Advice)

Regulation 2014 does not impact on this exemption.

42 The exemption for life risk insurance is set out in s963B(1)(b) and

reg 7.7A.12A of the Corporations Regulations 2001 (Corporations

Regulations), which exclude monetary benefits given in relation to life risk

insurance products, as defined by s764A(1)(e), unless they are given in

relation to:

(a) a group life risk policy inside superannuation (regardless of whether it

is for a default or another type of superannuation fund); and

(b) an individual life insurance policy for the benefit of a member of a

default fund.

Sections 29SAC(1)(a)(i) and 29SAC(1)(a)(ii) of the Superannuation Industry (Supervision) Act 1993 (SIS Act) ban

commission payments on MySuper products.

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B Project scope and methodology

Key points

Conducted between September 2013 and July 2014, our research project

involved two phases:

• industry roundtables and a survey of 12 insurers that manufacture and

distribute life insurance products under personal advice models

(phase 1); and

• a targeted surveillance of advisers who give personal advice to

consumers on life insurance products (phase 2).

Phase 1: Understanding the industry

43 Phase 1 of our project began with two industry roundtables with 12 life

insurers (the insurers) to explain the scope of the project and to ensure that

our questions were appropriately targeted so as to gather the essential

information, while minimising the compliance burden on responding

insurers. We wish to thank the insurers for their cooperation and assistance.

44 We then used our compulsory notice powers to gather information from

the insurers currently writing life insurance policies under personal advice

models. We excluded insurers in run-off arrangements and we also excluded

life insurance sold directly to consumers under general or no advice models.

45 We asked the insurers questions about their current product book with a

focus on a specific list of retail policy types. Our objective was to better

understand at an aggregate industry level and at the individual insurer level:

(a) the policies and policy combinations issued to clients under personal

advice models;

(b) the policies currently in force for each policy type and how market

share was changing over time;

(d) distribution arrangements and remuneration models;

(e) information about lapse rates for each policy type, premium type,

distribution channel and remuneration model; and

(f) information about commission types and ‘clawback’ arrangements.

Note: A commission or benefit that is paid to an adviser is recovered, or ‘clawed back’,

by the insurer if the policy lapses within a certain period, usually within the first

12 months the policy is on foot.

Section C sets out our analysis of the data gathered.

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Phase 2: Assessing the quality of advice

47 Phase 2 involved a major surveillance of personal advice given to consumers

about life insurance.

48 This was a targeted surveillance in so far as the sample of files selected for

review was not a random sample of advice from randomly selected AFS

licensees or authorised representatives. Rather, our objective was to identify

the licensees and authorised representatives who were active in giving life

insurance advice so as to test the quality of advice these licensees were

giving.

49 To identify AFS licensees to include in our surveillance, we asked the

insurers identified in phase 1 to tell us the three licensees or authorised

representatives who had:

(a) the highest number of new ‘in force’ policies written in the relevant

period (2012 and 2013 financial years); and

(b) the highest number of policy lapses in the relevant period.

50 We asked for this information to identify AFS licensees who had recently

given new and replacement product advice. The responses to the question in

paragraph 49(b) were inconsistent due to differences in interpretation among

the participating insurers; we did not select any licensee on the basis of the

insurers’ response to this question. Nevertheless, our final sample included

both advice to new clients and replacement product advice.

51 Of the pool of AFS licensees identified in the high selling category by

insurers, we excluded licensees that had been the subject of recent regulatory

action by ASIC. We then chose two large licensees and three medium

licensees from the remaining pool. We added two small licensees to the

sample so that our final sample included advice from a broad mix of

licensees.

Note: The small licensees we selected were not chosen on the basis of known risk

factors. To maximise efficiency, we used seven files that ASIC had previously obtained

for different projects (in which the focus was not life insurance advice). The results

from these licensees had a negligible impact on the overall results of this report.

Conducting the file reviews

52 After we had identified the AFS licensees and authorised representatives

who would be included in the sample, we used our compulsory notice

powers to gather the following information:

(a) the name of the authorised representative who provided the advice on

the insurance and/or risk product;

(b) the client name;

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(d) the name of the insurer who paid the commission to the licensee;

(e) the date the commission was received by the licensee;

(f) the amount of upfront commission received; and

(g) the amount of ongoing commission received.

53 From this information, we requested client files for review based on:

(a) the date the commission was paid (to identify pre-FOFA and post-

FOFA advice);

(b) the amount of commission paid (to identify new advice that involved

the giving of a Statement of Advice (SOA) because this was an advice

review); and

ensure that our policy sample was reasonably diverse, covering a suite

of policy types (e.g. life, TPD, trauma and income protection

insurance).

54 We looked at 243 files in total. Our reviews were the subject of two quality

checks:

(a) 101 files were reviewed a second time by analysts who were former

financial planners with current Certified Financial Planner

qualifications; and

(b) 20 files (five pre-FOFA and 15 post-FOFA files) were reviewed by an

independent external consultant to ensure our ratings were sound and

consistent.

55 To maintain the integrity of our sample and analysis, we excluded from our

statistical analysis:

(a) files from two advisers where we had specific intelligence that they

were giving poor life insurance advice; and

(b) files that were inadequate or otherwise incomplete and this made it

impossible to rate the advice for the purpose of this review without

serving additional notices. We will be raising this issue individually

with the relevant AFS licensees.

56 Our final sample of advice included 202 advice files from seven AFS

licensees. It involved a random selection of advice from those licensees from

79 individual advisers and included a spread of pre-FOFA and post-FOFA

advice: see Table 2.

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Table 2: Review of advice files—Pre-FOFA and post-FOFA

Advice type

Number of files

Percentage of files

Pre-FOFA advice

47%

Post-FOFA advice

108

53%

Total

202

100%

57 The 202 files we reviewed included a broad range of advice types, including:

(a) advice to new clients;

(b) product replacement advice to new or existing clients; and

58 ASIC analysts used an advice review template to standardise the assessment

of the files. Most of the analysts were former financial planners with years of

practical experience.

59 We rated the advice against the relevant legal obligations in force at the time

the advice was given. If the advice complied with the law, we rated the

advice ‘a pass’. If the advice failed to meet the relevant legal standard, we

rated the advice ‘a fail’. As will be seen in our discussion of the case studies

and in our life insurance advice checklist (see the appendix), we identified

key areas for improvement to lift the quality of life insurance advice

consumers receive.

60 We rated the pre-FOFA advice a pass if the advice was appropriate (i.e. it

met the then test in s945A of the Corporations Act).

61 In rating the post-FOFA advice, we applied the new best interests duty

(s961B), the appropriate advice test (s961G) and the client priority rules

(s961J), and rated the advice a pass or a fail. Where there was some doubt as

to the final rating, we gave advisers the benefit of the doubt given the law

was new.

62 Section D sets out our detailed findings from phase 2.

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C Our findings on the industry

Key points

This section sets out our findings from phase 1 in which we sought to better

understand the life insurance policies sold under personal advice models.

For the 12 participating insurers in the survey, we found that:

• there were 2.6 million policies in force at 30 June 2013, representing a

5.8% increase over the previous year;

• life only and income protection policies are the most common policies;

• for the purposes of product design and pricing, insurers assume that

policies written will remain in force for an average duration of 86 months

(7.2 years);

• 58% of insurers distribute their policies through AFS licensees operating

personal advice models;

• upfront commission arrangements are the dominant remuneration

arrangement for advisers by a significant margin; and

• life insurance policies are lapsing at very high rates.

Number and types of policies

63 We asked insurers what policy types and/or combinations they issued under

personal advice models. Insurers sold:

(a) life cover only;

(b) life and TPD cover only;

(d) life, TPD and trauma cover;

(e) TPD cover only;

(f) TPD and trauma cover;

(g) trauma cover only;

(h) income protection cover; and

(i) income protection cover combinations.

64 At 30 June 2013, the insurers had 2.6 million policies in force. This

represents the total number of policies in force, not the lives insured, as

many consumers will hold more than one policy type.

Trauma insurance includes coverage for critical illness.

A minority of insurers sold policies in other combinations (e.g. income protection and trauma; income protection and TPD;

income protection, trauma and TPD). For consistency, we have grouped these policy combinations under the banner of

income protection combinations.

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65 The life insurance policies in force that were the subject of our survey grew

at a rate of 4.5% in 2011–12 and 5.8% in 2012–13: see Table 3.

Table 3: Life insurance policies in force (2011–13)

Year

Policies in force

Percentage growth

2010–11

2,357,047

N/A

2011–12

2,462,362

4.5%

2012–13

2,605,395

5.8%

66 Life only and income protection policies are the most common policies in

force, comprising 32% and 21% respectively of the overall policies in force

at 30 June 2013. Figure 2 shows the market share for each policy type as a

proportion of the total number of policies in force.

Figure 2: Market share of policy types (2011–13)

0% 5% 10% 15% 20% 25% 30% 35% 40%

Life only

Life and TPD

Life and trauma

Life, TPD and trauma

TPD only

TPD and trauma

Trauma

Income protection

Income protection combinations

Market share

Policy type

2011

2012

2013

REPORT 413: Review of retail life insurance advice

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67 While still dominant, the market share of stand-alone life policies declined

across the survey period. Stand-alone trauma policies are increasing in

market share, along with other policy combinations such as TPD and trauma,

which has seen a 64% increase in market share in 2013, albeit off a low base.

68 The market share of other policy types or combinations has remained

relatively stable. However, the growth in newer policy combinations

suggests the market is moving away from stand-alone life or stand-alone

TPD cover. Instead, those policy types form the nucleus in newly configured

policy bundles comprising different policy combinations: see Figure 3.

Figure 3: Annual percentage change in market shares of policy types (2012–13)

Product innovation and product bundling

69 There are sound commercial reasons for insurers to redesign policies and/or

offer them in new policy combinations, including in response to advances in

the identification of new medical conditions or advances in the treatment or

-10% -5% 0% 5% 10%

15%

20% 25% 30% 35%

Life only

Life and TPD

Life and trauma

Life, TPD and trauma

TPD only

TPD and trauma

Trauma

Income protection

Income protection combinations

Growth rate

Policy type

Growth in 2012

Growth in 2013

REPORT 413: Review of retail life insurance advice

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prognosis of existing medical conditions. An insurer may redesign policies

with revised definitions and promote them to their distribution channels to

win market share or attract a new segment of the market.

70 New policies on issue may benefit the insurer by replacing high-cost legacy

policies, which may have been poorly designed or underwritten, or which

had unsustainably broad definitions or conditions. Product innovation and

redesign can therefore be a useful tool to manage claims exposures on a

legacy book of policies.

71 Product innovations and new policy combinations may also evolve from

regulatory changes.

72 Product innovation and product bundling can be a positive for consumers. It

may mean that they can:

(a) access new products with tailored cover; or

(b) access a broader class of products perhaps at lower cost (e.g. if an

insurer applies multi-cover discounts on premiums).

73 Product innovation and reconfigured policy combinations may also be

attractive to advisers where the cost, policy terms and definitions of new

products may be more suitable to a client than an existing product.

74 However, product innovation and bundling can also lead to overinsurance,

which may ultimately be unaffordable for consumers. Product innovation

may also provide a rationale for advisers to rewrite insurance for existing

clients in a way that delivers only marginal benefits to the client but at

significant additional cost to them. The structure of incentives in the advice

industry means that advisers have a clear financial incentive to write new

business for clients with existing insurances.

75 Insurers also have commercial incentives to write more business, and

product innovation and bundling is an important tool to gain or re-gain

market share in a competitive environment.

Product design

76 Life insurance products comprise ‘fixed’ and ‘moving’ parts. The fixed parts

include the product’s key features and benefits, and the actuarial

assumptions (such as the expected duration of the policies) that affect how

the product is priced at the time of underwriting. The moving parts include

those aspects of the policy customised to fit the client at the time of

underwriting and include the sum insured, any add-on benefits, exclusions or

loadings, and the premium type (stepped or level) chosen by the consumer.

For example, see the 2007 tax ruling (TR 2006/10) and 2014 amendments to the SIS Act and the Superannuation

Guarantee (Administration) Regulations 1993.

REPORT 413: Review of retail life insurance advice

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77 The premium on a stepped premium policy typically increases each year with

age and they are the most common premium type across the industry. Level

premiums, by contrast, are fixed at the same level for the duration of the

policy. The value of a stepped premium versus a level premium differs for

different consumers and is a key factor for advisers to consider when weighing

up the affordability of cover for a client and their ability to retain the cover

over time.

Assumptions made about the duration of policies

78 We asked insurers about the assumptions they made about the duration of

policies written over the survey period. These forward-looking assumptions

tell us the average length of a policy, as anticipated by the insurers in the

year the policy was underwritten. They also inform how insurers price

policies at the commencement of the policy and price premium increases

over time. They are significant commercial decisions that shape the value of

the retail policy book at the time of underwriting and into the future.

79 There was a high degree of uniformity across the industry regarding assumed

policy durations for stepped premium policies.

80 Life insurance policies, singly or in combination with TPD and/or trauma

cover, had the longest assumed durations—between 86 and 93 months

(between seven and eight years) on average: see Figure 4.

Figure 4: Average assumed durations for stepped premium policies by policy type (2011–13)

Note: This figure is based on 10 of the 12 insurers in our sample. Some insurers were omitted to maintain their anonymity or

because their data could not be compared accurately with other insurers’ data.

Stepped premiums have been criticised for discouraging longevity in product holdings because of the step increases in

premiums: see Ruth Liew, ‘Suncorp argues for life changes’, Australian Financial Review, 25 September 2013.

100

Life only Life and

TPD

Life and

trauma

Life, TPD

and trauma

TPD TPD and

trauma

Trauma Income

protection

Months

Policy type

2011 2012 2013

REPORT 413: Review of retail life insurance advice

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81 With some variation for different policy types, our data shows that, for the

purposes of product design and pricing, insurers assumed that policies

written in the relevant time period would remain in force for an average

duration of 86 months (7.2 years).

82 However, with the exception of income protection policies, the data shows

assumed durations for stepped premiums are decreasing.

83 Across the industry, insurers and their actuaries are revising downward the

expected duration of policies. These revisions affect policy pricing—if a

policy is assumed to be retained by the insured for a shorter duration, the

opportunity for the insurer to recover the cost of establishing the policy must

also be revised. This in turn affects the size of stepped premium increases

because the premium must cover costs over a shorter policy duration.

84 By contrast, insurers are assuming that level premium policies will have

significantly longer durations, at 109 months (9.1 years). However, the data

for level premium policies shows the same trend with insurers incrementally

revising the policy durations down across the survey period.

85 Assumptions made by insurers in the underwriting process have significant

commercial effects over time. Our analysis of this data suggests that insurers

are changing key actuarial assumptions about product duration, in an effort

to ‘catch up’ to changes in the market (e.g. increasing lapse rates).

Distribution models and costs

86 Insurers use a number of channels to distribute life insurance policies to

consumers. These include:

(a) retail personal advice models operated by the insurer or under the AFS

licence of a related corporate entity;

(b) retail personal advice models operated by another AFS licensee; and

distribution channels, including comparison websites).

87 More than half of the insurers in our sample (58%) distribute their policies

through AFS licensees operating personal advice models. Of the remaining

42%, the majority reported that their policies were distributed by AFS

licensees where the advice model was not known by the insurer. One insurer

distributed its policies under a mix of advice models, including via their own

salaried employees.

REPORT 413: Review of retail life insurance advice

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Remuneration arrangements

88 For life insurance distributed under personal advice models, advisers are

typically paid under commission arrangements. To identify the spectrum of

remuneration arrangements in the market, we asked insurers how they paid

their advice channels so we could understand:

(a) the most common remuneration arrangements in the market; and

(b) the extent to which those arrangements differed, depending on:

(i) whether advice was given (personal, general or no advice); and

(ii) whether the advice was given under the insurer’s own AFS licence

or by another licensee under its own licence.

89 We asked for this information across the survey period to understand the extent

to which remuneration arrangements may have changed over time.

Categories of remuneration arrangements

90 We also asked insurers to categorise their remuneration arrangements. The

following labels are commonly understood and applied in the industry:

(a) Upfront commission—This is generally an upfront commission of 100%

to 130% of the new business premium and an ongoing commission of

around 10% of renewal premiums.

(b) Hybrid commission—This is generally an upfront commission of 70%

of the new business premium and an ongoing commission of around

20% of renewal premiums.

around 30% on the new business premium and an ongoing commission

of around 30% of renewal premiums.

(d) No commission—This includes fee-for-service remuneration

arrangements, where typically the adviser would rebate any commission

paid by an insurer back to the client and the client would pay a fee for

service, as negotiated between the adviser and the client, which would

vary depending on the nature, scope and complexity of the advice

provided to the client.

(e) Salaried employee—In this case, remuneration is not by commission.

Clawback arrangements

91 We also asked insurers about the circumstances in which they claw back

commissions paid to advisers. A commission or benefit that is paid to an

For example, typically advisers are paid by an upfront commission and an ongoing commission, or trail, set at different

levels depending on the type of arrangement chosen by the adviser.

REPORT 413: Review of retail life insurance advice

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adviser is recovered, or ‘clawed back’, by the insurer if the policy lapses

within a certain period, usually within the first 12 months the policy is on

foot.

92 Clawback arrangements are designed to provide a disincentive to advisers to

rewrite insurance cover for existing clients during the ‘clawback period’: see

paragraphs 122–128.

Commission arrangements

93 Typically, advisers who are paid by commission choose which commission

model they wish to be paid under in the insurance application form and the

commission is paid when the policy is in force.

94 Commission remuneration arrangements pay advisers for product sales

(upfront) and ongoing commissions on receipt of each year’s annual

premium. Commission remuneration arrangements mean that the advice cost

is built into the product (described as a commission).

95 The value of the commission to the adviser directly relates to the value of the

business to the insurer. This is because insurers calculate the commission as

a percentage of the annual premium paid by the client. The total premium on

the policy (or policies) the client purchases is affected by:

(a) any new or voluntary increases on the insured benefits or sum insured;

and

(b) any loadings (for age or existing medical conditions) or any additional

features or benefits that may apply to the policy.

96 Under commission arrangements, there is no necessary relationship between

the cost or complexity of the advice and the remuneration received by the

adviser. The consumer pays the premium to the insurer. The insurer pays the

commission to the AFS licensee. Each insurer applies its own formula for

each commission type in their remuneration schedule.

97 The amount of commission an adviser receives varies according to the terms

of their agreement with their AFS licensee. For example, a licensee may split

the commission earned on a fixed formula basis with the adviser, passing on

85% to the adviser and retaining the balance of 15% of the commission. In

other cases, the licensee may charge a fixed flat annual fee to the adviser and

pass on 100% of the commission earned to the adviser.

98 Advisers must disclose their remuneration arrangements in the SOA.

However, it may not always be clear to the client exactly how they are

paying for the advice. While the commissions are disclosed in the SOA, it

may appear to the client that the payment to the adviser comes from the

insurer and that they do not pay for the advice. Indeed, many SOAs leave the

section relating to the ‘advice fee’ blank or state N/A (not applicable).

REPORT 413: Review of retail life insurance advice

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Ultimately, the consumer pays through their premium for the commission to

be paid to an adviser.

99 Advisers can rebate (or ‘dial down’) the commission they would receive,

which reduces the premium a client pays by reducing the remuneration the

adviser will receive. Most insurers enable advisers to discount the premiums

by any whole percentage point up to a maximum of 30%. We found this to

be uncommon.

100 There is some variation among insurers in how they structure their

remuneration arrangements. Remuneration schedules include the

commission payments for each commission type, what premium discounts

may apply and in what circumstances (e.g. multi-policy discounts), and the

circumstances where commissions paid will be ‘clawed back’ by the insurer

in the event of a policy lapse within the first year.

101 Along with policy terms and claims experience, the remuneration

arrangements on offer by different insurers can have a significant bearing on

which insurer a given adviser may be more likely to recommend to their

clients.

102 Upfront commission models that pay on average 110% of a new business

premium to an adviser (with an ongoing commission of around 10%)

represent an incentive for advisers to:

(a) write new business;

(b) increase the sum insured or the level of cover the client holds because

the commission is calculated on the premium, which is based on the

sum insured, so generally the higher the premium paid, the more

revenue is earned by the adviser; and

arrangements, resulting in the adviser earning a new upfront

commission on the replacement policy, provided any clawback period

has expired on the current policy.

103 Upfront commission arrangements are the dominant remuneration

arrangement by a significant margin, at 82% of the industry. Figure 5 shows

the distribution of remuneration models across the industry and how that

distribution has changed across the survey period.

104 The average is very high—for some insurers, more than 90% of their advice

channels are paid under an upfront commission model. A minority of

insurers appear to be developing their hybrid distribution channels.

105 While there is some variation among insurers, the general trend is that

remuneration arrangements are relatively stable. The vast majority of

advisers choose to be remunerated under upfront commission models.

REPORT 413: Review of retail life insurance advice

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Figure 5: Remuneration models—Averages (2011–13)

106 Figure 6 and Figure 7 show the breakdown of remuneration model by insurer

in 2012 and 2013.

Figure 6: Breakdown of remuneration model by insurer (2012)

Note: This figure is based on 11 of the 12 insurers in our sample. We omitted data from insurers only in circumstances where it

was necessary to maintain their anonymity or because their data could not be accurately compared with other insurers’ data.

0.7%

12%

82%

0.5%

13%

80%

10%

84%

Salaried employee

No commission

Level commission

Hybrid commission

Upfront commission

Percentage of remuneration

Remuneration model

2011

2012

2013

98%

91%

90%

88%

80%

79%

80%

55%

79%

70%

68%

18%

10%

11%

35%

14%

13%

26%

11%

15%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

3 4

8 9

Percentage of remuneration

Insurer

Upfront commission Hybrid commission Level commission No commission

REPORT 413: Review of retail life insurance advice

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Figure 7: Breakdown of remuneration model by insurer (2013)

Note: This figure is based on 11 of the 12 insurers in our sample. We omitted data from insurers only in circumstances where it

was necessary to maintain their anonymity or because their data could not be accurately compared with other insurers’ data.

Relationship between product design and lapse rates

107 To understand the relationship between the assumptions built into product

design and policy lapse rates, we asked insurers:

(a) how many policies were in force for each policy type and distribution

channel;

(b) for each policy type, the average duration (expressed in months) of the

policies that ceased for any reason for each year in the survey period;

and

stepped and level premiums for each year across the survey period.

108 The data about actual durations gives us a snapshot of average durations at a

moment in time: see Figure 8. For example, life only policies that ceased in

2013 for any reason were, on average, in force for 97 months, or just over

eight years.

Note: The figures for actual durations (Figure 8) are backward looking in time and

cannot be compared to figures for assumed durations (Figure 4), which are forward

looking projections as to the assumptions made at the time of underwriting.

109

The actual duration data also shows that, across 2011–13, life policies

remained in force for longer before ceasing for any reason. Regardless of the

reason that a policy ceases, policies are, on average and excepting life and

TPD, remaining in force for longer.

98%

91%

90%

89%

81%

79%

78%

76%

72%

58%

15%

10%

11%

18%

16%

13%

37%

11%

13%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 2

3 4 5 6 7 8

9 10 11

Percentage of remuneration

Insurer

Upfront commission Hybrid commission Level commission No commission

REPORT 413: Review of retail life insurance advice

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Figure 8: Average actual duration for stepped premium policies by policy type (2011–13)

Note: 11 of the 12 respondents provided data for this question. The data from one insurer could not be compared accurately

with the other data.

Lapse rates

110 For the purposes of this project, we defined a policy lapse as when a policy

ceases due to non-payment or cancellation by the client.

111 We do not consider the following examples to be policy lapses and asked

insurers to exclude these policy events from their responses:

(a) a claim on a policy;

(b) a policy ceasing due to the insured person reaching a certain age (e.g.

age 65);

ownership, with the same underlying insured person and risk;

(d) a policy being unconditionally reinstated on payment of an outstanding

premium, after non-payment has occurred for a period of time;

(e) a policy owner electing to discontinue one of the benefits the policy

commenced with (e.g. the original policy had life, TPD and trauma

cover, but the policy owner chooses to discontinue the trauma cover,

while continuing with the life and TPD cover); and

(f) one person under a policy that covers multiple people ceasing to be

insured, but the policy remaining in force for the other person or people.

We asked insurers to apply our definition to calculate lapse rates. For commercial reasons, many insurers calculate the

lapse rate by reference to the value of the premium that lapsed (e.g. $5,000 or $50,000 premium lapsed). Calculating the

lapse rate in this way is relevant to the application of each insurer’s clawback arrangements.

100

Life only Life and

TPD

Life and

trauma

Life, TPD

and trauma

TPD TPD and

trauma

Trauma Income

protection

Months

Policy type

2011

2012

2013

REPORT 413: Review of retail life insurance advice

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112 Our objective was to better understand:

(a) what types of policies were lapsing and when those policies were

lapsing to identify any trends in lapse rates; and

(b) the overall lapse rate profile, to identify any factors that may affect the

lapse rate, such as consumer price sensitivity to premium increases or

the effect of incentives on adviser behaviour.

113 For this reason, we asked insurers to tell us their lapse rate (expressed as a

percentage) for each policy type across the three-year survey (June 2011 to

June 2013) period for both stepped and level premium types. We also asked

insurers to tell us the period in which a policy lapsed—that is, before the end

of the first year, from year 1 to year 2, year 2 to year 3, and so on up to year 5.

114 Regardless of the policy type, lapse rates are lowest in the first year of the

policy, and increase sharply from the first to the second year: see Figure 9

and Figure 10. For example, during the move from the first to the second

year:

(a) lapse rates for income protection policies increased from 9% to 16.4%

(see Figure 9); and

(b) lapse rates for ‘life and TPD’ policies more than doubled from 4% to

10% (see Figure 10).

Figure 9: Lapse rate by policy type—Stand-alone policies

10%

12%

14%

16%

18%

Up to year 1 Year 1 to year 2 Year 2 to year 3 Year 3 to year 4 Year 4 to year 5

Lapse rate

Policy duration

Life only

TPD

Trauma

Income protection

REPORT 413: Review of retail life insurance advice

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Figure 10: Lapse rate by policy type—Combination policies

115

For stepped premium policies that lapsed in 2013, policy lapses doubled

from approximately 7% for policies that had been held for less than a year to

14% for policies that had been held for between one year and two years: see

Figure 11. We found that these lapse rates remained persistently high

regardless of the policy duration (i.e. the length of time the policy had been

held before lapsing). This contrasts to the data for policy lapses in 2011,

when the lapse rate begins to taper after the initial spike after year 1. Across

the three-year time period, the data suggests that the profile of lapse rates is

changing. Lapse rates are increasing sharply after year 1 and remaining

persistently high for stepped premium policies.

Figure 11: Aggregate lapse rates for stepped premium policies

10%

12%

14%

16%

18%

Up to year 1 Year 1 to year 2 Year 2 to year 3 Year 3 to year 4 Year 4 to year 5

Lapse rate

Policy duration

Life and TPD

Life and trauma

TPD and trauma

Life, TPD and trauma

10%

12%

14%

16%

18%

Up to year 1 Year 1 to year 2 Year 2 to year 3 Year 3 to year 4 Year 4 to year 5

Lapse rate

Policy duration

2011 2012

2013

REPORT 413: Review of retail life insurance advice

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116 Stepped premium policies lapsed at a much higher rate than level premium

policies. Consumer price sensitivity to stepped premium price increases is

likely to be a contributing factor in the difference between the lapse rates for

stepped and level premium policies.

Note: Research by Investment Trends indicates that the price of premiums was the

reason 38% of people cancelled their life insurance—19% said they could no longer

afford the insurance and 19% said that the premiums increased too much. This research

also identified the fact that a significant driver in consumer switching is price sensitivity

to premium increases—33% of respondents in the Investment Trends research said that

lower premiums would make them more likely to change their life insurance provider

and, of consumers who did switch provider in the last two years, their reasons for

switching life insurers were premiums increasing too much (27%), and finding a

provider with cheaper premiums (21%).

117 Level premium policy lapse rates show a similar spike after the first year;

however, after this spike the lapse rates begin to taper down significantly:

see Figure 12.

118 This suggests that once the policies have been in force for the first few years,

consumers seem more likely to retain the policies over time and they are

therefore relatively less likely to lapse compared to stepped premium

policies.

119 Level premium policies are more likely to suit consumers who take them out

at a younger age and intend holding the policy for a long time. It is only after

a long period of time that the value of the initial high premium of a level

policy when compared to a stepped premium policy is realised.

Figure 12: Aggregate lapse rates for level premium policies

See Investment Trends, Investor product needs report, November 2013, I-352, I-350, I-351.

10%

12%

14%

16%

18%

Up to year 1 Year 1 to year 2 Year 2 to year 3 Year 3 to year 4 Year 4 to year 5

Lapse rate

Policy duration

2011 2012 2013

REPORT 413: Review of retail life insurance advice

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120 Stand-alone life insurance and income protection policies represent more

than 50% of the market share for life insurance in Australia: see Figure 2.

However, these policy types experienced lapse rates of 12%–16% in the

second year the policies are in force, with the lapse rates remaining high year

after year: see Figure 13.

Figure 13: Lapse rates for life only and income protection insurance

121 The lapse rates for life insurance policies covered by our survey are

consistent with the upward industry trend of lapse rates that APRA has

reported (see Figure 14):

Overall, annual lapse rates for both lump sum (death/TPD) and disability

income benefits have increased from 11%–12% per annum when they were

at their lowest level in 2006 to 16%–17% per annum in 2013.

APRA, Insight, Issue 3, 2013, p. 39, Figure 5. Note that APRA calculates lapse rates by premium, not policy number.

10%

12%

14%

16%

18%

Up to year 1 Year 1 to year 2 Year 2 to year 3 Year 3 to year 4 Year 4 to year 5

Lapse rate

Policy duration

Life only Income protection

REPORT 413: Review of retail life insurance advice

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Figure 14: Lapse rates for individual term life insurance

Source: Plan For Life, Life insurance statistics, June 2013, as cited in APRA, Insight, Issue 3, 2013, p. 39.

Lapse rates and commission clawback

122 Regardless of the policy type or premium type, our data shows a sharp

increase in lapse rates after policies have been in force for more than

12 months. These lapse rates then remain persistently high over time.

123 The 12-month period is significant for two reasons:

(a) for stepped premium policies, the policy renewal anniversary is the

point at which the first stepped premium increase will apply; and

(b) it is the point at which the clawback period expires for adviser

commissions.

124 The uniformity of the sharp increase in lapse rates after the expiry of the

clawback period suggests that the incentive for advisers to write new

business increases once the clawback period ends.

125 Some insurers taper their clawback arrangements so that 100% of the

commission is clawed back if the policy lapses within the first six months,

50% if the policy lapses at nine months, and so on.

126 Some individual insurers include in their remuneration schedules specific

measures designed to address high lapse rates among certain advisers or

affecting certain classes of policies. Such measures include:

(a) the application of longer clawback periods to some clusters of policies

or advisers;

REPORT 413: Review of retail life insurance advice

Page 35

(b) the exclusion of level premium policies from their clawback

arrangements;

being rewritten with the same insurer within a certain timeframe (e.g.

five years);

(d) restricting an adviser to level commission where that adviser’s lapse

rate exceeds a certain threshold; or

(e) restricting advisers to certain commission models subject to the age of

the insured at application.

127 While there was some common ground among these measures, there was

also significant diversity among approaches, including approaches to the

tapering of clawback periods. Commercial decisions about remuneration

arrangements at the individual insurer level are limited in their broader

industry impact. Where an adviser chooses their remuneration arrangement,

they have an incentive to write new business or rewrite existing business

with an insurer or insurers whose remuneration model is most attractive to

them.

128 Clawback arrangements are designed to provide a disincentive to advisers to

rewrite existing insurance cover for clients during the clawback period—that

is, to address the conflicts of interest inherent in a remuneration model that

gives advisers the incentive to write new business or rewrite existing

business. However, they generally have no application beyond the first year

of the policy and are therefore a blunt instrument to address structural issues

with remuneration arrangements.

Lapse rates and average policy durations

129 Our analysis of the insurer data shows that, at an aggregate level, policy

durations are increasing over time: see Figure 8. That is, at an aggregate

level, policies are being held for longer before a claim or other event occurs

(such as the insured reaching an age limit causing the policy to cease).

130 This may appear inconsistent with our findings that the assumed duration of

policies is decreasing and lapse rates are increasing. This is explained in part

by the fact that the average duration of a policy is arrived at by calculating

how long a policy has been held before ceasing for any reason (i.e. a

backward-looking measure), while assumed durations are a forward-looking

measure made by actuaries at the time of policy design.

131 Another relevant issue is the application of different definitions. Our

definition of actual duration includes a broader group of policies than our

definition of lapse rate, which explicitly excludes claims or a policy ceasing

due to the insured reaching an age limit: see paragraphs 110–111. This

means that the two data sets cannot be directly compared.

REPORT 413: Review of retail life insurance advice

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132 Policies in the actual duration data set include policies that may have

recently lapsed, including policies that end because the insured has met an

age limit (such as reaching age 65). Such policies may also have been held

by the insured for a long period of time. Demographic factors such as the

ageing of the population may also be contributing to the overall increase in

actual policy durations across the survey period.

133 A detailed analysis of these variables would require further data and analysis

and is beyond the scope of this report. However, in commenting on claims

experience, APRA recently expressed concerns that there may be an anti-

selection effect in certain policy cohorts, where less healthy lives will be

more inclined to retain their policies over time and more healthy lives less so

(particularly in the face of rising premiums).

Lapse rates and remuneration models

134 In addition to asking insurers about lapse rates by policy and premium type,

we also asked about lapse rates by remuneration model for both stepped and

level premium policies.

135 Figure 15 and Figure 16 show the lapse rates for stepped and level premium

policies respectively, by the three different commission arrangements—

upfront, hybrid and level. We excluded no commission and salaried

employment arrangements because the percentage of insurers’ distribution

channels that were remunerated in this way was extremely small, at less than

2%: see Figure 5.

Figure 15: Lapse rates by remuneration arrangement for stepped premium policies

APRA, Insight, Issue 3, 2013, p. 37.

10%

12%

14%

16%

18%

Up to year 1 Year 1 to year 2 Year 2 to year 3 Year 3 to year 4 Year 4 to year 5

Lapse rate

Policy duration

Upfront commission

Hybrid commission

Level commission

REPORT 413: Review of retail life insurance advice

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Figure 16: Lapse rates by remuneration arrangement for level premium policies

136 Upfront commission models had significantly higher lapse rates relative to

hybrid or level commission models. For stepped premium policies, upfront

commission models had a lapse rate of around 7% in the first year of the

policy, which doubled to 14% in the second year: see Figure 15. These lapse

rates remained persistently high, at around 14% for the following years.

137 For stepped premium policies, lapse rates for hybrid commission

arrangements increased at a similarly sharp gradient from around 5% in the

first year of the policy to around 10% in the second year, and then tapered

before increasing again from the third year to meet the lapse rate for upfront

commission models.

138 This contrasts to the lapse rates for stepped premium policies where the

adviser is remunerated under a level commission model. For these policies,

the lapse rates increased from just over 8% to just over 10% in the second

year of the policy and remained relatively steady over time. That is, lapse

rates for level commission models had a much flatter curve than either

upfront commission or hybrid commission models.

139 Consistent with the lapse rate by policy type (see Figure 9 and Figure 10)

and premium type (see Figure 11 and Figure 12), lapse rates by remuneration

model also spike after the clawback period expires (i.e. in the second year of

the policy).

140 This spike in lapse rates in the second year that a policy is in force was also

in evidence for level premium policies: see Figure 16. Upfront commission

models had the higest lapse rates, followed by hybrid and level premium

models, although the lapse rates tapered off much more quickly for level

premium policies. This tapering of lapse rates for level premium policies is

10%

12%

14%

16%

18%

Up to year 1 Year 1 to year 2 Year 2 to year 3 Year 3 to year 4 Year 4 to year 5

Lapse rate

Policy duration

Upfront commission

Hybrid commission

Level commission

REPORT 413: Review of retail life insurance advice

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consistent with the fact that the benefit of these policies is only realised

when the policies are held over a longer time period.

Analysis and observations on lapse rates

141 We make the following observations:

(a) actual durations of policies that ceased for any reason during the survey

period are, on average, remaining on foot for longer;

(b) for new policies written over the survey period, insurers are

progressively revising downward their assumptions about the duration

of those policies (see Figure 4);

across policy and premium types;

(d) lapse rates increase sharply for all policy and premium types after the

clawback period expires;

(e) stepped premium policies lapse at a higher rate than level premium

policies; and

(f) upfront commission remuneration models lapse at a higher rate than

other remuneration models and, for stepped premium policies, they

remain persistently high over time.

142 We consider that insurers are revising down their assumed policy durations

over time in an effort to bridge the gap between:

(a) the assumed policy durations insurers had historically built into their

pricing assumptions at the time of underwriting; and

(b) their actual policy retention experience.

That is, insurers are revising down their assumed policy durations to factor

increasing lapse rates into policy design.

143 Increasing lapse rates are of significant concern to the industry and are a

consequence of a number of different factors, including:

(a) product innovation and product pricing and repricing for stepped

premium policies;

(b) age-based premium increases affecting affordability; and

business to increase commission income.

144 The revenue gained by insurers winning new business is affected by the high

costs involved in winning that business.

All the insurers in our sample had clawback arrangements that expired after 12 months, noting that some insurers had

staggered clawback arrangements as described in paragraph 125.

REPORT 413: Review of retail life insurance advice

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145 Remuneration arrangements that pay high upfront commissions to advisers

are important to insurers to win new business. However, those very same

remuneration arrangements are contributing to high lapse rates where

insurers lose existing business to competitors offering high upfront

commissions.

146 It seems that high upfront commissions are contributing to poor commercial

outcomes for insurers.

147 Insurers are losing existing business at a point in the policy life cycle where

they have no prospect of recovering high upfront costs (where the clawback

period has expired on the policy). At the same time, insurers are incurring

new upfront costs to win new business to replace the business lost to

competitors.

148 High upfront commissions give advisers an incentive to write new business.

The more premiums they write, the more they earn. There is no incentive to

provide advice that does not result in a product sale or to provide advice to a

client that they retain an existing policy unless the advice is to purchase

additional covers or increase the sum insured.

149 Our analysis suggests that the interests of insurers, advisers and their clients

are in conflict. These conflicts have the following implications:

(a) if one insurer introduces initiatives to better align remuneration

arrangements with other objectives (e.g. product retention), they risk

losing market share—the ‘first mover’ problem;

(b) insurers may relax their clawback arrangements (e.g. reducing their

clawback periods from two years to one year) to win new business from

competitors or to avoid further loss of market share (in the case of

insurers who may have tried alternative strategies). This waters down

the effectiveness of clawback arrangements as a disincentive for

advisers who can shop around for the most attractive remuneration

arrangement; and

the quality of the advice they receive.

150 The short-term effectiveness of clawback periods also represents a challenge

to industry because their very effectiveness suggests that commission

incentives for advisers are operating in such a way as to distort and/or

influence the behaviour of advisers. This has real commercial effects on

insurers, on the price of life insurance products and on the quality of advice

consumers receive, as set out in Section D.

REPORT 413: Review of retail life insurance advice

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D Our findings on the quality of advice

Key points

In phase 2, we conducted a targeted surveillance of advisers who give

personal advice to consumers on life insurance products.

Of the 202 files reviewed, 63% were rated a pass while 37% were rated a

fail—that is, they did not comply with the law.

We identified a number of factors that affect the quality of advice, including:

• adviser incentives;

• inappropriate scaling of advice;

• lack of strategic life insurance advice;

• weak rationales for product replacement advice; and

• failure to consider the relationship between life insurance and

superannuation.

We also identified some key warning signs of poor advice, including:

• high clawback rates; and

• high volumes of replacement product advice, product bundling and

upselling.

Overview of our findings

151 While many consumers (63%) received personal advice about life insurance

that complied with the law, more than one-third (37%) received life

insurance advice that failed to comply with the law: see Table 4. (Table 5

and Table 6 show the failure and pass rates for pre-FOFA and post-FOFA

advice.) This finding from our initial file reviews (which included a detailed

process of internal quality checks) was affirmed in our external

benchmarking exercise.

Table 4: Overall quality of personal advice files

Quality of advice

Number of files

Percentage of files

Pass

127

63%

Fail

37%

Total

202

100%

REPORT 413: Review of retail life insurance advice

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Table 5: Pre-FOFA advice

Quality of advice

Number of files

Percentage of files

Pass

59%

Fail

41%

Total

100%

Table 6: Post-FOFA advice

Quality of advice

Number of files

Percentage of files

Pass

67%

Fail

33%

Total

108

100%

152 Given the importance of quality life insurance advice to consumers, and that

the sample involved AFS licensees for whom life insurance advice is a key

part of their business, it is of major concern to ASIC that more than one-third

of the advice given by advisers failed to meet the relevant legal standards.

Obligation to give priority to the client’s interests

153 The client priority rule means that an adviser must not recommend a product

to create extra revenue for themselves where additional benefits for the client

cannot be demonstrated. Such a conflict of interest cannot be managed; it

must be avoided: see Regulatory Guide 175 Financial product advisers—

Conduct and disclosure (RG 175) at RG 175.367–RG 175.382.

154 Our surveillance results indicate that many advisers giving post-FOFA

advice may prioritise their own interests in earning commission income

ahead of the interests of the client in getting good quality advice.

155 Where we have found significant breaches of the law in our advice reviews,

we will take enforcement action. We will take further regulatory action as

appropriate to ensure advisers give compliant life insurance advice to their

clients: see paragraphs 28–31 for details on our further work.

Factors that affect the quality of advice

156 From our surveillance we identified the following factors that affect the

quality of advice:

(a) adviser incentives;

(b) inappropriate scaling of advice;

REPORT 413: Review of retail life insurance advice

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(d) weak rationales for product replacement advice; and

(e) failure to consider the relationship between life insurance and

superannuation.

Adviser incentives

157 Our findings confirm that adviser incentives affect the quality of advice

consumers receive. The data from insurers indicates that, on average, 82% of

advisers are remunerated under upfront commission models: see Figure 5.

However, our analysis shows that upfront commission models are correlated

to advice that failed to comply with the law.

158 In 80% of the files in our sample, advisers were remunerated under upfront

commission models. However, 96% of the poor advice was given by

advisers paid under upfront commission models: see Figure 17. This

suggests that where an adviser is paid under an upfront commission model it

has a statistically significant bearing on the likelihood of that adviser giving

advice that did not comply with the law.

Figure 17: Relationship between upfront commissions and advice that failed in our sample

159 The chance of getting advice that rated a pass was significantly higher where

the adviser was paid under a commission structure other than upfront

commissions: see Figure 18.

160 Our analysis of data from the insurers and data from our file reviews

demonstrates that there is a material relationship between:

(a) high lapse rates and upfront commission models (see paragraphs 134–

140 and Figure 15)—upfront commission models had significantly

higher lapse rates relative to hybrid or level commission models; and

(b) advice that failed to comply with the law and upfront commission models.

Upfront commission

80%

Upfront commission

96%

Other commission

structures

20%

Other commission

structures

Advice files in the sample

Advice files rated ‘a fail’ in the sample

REPORT 413: Review of retail life insurance advice

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Figure 18: Percentage of advice rated a pass or fail by commission structure in our sample

161 A remuneration arrangement tied to a product sale creates an incentive for

the adviser to make a sale, rather than provide non-product-specific advice

or strategic advice for which the adviser may not be paid.

162 Among the advice that failed, we found files that were poorly documented

and where the needs analyses were poor.

163 In the case of pre-FOFA advice, there was no reasonable basis for much of

the advice. In the case of post-FOFA advice, the advice did not comply with

the best interests duty and related obligations and failed to leave the client in

a ‘better position’.

164 The case studies that follow are all drawn from files we reviewed in the

course of this surveillance. Identifying information has been removed.

Where we quote the commission paid to the adviser, we refer to the upfront

commission the adviser would have earned less any payment to their AFS

licensee. We exclude any ongoing commissions the adviser may have earned

from the analysis. As noted in paragraph 90, advisers paid under upfront

commission models typically also receive ongoing commissions of 10% of

the renewal premium.

Case study 1: Post-FOFA advice that failed to comply with the law

Personal

circumstances

Michelle is 50 and married. She is employed full time and earns $56,800 per annum. There

was no information about Michelle’s spouse or dependants on her file.

Assets

Michelle jointly owns a home valued at $800,000 and an investment property valued at

$500,000. She has a cash account of $10,000, but she has no other cash savings or

investments. Michelle’s superannuation balance is $80,000.

Debts

Michelle has mortgages totalling $600,000 on her home and investment property.

Pass

55%

Pass

93%

Fail

45%

Fail

Upfront commission

Other commission structures

% of advice files

REPORT 413: Review of retail life insurance advice

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Insurance

Michelle has life and TPD cover of $406,000 and trauma cover of $100,000. Her current

annual premium is $1,676, with $502 paid from her superannuation benefits and the balance

of $1,174 from her personal cash flow.

Reason for

seeking advice

Michelle wants her life cover to be paid from her superannuation benefits and not from her

personal cash flow.

Advice

The adviser recommended that Michelle increase her insurance and take out life cover of

$588,100, TPD cover of $578,100, trauma cover of $667,469, and income protection cover of

$3,879 per month, with a 30-day waiting period and a benefit payment period to age 65.

The new total annual premium was $10,772, of which $5,353 was paid from Michelle’s

superannuation benefits and the balance of $5,419 from her personal cash flow.

Commission

The commission was 110% or $11,849. This was a gross figure less fees payable to the AFS

licensee.

Commentary

The advice to Michelle failed to comply with the law:

• The $5,353 annual premium for the life, TPD and income protection policies that

Michelle will pay from her superannuation benefits exceeds Michelle’s superannuation

guarantee contributions of $5,254 per annum.

• Although the assets are jointly owned, the adviser did not identify her spouse’s personal

details (age and employment status or income). Without this information, the adviser

cannot demonstrate why the insurance recommendations are appropriate and in

Michelle’s best interests.

• The adviser did not consider retaining her existing life insurance cover in her

superannuation where the premium is cost effective.

• The $5,419 annual premium for the trauma policy that Michelle will pay from her

personal cash flow represents 9.5% of Michelle’s gross income. This is a large financial

commitment, particularly when it is unclear from the file how necessary and appropriate

this insurance cover is for Michelle.

• The advice did not address Michelle’s stated objective, which is to reduce the impact of

her existing premium on her current personal cash flow.

165 Our findings from this surveillance suggest that dependence on upfront

commission remuneration arrangements has a material effect on the type of

advice an AFS licensee’s business will give, and increases the possibility

that the business may give advice that does not comply with the law.

166 The practice of only paying remuneration on a product sale works against

the provision of balanced, strategic risk advice to clients.

167 These risks must be actively managed by AFS licensees who must consider:

(a) declining to provide advice if they cannot do so in compliance with the

best interests duty and related obligations;

(b) structuring remuneration arrangements so they receive some

remuneration from clients for advice where there is no product sale;

conflicts of interest and create financial incentives for advisers to meet

compliance obligations;

REPORT 413: Review of retail life insurance advice

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(d) ensuring they provide appropriate levels of training to improve adviser

competence; and

(e) performing regular file audits.

Inappropriate scaling of advice

168 All personal advice is ‘scaled’ or ‘limited in scope’ to some extent—advice

is either less or more comprehensive in scope along a continuous spectrum.

169 Regardless of whether an adviser is giving advice on a particular topic, such

as insurance, or a broader suite of advice topics, the obligation to comply

with the best interests duty and related obligations remains unchanged.

170 We found examples where advisers failed to exercise sufficient prudence

and judgement in the scope of their inquiries into the client’s relevant

circumstances. In some cases, advisers failed to ask the most rudimentary

questions of their clients or their inquiries were unduly limited when a

product recommendation was made.

171 When a consumer is seeking advice about life insurance, a prudent adviser

would make sufficient inquiries to establish what the client was seeking to

insure. For example, does the client want to secure their spouse or family in

the event of death or to cover debt or business expenses should they fall ill?

172 We reviewed files where the client requested a particular sum insured and

there was no documentation on the file relating to how that sum insured may

meet the client’s needs or objectives. It is the role of an adviser to engage

with the client about the relative value and cost of insurance at a particular

sum insured and to help the client arrive at the right type of cover and sum

insured that is appropriate and affordable to them over time. This is the

‘value add’ of personal advice to a client.

Case study 2: Post-FOFA advice that complied with the law

Personal

circumstances

Stephen is 56 and married. He is a self-employed management consultant and works full

time. There was no information on his file about his income, spouse or any dependants.

Assets

There was no information on Stephen’s file about his assets.

Debts

There was no information on Stephen’s file about his liabilities.

Insurance

Stephen has held life, TPD and trauma insurance since 1996. His sum insured was

$190,000. Stephen has held income protection insurance since 2010. His insured monthly

benefit was $11,576, with a 30-day waiting period and a benefit payment period to age 65.

Stephen’s premium was $17,513 per annum.

Reason for

seeking advice

Stephen wanted a review of his insurance cover because his premium was too expensive.

He was comfortable with the level of life, TPD and trauma cover, but wanted his income

protection cover increased to $12,000 per month.

REPORT 413: Review of retail life insurance advice

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Advice

The adviser compared Stephen’s current insurer with three other insurers before

recommending Stephen take out:

 $190,000 life insurance and TPD (any occupation);

 $190,000 trauma cover with a TPD rider (any occupation); and

 income protection insurance with an insured monthly benefit of $12,500, with a 30-day

waiting period and a benefit payment period to age 65.

The annual premium for the recommended policies was $14,867, an annual saving of $2,646

or 15%.

The new insurer had the most competitive premium and had improved trauma policy

definitions compared to the existing policy.

Commission

The commission was 121% of the premium or $18,199.08. This is a gross figure that is

reduced by the adviser’s arrangement with their AFS licensee. In this case, the SOA stated

the adviser would earn 93% of the gross commission or $16,925.44.

Commentary

The advice to Stephen was compliant with the law. The adviser had achieved the client’s

stated objectives of maintaining the same insurance type and cover, with an increase in

income protection to reflect current earnings with a cheaper premium.

What would have made this advice high quality advice?

High quality advice to Stephen would have included the adviser:

• making further inquiries about Stephen’s relevant circumstances, needs and objectives

to ensure the type and amount of cover recommended were suitable. In the absence of

those inquiries, Stephen may be overinsured or underinsured;

• making further inquiries to assess whether Stephen needed the trauma cover, or

whether a longer waiting period and/or a shorter benefit payment period would have

been suitable; and

• canvassing whether the life and TPD cover could have been held inside superannuation

for tax effectiveness and exploring the advantages and disadvantages of this strategy.

173 Advisers should employ their expertise to ask questions to ascertain the

client’s true position and test whether the subject matter of the advice as

identified by the client is appropriate and in the best interests of that client,

given their relevant personal circumstances.

174 Failure to ask questions of the client, and therefore determine with the client

the scope of the advice, means that the adviser does not have sufficient

information on which to base their advice.

175 To scale advice appropriately is to apply the professional judgement of the

adviser to the client’s circumstances. Advisers should ask questions to make

sure that:

(a) the information they have about existing clients’ relevant circumstances

is up to date; and

(b) they have enough information about new clients’ relevant

circumstances on which to base their advice.

REPORT 413: Review of retail life insurance advice

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176 Scaling advice does not mean an adviser can walk away from their

obligations to give appropriate advice that is in the best interests of their

clients. Regardless of whether the advice is scaled narrowly or broadly, the

obligations remain the same. For example:

(a) a generic warning from the adviser in the SOA that the advice is based

on incomplete or inaccurate information does not affect the obligation

on the adviser to act in the best interests of their clients and to make

reasonable inquiries to obtain complete and accurate information; and

(b) a needs analysis is not a tool to upsell clients more insurance than they

could reasonably afford, with product recommendations for add-on

policies of negligible benefit to the client but at significant additional

cost to them.

177 In our file reviews, we found advice that recommended increasing the total

package of insurance cover (life, TPD, trauma and income protection) that

was not in the best interests of the clients, but which increased the premium,

and therefore the commission income, for the adviser.

Case study 3: Pre-FOFA advice that failed to comply with the law

Personal

circumstances

Phuoc is 56, self-employed and earned $100,000 the previous year. Khanh is 55 and earns

$40,000 per annum. There was no detail about dependants on the file beyond a note about

child maintenance costs of $150 per week.

Assets

Phuoc and Khanh own a home valued at $430,000. Phuoc has a superannuation balance of

$183,677. Khanh has a superannuation balance of $58,229. The SOA listed their combined

assets as $1.34 million.

Debts

Phuoc and Khanh have:

 a home loan of $280,000;

 a personal loan of $17,000 (at an interest rate of 10%); and

 two credit cards with a debt of $14,000 (at an interest rate of 17%) and $8,000 (at an

interest rate of 17%).

Insurance

Phuoc had $400,000 of life insurance inside his superannuation at an annual premium of

$1,079.75. Khanh had $350,000 of life insurance inside her superannuation at an annual

premium of $576.17. Phuoc also had an income protection policy with a benefit of $3,500 per

month, with a 30-day waiting period and a benefit payment period of 12 months.

Reason for

seeking advice

Phuoc and Khanh stated they would like to:

 consolidate their personal debts;

 set up an SMSF to purchase property; and

 review their levels of insurance.

The SOA stated that the adviser did not complete a full needs analysis because arranging

the insurance cover was ‘time critical’.

REPORT 413: Review of retail life insurance advice

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Advice

The adviser recommended that Phuoc take out two insurance policies with a new insurer.

The policies would be held inside the new superannuation fund, which was yet to be

established:

 $500,000 of life insurance with an annual premium of $2,291.52; and

 $7,875 of income protection per month with an annual premium of $4,304.84.

The adviser recommended Khanh take out two policies inside her superannuation:

 $500,000 of life insurance cover, with an annual premium of $2,489; and

 $2,500 of income protection per month with an annual premium of $3,070.30.

The adviser referred Phuoc and Khanh to an accountant to set up an SMSF and to transfer

their existing superannuation balances to the new fund.

Commission

The commission was 115% upfront or $11,909.47 (for all four insurance policies

recommended) less any payments to the AFS licensee.

Commentary

The advice to Phuoc and Khanh failed to comply with the law:

 The SOA stated that the adviser prioritised the need to arrange the insurance because

Phuoc did not have any income protection insurance and that the need was ‘time critical’.

Phuoc and Khanh currently held insurance and Phuoc had income protection cover, so the

rationale supporting the scoping of the advice to insurance only as a ‘time critical’ issue

had no basis.

 Given the other client objective was to pay off their debt as soon as possible and given the

size of the debt and the age of the clients, the debt should have been identified as a

priority.

 The adviser did not complete a full needs analysis and limited the scope of the advice to

insurance where there was no reasonable basis to do so.

 The SOA stated that the combined debt level was the justification for increasing both

Phuoc and Khanh’s life insurance cover. However, the recommended insurance was

significantly more expensive than the couple’s existing insurance and did not provide much

more cover. Phuoc was paying approximately 220% more in life insurance premium for

only 25% more cover.

 The adviser failed to consider Phuoc and Khanh’s existing provider, although it appears to

have been cheaper than the recommended cover.

 The SOA did not explore the option of making a partial rollover of funds into the new

SMSF,

while maintaining a balance in the existing fund to retain the existing insurance. The

adviser also did not explore retaining the existing insurance cover until the cover being

applied for in the SMSF had been underwritten and accepted.

 The strategy to fund their insurance through their superannuation will have a dramatic

impact on their superannuation balances.

 The adviser did refer the clients to an accountant to establish their SMSF, but scoped

retirement out of the advice, explaining that the couple could review their strategies ‘when

they are ready’. Given Phuoc and Khanh’s age and debt levels, strategies for retirement

should have been identified as a priority for the couple and not scoped out of the advice.

178 The needs analysis is the fundamental building block of the financial advice

process. It is a threshold issue for advisers. Consumers cannot get good

advice without it. Done well, it enables the adviser to understand the client,

their financial situation, needs, objectives and values, and forms the basis of

the advice engagement process.

179 However, the needs analysis is only the first step in identifying client needs

and objectives. The further step in the advice process is the prioritising of

REPORT 413: Review of retail life insurance advice

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these needs and objectives against what is appropriate and achievable at the

time the advice is given.

Lack of strategic life insurance advice

180 It is the process of identification and prioritisation of needs and objectives

that is the most important aspect of financial advice for consumers. It is a

key reason why consumers look for financial advice.

181 A recurring theme in this surveillance was the failure of advisers to give

strategic risk advice to their clients. Strategic life insurance advice includes

advice on the type, level, structure and affordability of life insurance cover

based on the client’s cash flow position and which prioritises their insurance

needs. Strategic advice can be stand alone or, where appropriate, provide the

framework for product advice.

182 For example, we found many files where the adviser failed to add any

meaningful value to their clients by:

(a) helping them set an appropriate sum insured, balancing the competing

priorities of underinsurance versus affordability;

(b) testing the value of optional extras against the client’s ability to sustain the

insurance over time by prioritising the essential and the non-essential; or

relative to the amount of time the client may expect to hold insurance—

for example, until debts are repaid, children are adults or the client

transitions to retirement.

Setting an appropriate sum insured

183 There is currently a discussion about underinsurance in Australia. Life

insurers, advisers, commentators and policy makers are actively engaged in

the process of identifying insurance needs and the extent to which they are

being met relative to the level of cover consumers hold.

184 The Financial System Inquiry: Interim report stated that:

Superannuation funds now play an important role in providing life

insurance to members through group insurance policies. Latest estimates

indicate more than 90 per cent of the working age population now has some

life insurance.

Introducing default insurance into many superannuation funds has extended

the number of people holding life insurance; however, submissions

question the adequacy of this coverage. Some submissions put forward the

view that underinsurance for life and disability is significant, requiring

policy measures to close the ‘underinsurance gap’.

Financial System Inquiry: Interim report, Commonwealth of Australia, July 2014, section 3:78–3:79 (see also notes 50 and

51). See also Rice Warner, Underinsurance in Australia, Rice Warner, Sydney, 2013. Rice Warner estimates that current life

insurance cover is 64% of the amount needed, with disability insurance much lower again. As income protection insurance is

REPORT 413: Review of retail life insurance advice

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185 An indicator of the level of underinsurance is typically a measure of the

desired level of insurance (or the level of insurance need) relative to the

actual level of personal insurance already held.

186 Different industry participants employ a range of heuristics (rules of thumb)

to provide some guidance about appropriate levels of insurance for

consumers based on typical client personas (e.g. working adults with

dependants and high levels of debt). This is also a common approach taken

by life insurance calculators, which tend to model insurance needs as a

multiple of the insured person’s annual income. However, at the individual

level, underinsurance must be balanced against affordability.

187 In our file reviews, we found that the complexity of the client’s personal

circumstances was not taken into account and that many advisers responded

with generic advice.

Case study 4: Pre-FOFA advice that failed to comply with the law

Personal

circumstances

June is 62, single and earns $40,000 per annum. June is the guarantor on her adult son

Matthew’s home loan of $300,000. Matthew earns $50,000 per annum. June and Matthew

have set up an SMSF together—with a combined value of $120,000.

Assets

June owns her home valued at $450,000. Matthew’s home is valued at $450,000.

Debts

June has no debt. Matthew has a $300,000 mortgage.

Insurance

There was no evidence on the file that either June or Matthew have existing life insurance.

Reason for

seeking advice

June and Matthew want insurance as security against sickness and injury.

Advice

The adviser recommended June take out $400,000 of life insurance cover. In the application

process a 75% health loading was applied, which increased June’s premium from $5,829 to

$10,260 per annum.

The adviser recommended Matthew take out $500,000 of life cover, $300,000 of TPD cover

and income protection of $3,500 per month. There is no information on the file about

Matthew’s premium.

The policies were to be held in their SMSF.

Commission

The commission was 115%–123% of the premium. The SOA stated the client accepted the

insurance terms at an annual premium of $10,260. Based on the minimum commission

payable of 115%, the adviser would earn $11,790 less the adviser’s payment to their AFS

licence. This file was silent on that payment.

only available to a limited range of people in certain types of employment, it is not possible to judge the level of

underinsurance.

See KPMG, Underinsurance: Disability protection gap in Australia, January 2014, and Rice Warner, ibid., pp. 9–10.

REPORT 413: Review of retail life insurance advice

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Commentary

This advice to June failed to comply with the law:

 There was no reasonable basis for this advice or any explanation on the file as to why

June, single with no debt or dependants, would need $400,000 of life insurance cover. If

June were to die, it is reasonable to assume Matthew would inherit her unencumbered

home valued at $450,000.

 The advice to June did not address the stated objectives of the need for insurance to

address sickness and injury.

 The premium was unaffordable even before the 75% health loading was applied. The

premiums exceed 100% of June’s superannuation guarantee contributions on an annual

income of $40,000 and would erode June’s very modest superannuation savings as she

approaches retirement.

188 Unfortunately, in our advice surveillance, this kind of advice was not

isolated. We found a number of cases where the advice recommended a sum

insured and therefore a premium that seemed significantly in excess of the

client’s ability to afford or retain the insurance over a period of time. There

was no evidence of any evaluation of the client’s other priorities to found a

reasonable basis for the advice.

189 Advice that recommends a client obtain insurance at a sum insured that is

unlikely to be affordable for that client at that level of premium over time is

likely to leave the client uninsured when the policy lapses or is cancelled,

precisely because it is unaffordable. Such advice may leave the client with

greater cover but at a premium that is unsustainable.

190 Cost was a major trigger for clients to seek advice about their insurance and

a key trigger for consumers to drop their insurance over time, as they

struggled to continue making premium payments as stepped premium

increases became unaffordable.

191 Our analysis of the insurer data in Section C, Investment Trends research on

consumer behaviour (see paragraph 116) and the findings of our advice

surveillance suggest that rising premiums increase the likelihood of the

client discontinuing the policy. Where the client sought further advice, we

found advisers were responding to this issue with product replacement

advice that simply recommended a cheaper policy.

192 The sum insured and the affordability of the premium are interdependent

issues and go to the heart of the provision of appropriate personal advice that

complies with the best interests duty and related obligations.

193 We found that absent or inadequate cash flow analysis or evidence of any

active engagement with the client in setting the sum insured and premium

often led to template advice that simply set the sum insured at a multiple of

the client’s income or a benchmark level and compared policies set at that

level of cover.

REPORT 413: Review of retail life insurance advice

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194 In many cases, we found that when clients explicitly expressed concerns

about affordability, they were not given strategic advice that considered

options such as:

(a) setting an appropriate sum insured, informed by how long the client,

given their relevant circumstances, wants or needs to maintain

insurance cover (for a limited period such as when debts are paid or

until retirement);

(b) what type of policy is appropriate and affordable;

including prioritising the essential and the non-essential; and

(d) whether insurances should be reviewed (increased or decreased at

appropriate intervals) and what those intervals should be for the

particular client.

195 Our concerns about the lack of strategic advice were amplified where we

saw affordability issues addressed by:

(a) writing new cover with a different insurer at the same level of cover

without any consideration of alternative approaches, such as retaining

the same policy at a lower level of cover; or

(b) writing the same level of cover but changing the source of the payments

from direct cash flow to superannuation, without any adequate

consideration of the impact of this strategy over the long term on the

retirement savings of the client given their other relevant circumstances.

196 It was rare to find advisers who recommended clients hold an existing policy

or marginally decrease the level of cover or suite of insurance, regardless of

whether this advice would have been in the best interests of their clients. The

stakes can be very high for the insured and all too often we saw advice that

failed to consider these important issues or provide any strategic value to the

client in making these decisions.

197 The upfront commission payments advisers receive for life insurance advice

is significant, and significantly above estimates of the cost of a

comprehensive financial plan. In 2010, we published Report 224 Access to

financial advice in Australia (REP 224). In that report, AFS licensees

reported an estimate of the cost of providing comprehensive financial advice

to a client in the range of $2,500–$3,500: see paragraph 171 of REP 224.

Even allowing for inflation, this cost is significantly below the remuneration

we found advisers were receiving for life insurance advice in our

surveillance.

198 As noted in paragraph 96, under commission remuneration arrangements,

there is no relationship between the cost or complexity of the advice and the

remuneration received by the adviser.

REPORT 413: Review of retail life insurance advice

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199 Consumers are paying a significant amount of money for life insurance

advice. They pay this cost indirectly as the cost is built into the premium.

This cost is considerably above the general industry benchmark for

comprehensive financial advice. For the prices they paid, consumers should

be entitled to expect diligent and thorough life insurance advice that

considers their insurance needs and objectives in a strategic way that is in

their best interests.

200 The failure of advisers to do so is particularly concerning and suggests that,

for too many consumers, the advice they are receiving is poor value for

money.

Record keeping

201 For advice given after 1 July 2013, there is an onus on an adviser who is

relying on the best interests duty ‘safe harbour’ to satisfy their obligations

under s961B(2) to show they have complied with the best interests duty.

202 As noted in the methodology section (see paragraph 55), in the course of this

surveillance we found files that were inadequate or otherwise incomplete,

which made it impossible to rate the advice for the purpose of this project.

We excluded those files from our overall results. We will be raising this

issue individually with the relevant AFS licensees.

203 However, in future surveillances, where we find that the record keeping is so

poor or inadequate that we cannot satisfy ourselves whether the relevant

legal obligations are met, it is likely that we will need to talk to clients to

assess whether an adviser has complied with their obligations. It is less likely

that we will need to do this if the file contains thorough records of the

information relied on and action taken by the adviser that demonstrates that

the advice was in the client’s best interests.

204 Access to client records is essential for AFS licensees to enable them to:

(a) deal with client complaints or disputes; and

(b) supervise their advisers when giving client advice and review adviser

conduct whenever they need to do so.

Weak rationales for product replacement advice

205 We saw product replacement advice that met the client’s objective to find a

cheaper policy. This is a reasonable basis for a product switch for many

clients who wish to retain insurance in the face of immediate cost pressures.

206 However, because of the impact of stepped premium price increases, this

strategy would need to be repeated every couple of years because the initial

savings would evaporate for the client within a year or two as the premium

increases overtake the savings from the cheaper product.

REPORT 413: Review of retail life insurance advice

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207 We found that many files lacked any strategic consideration of the issues

bringing the client to the adviser in the first instance—issues such as the

effect of stepped premium increases on product affordability.

208 There is a tension between a client’s insurance need, which may be to hold

cover over the long term, and the immediate cost pressures they face as they

try to maintain their insurance as their premiums rise.

209 While it is not the responsibility of advisers to resolve this tension, there are

real risks that advisers need to adequately consider when advising clients to

switch their insurance for premium savings. These include the risk that

future insurance cover will only be provided at higher cost or on less

favourable terms than a previous policy.

210 The nature of life insurance presents particular risks for consumers when

they receive and act on advice to replace existing insurance products. There

are also significant risks for advisers in giving replacement product advice.

Two recent cases bear out both the catastrophic risks to the client and the

responsibility of the adviser in ensuring that the product replacement advice

was appropriate.

211 The operation of s29(3) of the Insurance Contracts Act represents a

significant risk to consumers where product replacement advice is given. It

means that an insurer can avoid a policy within three years if the insured

person fails to comply with the duty of disclosure, (s21 of the Insurance

Contracts Act). It requires the insured person, before the contract is entered

into, to disclose every matter that is known to the insured person that:

(a) they know to be relevant to the decision of the insurer whether to accept

the risk and, if so, on what terms; or

(b) a reasonable person in the circumstances could be expected to know to

be so relevant.

212 In the cases of Commonwealth Financial Planning Ltd v Couper [2013]

NSWCA 444 and Swansson v Harrison & Ors [2014] VSC 118, the existing

In Commonwealth Financial Planning Ltd v Couper [2013] NSWCA 444, the NSW Court of Appeal upheld a NSW

District Court finding that an authorised representative of Commonwealth Financial Planning had negligently engaged in

misleading or deceptive conduct by failing to warn about the effect of s29(3) of the Insurance Contracts Act when advising a

client to change life insurance policies. In this case, the insurer avoided the client’s claim based on non-disclosure of his

health history. The client would have been covered under the previous policy, which he had held since 2003.

In a similar case—Swansson v Harrison & Ors [2014] VSC 118—the Victorian Supreme Court found that an

authorised representative of Synchronised Business Services was negligent with respect to what a ‘reasonably prudent advice

provider’ would have done. At issue was the failure of the adviser to make any further inquiry of the client about a current

medical issue before cancelling their existing policy. The independent insurance expert in this case held that: ‘A reasonably

prudent broker would have rung [the client] to check on his stomach condition before cancelling the first policy. This is

because of the precious asset (being continuity of cover) that stood to be lost if there has been some development in respect

of that stomach condition’ (at 180). The second insurer subsequently avoided the replacement policy on the basis of non-

disclosure in reliance on s29(3) of the Insurance Contracts Act. In this case, the court also found the client contributed to the

negligence and the damages awarded to the client were reduced by 50%.

We would also note that each year the Financial Ombudsman Service (FOS) resolves a significant number of life

insurance and advice-related disputes: see the FOS annual review.

REPORT 413: Review of retail life insurance advice

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life insurance policy was of significant value to the client. In both cases, the

three-year period during which the insurer could have avoided the existing

policy had lapsed, so the existing cover represented a significant asset to the

clients when subsequently diagnosed with terminal illnesses. Avoidance of

the replacement policies was a catastrophic financial event for both clients.

213 These cases underscore the importance of the role of the adviser in

recommending a client switch to a new product and in exercising due care

and diligence when completing an insurance application and assisting the

client through the underwriting process.

214 Quality life insurance advice should be robust and rigorous in duly

considering the adverse implications of a product switch. The potential effect

of s29(3) of the Insurance Contracts Act should be considered by the adviser

when the client has a current policy in force that cannot be avoided by their

existing insurer based on this provision.

215 Personal advice should include personal warnings to the client. In our

reviews, we saw too many generic warnings that were insufficient to engage

the client in understanding their disclosure obligations or other key aspects

of the advice.

Stepped versus level premium options

216 Most life insurance products sold under advice recommended stepped

premium policies. In some cases, SOAs modelled the effect of stepped and

level premiums over time and we found examples where this was done well,

in ways that were concrete and realistic for the client.

217 In other cases, we found limited consideration of the merits of different

premium options or any engaged discussion with the client about how long

they intended to hold the cover, and therefore the effect of stepped premium

increases on the premium (and the client’s cash flow) across that timeframe.

Compliance with the product replacement disclosure obligations

218 Of the files in our sample, 67% involved product replacement advice. Of this

advice, we found that 63% of the produce replacement advice met the

expected disclosure requirements in s947D, while 37% failed to meet these

requirements.

The Insurance Contracts Amendment Act 2013 amends the remedies available for insurers in cases of non-fraudulent non-

disclosure under s29 to avoid or to vary the contract of insurance in such a way as to place the insurer in the position in which

the insurer would have been if the duty of disclosure had been complied with or the misrepresentation had not been made,

s29 (4)-(10).

REPORT 413: Review of retail life insurance advice

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Failure to consider the relationship between life insurance

and superannuation

219 Australia’s compulsory superannuation system with mandatory default life

and TPD insurance means that most working Australians generally hold

some life and disability insurance inside their superannuation.

220 While group life insurance inside superannuation was not a focus of this

project, the insurance a consumer holds inside their superannuation is an

important and relevant consideration for advisers giving life insurance

advice that complies with the best interests duty and related obligations.

221 Considering the merits of holding cover inside and outside superannuation is

an important part of strategic life insurance advice. This is because:

(a) generally, group life insurance cover is cheaper than a retail policy;

(b) many consumers may benefit from automatic acceptance arrangements,

which mean they have a certain level of cover regardless of any

underlying health issues; and

cover inside their superannuation and some funds offer additional

policy types such as income protection.

222 Life insurance is a part of consumers’ default superannuation arrangements.

The question of where to hold life insurance, inside or outside

superannuation, is an important consideration for consumers seeking

personal advice depending on:

(a) what they are insuring (e.g. life, income or illness);

(b) their existing superannuation arrangements; and

223 Life insurance and superannuation is also an area of advice where we found

many advisers fall short in giving their clients appropriate advice.

224 Of the files we reviewed, 33% related to insurance held both inside and

outside of superannuation, 22% related to insurance held solely inside

superannuation and 39% related to insurance held outside superannuation:

see Table 7. In a very small number of files, it was unclear where the

insurance was held.

Although we note that Rice Warner has recently reported that the price differentials between retail and group segments had

significantly reduced during the prior eight months to April 2014: see Rice Warner, The gap between group and retail risk

offers continues to narrow, 6 August 2014.

Since 1 July 2014, trauma insurance cannot be offered inside superannuation.

REPORT 413: Review of retail life insurance advice

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Table 7: Breakdown of advice sample—Insurance held inside/outside superannuation

Where is the life

insurance held?

Pre-FOFA

Post-FOFA

Total

No.

Combination inside and

outside superannuation

32% 36 33% 66 33%

Inside superannuation

16%

27%

22%

Outside superannuation

40% 42 39% 80 39%

Unclear

12%

Total

100%

108

100%

202

100%

225 Whether to hold insurance inside or outside the superannuation environment

or in combination can be an important issue affecting:

(a) the cost, amount and type of cover available;

(b) the level of underwriting and/or tax effectiveness of different insurance

arrangements; and

ensure that any insurance payout meets a condition of release under the

Superannuation Industry (Supervision) Act 1993 (SIS Act) before

releasing those funds to the member.

226 Recent changes to the regulation of insurance and superannuation

mean

that, since 1 July 2014, insurance cover offered inside superannuation funds

must have policy wording that aligns with SIS Act conditions of release.

Insurances that do not meet these requirements cannot be offered within the

superannuation environment.

227 These changes introduce a more restrictive definition of permanent incapacity,

so ‘own occupation’ cover is prohibited for any new insurance cover issued to

a member after 1 July 2014. Similarly, trauma insurance will not meet a

condition of release and therefore will not be available inside superannuation.

228 Personal advice about life insurance and superannuation requires strategic

advice and the application of expertise and due diligence to ensure the

insurance is appropriate and will meet the needs of the client and their

beneficiaries in the event of a claim. Personal advice about life insurance and

superannuation should include advice about:

(a) relevant taxation issues;

The 2014 amendments to the SIS Act and the Superannuation Guarantee (Administration) Regulations 1993 have changed

a number of insurance and superannuation-related policy settings. The changes include requirements on trustees of SMSFs to

have an investment strategy that addresses the insurance needs of each member of the fund.

REPORT 413: Review of retail life insurance advice

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(b) binding or non-binding death benefit nominations and the need to

update those nominations as circumstances change; and

the client’s superannuation fund to mitigate the effect of insurance

premiums on retirement benefits.

229 Many of the advice files in our surveillance that recommended clients hold

their insurance inside superannuation failed to adequately consider these

issues.

Paying the insurance premium from the client’s superannuation

230 In many files, we found that advisers were recommending policy bundles

and a sum insured for each policy type resulting in an aggregate premium

that was unaffordable to the client. The recommended strategy to manage

this was to pay the insurance premium from the client’s superannuation

guarantee contributions.

Case study 5: Post-FOFA advice that failed to comply with the law

Personal

circumstances

Amon is 52, employed full time and earns $80,000 per annum. His spouse Fatima is not in

paid employment and they have no financial dependants.

Assets

Amon and Fatima rent, own a car valued at $10,000 and have $2,500 in the bank.

Amon has a superannuation balance of $62,000.

Debts

Amon has a debt of $26,000.

Insurance

Amon had $250,000 of life insurance and $225,000 of TPD insurance, and an income

protection policy with a monthly benefit of $5,000 per month, a 30-day waiting period and a

two-year benefit payment period.

Reason for

seeking advice

Amon’s short-term financial goals are to repay his debt of $26,000 and save. His longer term

goals are to retire at 65 and live comfortably.

Advice

The adviser recommends that Amon switch to a new superannuation fund, with $100,000 of

life and TPD cover and an income protection policy with a monthly benefit of $5,000 per

month, a 30-day waiting period and a five-year benefit payment period.

The new premium was $11,068 per annum.

Commission

The commission was 115% or $11,667 (reduced in this case by a payment of $7,817 to the

AFS licensee).

The adviser would earn other fees, including a percentage of the superannuation rollover and

implementation fees on the superannuation and an ongoing advice fee.

Commentary

The advice to Amon failed to comply with the law:

 The advice did not address Amon’s stated objectives.

 The advice reduced Amon’s life and TPD cover to $100,000 and, although there was an

increase in the benefit period of his income protection policy, there was a premium

increase.

REPORT 413: Review of retail life insurance advice

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 The annual insurance premiums of $11,068 exceed Amon’s superannuation guarantee

contributions of $7,400 per annum.

 The premiums will significantly erode Amon’s superannuation balance of $62,000 between

now and his retirement at age 65.

 The adviser failed to adequately consider the affordability or sustainability of paying the

insurance premium from Amon’s superannuation benefits, particularly given his stated

objective to save for retirement. Further, the adviser failed to consider any alternative

strategies such as:

− salary sacrificing part or all of the insurance premium;

− balancing the insurance objective against the retirement savings objective (the advice

sacrificed one for the other);

− whether Amon should self-insure in part or in whole; and

− what other resources may be available to Amon in the event of a serious accident or

illness.

231 Appropriate advice that complies with the best interests duty and related

obligations should actively consider the long-term effects of insurance costs

on clients’ superannuation savings.

232 For many clients, paying for insurance from superannuation is an entirely

viable and appropriate strategy. However, the true costs and effects of this

approach should be discussed with clients. Among our file reviews, we

found a number of cases where the cost of the insurance was consuming a

significant percentage of those superannuation savings and, in the worst

cases, more than 100% of a client’s annual superannuation guarantee

contributions without any justification.

233 We also found limited consideration of a contribution strategy to supplement

retirement savings depleted by the cost of insurance premiums or

consideration of the risk that a client may exceed the contributions caps for

example and hence be exposed to tax liabilities.

234 Some advisers recommended clients retain existing default insurance

arrangements inside superannuation, while also recommending the client

purchase new insurance outside superannuation. In many cases, we found

very little rationale on the file as to why this was a suitable option for the

client. In many of the other poorly rated files, the adviser did not even

consider the existing product as an option.

235 In many cases, consumers had the option to increase their life insurance

cover in their default superannuation fund at a low cost and obtain additional

insurance cover inside that fund. In our file reviews, we found that such

advice was rarely given to clients.

236 Advisers cannot earn commission for recommending a client purchase

insurance or increase cover

(a) under a group life risk policy inside superannuation; or

REPORT 413: Review of retail life insurance advice

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(b) under an individual life insurance policy provided for the benefit of a

member of a default fund.

This would again suggest that commission payments generate a conflict of

interest between the needs of consumers and advisers.

237 Where the adviser was recommending a product switch, inadequate

consideration of existing insurance arrangements made it difficult for the

adviser to found a reasonable basis for the advice or, for post-FOFA advice,

to meet the client priority rule (s961J) where the adviser had a clear conflict

of interest.

238 Adviser remuneration arrangements where the adviser is not paid for certain

types of advice present a barrier to those advisers complying with their legal

obligations.

239 We expect an adviser to decline to provide the advice if they cannot consider

or recommend a client’s existing insurance or superannuation

arrangements—for example, if the products are not on their AFS licensee’s

approved product list.

Disclosure about of the costs or benefits of paying for insurance from

superannuation

240 Many SOAs included generic warnings to clients, such as ‘following this

recommendation may affect your retirement savings’.

241 We also found explanations in SOAs such as ‘client doesn’t place much

importance on his super as such and is willing to use it to fund his

premiums’. We found it surprising that people did not put much weight on

their superannuation.

242 Repeatedly, we found advisers failed to meaningfully explain or model the

effect of a strategy to pay their insurance premium from their client’s

retirement savings over time.

243 In making the recommendation to pay for the insurance from

superannuation, some SOAs included statements to the effect that paying the

insurance premium from superannuation savings would not affect personal

cash flow, or would have a lessor financial impact on the clients.

244 In our view, such statements materially misrepresented the client’s situation.

Clients are paying the premium regardless, although the experience of that

effect is deferred because the payments are being made from their

superannuation guarantee contributions or balance.

245 Very few files included any comparison projection of the clients’

superannuation benefits with and without insurance premium payments. We

would expect advisers to make such comparisons so as to enable the client to

REPORT 413: Review of retail life insurance advice

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clearly understand the effect on final retirement benefits, including how

much longer they may need to work as a result.

Case study 6: Post-FOFA advice that failed to comply with the law

Personal

circumstances

Kevin is aged 54, employed full time and earns $75,000 per annum. Tricia is aged 53 and is

not in paid employment.

Assets

Kevin and Tricia rent, and their assets consist of a term deposit of $10,000, an investment

property valued at $350,000 and Kevin’s superannuation of $57,000. They earn annual rental

income of $14,000 on the investment property.

Debts

Kevin and Tricia have a mortgage on their investment property of $190,000.

Insurance

Held since 2011, their insurance included:

 Kevin: $533,540 of life cover, $533,540 of accidental death cover and $106,708 of trauma

insurance with an annual premium of $3,747.44; and

 Tricia: $266,512 of life cover with an annual premium of $1,389.60.

Reason for

seeking advice

Kevin and Tricia sought advice for their annual insurance review and expressed concern

about premium increases and how they could manage this cost now and in the long term, as

they wanted to retain the cover for at least another 10 years.

Advice

The adviser recommended that Kevin and Tricia retain the same type and amounts of

insurance, but switch to a new insurer. To help them in managing the cost of their premiums,

they would move to a level premium structure and pay for Kevin’s insurance premium

through his superannuation benefits (although this was already the case).

Their combined new annual premiums totalled $8,535, an increase of $3,398 per annum

compared to their current stepped premiums.

The adviser recommended the new insurer because they can pay for some of the premiums

through Kevin’s superannuation, gain multi-policy discounts and obtain ‘true’ level premiums

to age 65.

Commission

The commission was 115% or $9,774.19 (less a 25% fee payable to a referral source). The

SOA was silent on any fees payable to the AFS licensee.

Commentary

The advice to Kevin and Tricia failed to comply with the law:

 The insurance premium will erode approximately 80% of Kevin’s superannuation guarantee

contributions as Kevin approaches retirement.

 The advice did not consider the costs versus the benefits of such a strategy and any steps

Kevin may take to ameliorate the impact on his retirement savings.

 The adviser did not demonstrate the benefit of level versus stepped premiums for Kevin

and Tricia. It is not clear from the client file or SOA that a level premium was the most cost-

effective option for these clients over a 12-year period until they reach age 65.

 No consideration was given to retaining stepped premiums in exchange for a reduced sum

insured at each policy anniversary, despite this feature being noted as a gained benefit

when switching to the new insurer. Such an option may have been a suitable alternative

solution for Kevin and Tricia, as well as reducing the effect on Kevin’s final retirement

balance.

 Given their financial and cash flow position, the advice should have considered the need

for Tricia’s life cover because it is likely that Kevin would continue working in the event of

Tricia’s premature death.

REPORT 413: Review of retail life insurance advice

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246 Some of the life insurance and superannuation advice in our review simply

failed on basic competency grounds—that is, the advice failed to consider

issues such as:

(a) the option to salary sacrifice into superannuation to top up balances

reduced by the insurance premium;

(b) information or advice about the importance of nominating beneficiaries

for benefits and reviewing those nominations where client

circumstances change (e.g. divorce); and

Insurance and SMSFs

247 Insurance advice to clients in or establishing SMSFs did not feature

significantly in this advice surveillance. In Report 337 SMSFs: Improving

the quality of advice given to investors (REP 337), we identified a number of

areas where insurance advice to these consumers could be improved.

Problem areas included:

(a) discussing insurance after, and not before, an SMSF had been

established;

(b) inappropriately excluding insurance from the scope of the advice;

purposes without discussing the advantages and disadvantages of this

approach; and

(d) some small pockets of overinsurance.

248 Legislative changes, discussed at paragraph 226, require trustees of SMSFs

to have an investment strategy that addresses the insurance needs of each

member of the fund. This means that advisers giving advice to SMSF

trustees must consider whether it is appropriate for each member to have

their insurance inside or outside superannuation (or in a combination) or to

hold no insurance at all.

Warning signs of poor advice

249 In the course of our research project, we identified some key warning signs

for poor advice: see Table 8. These signs may operate singly or in concert

with other indicators to guide insurers and AFS licensees about where poor

advice and/or adviser misconduct is likely to be found.

REPORT 413: Review of retail life insurance advice

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Table 8: Warning signs of poor advice

Warning sign

Commentary

High clawback rates High clawback rates per adviser may be a warning sign about the quality of the

advice that the adviser is giving to their clients. Clawbacks can be a telling indicator

that advisers are rewriting business to earn commission income and providing

product replacement advice that is not in the best interests of their clients.

AFS licensees should monitor clawback rates and policy lapses across their

advisers.

High volumes of new

business with ‘no

underwriting issues’

Advisers may write new business in online applications or under certain limits to

avoid triggering any compliance concerns—to ‘fly under the radar’. This may be a

warning sign that the automatic underwriting process is being abused.

Automatic underwriting means that advisers can ensure questions are answered in

such a way so as not to raise any warning signs. This abuse of the automatic

underwriting process can cause significant detriment to clients and expose AFS

licensees to compensation claims from clients.

Insurers should have robust systems in place to review new business and ensure

that automatic underwriting is not being abused.

Poor or inadequate

needs analysis

Failure by an adviser to ask the most rudimentary questions about the client’s

relevant circumstances may be a warning sign that the advice is not in the best

interests of the client.

Advisers who fail to perform and record an appropriate needs analysis of their

clients present a significant risk to an AFS licensee’s business. An appropriately

detailed needs analysis is also important to ensuring that scaled advice is delivered

appropriately.

AFS licensees should actively review the quality of the needs analysis.

High volumes of

replacement product

advice, product

bundling and upselling

AFS licensees should actively monitor files for advice to clients that recommends

the client hold multiple policies where the recommendation suggests that the clients

may be overinsured relative to their insurance needs and income.

Where the business model is dependent on the incentives to advisers to write new

business, AFS licensees should actively monitor representatives writing high

volumes of new business, particularly replacement business written after the expiry

of the clawback period on the previous policy.

Competency

File reviews should consider the following warning signs that the adviser is not

competent to provide the advice:

 inadequate inquiries into the client’s relevant personal circumstances;

 poor record keeping and inadequate documentation on the file to found a basis

for the advice; and

 poor consideration of related issues of strategic importance for clients, such as

the need for clients to nominate beneficiaries (and update nominations) for death

benefits in superannuation.

See our submission to the Financial System Inquiry: Interim report, August 2014, p. 39, where we stated our support for

the need to raise the minimum education and competency standards for advisers who give personal advice and our recent

submission to the PJC Inquiry into proposals to lift the professional, ethical and education standards in the financial services

industry, September 2014, p.4.

REPORT 413: Review of retail life insurance advice

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Warning sign

Commentary

Insurance paid for using

a high percentage of the

client’s superannuation

guarantee contributions

Life insurance advice recommending a client pay insurance premiums using a

significant percentage of their superannuation guarantee contribution may be a

warning sign that the advice is not in the best interests of the client.

AFS licensees should review files to ensure that the effect of this strategy is

modelled to show the loss of retirement income over time and the extent to which

the advice considers contribution strategies as appropriate to the client’s

circumstances.

Poor record keeping Record keeping is essential to prove compliance with s961B(2) and to enable

licensees to comply with their obligations to monitor and supervise their

representatives. Poor record keeping should be a key warning sign to an AFS

licensee that the advice may not be compliant.

Poor compliance with

disclosure obligations

and use of generic

warnings

Generic warnings and non-specific information about strategy may be a warning

sign that the advice may not be in the best interests of the client.

AFS licensees should review files to ensure that the SOA includes relevant

information about the basis on which the advice was given. This includes:

 a clear and specific explanation to the client about the rationale for and

implications of a recommended strategy;

 the pros and cons of a strategy to pay for insurance inside or outside

superannuation; and

 consideration of the importance of the duty of disclosure where a client is given

switching advice.

The challenge for insurers and advisers

250 There is no doubt that the findings in this report represent a significant

challenge to the insurance industry, advisers, regulators and consumers.

251 Insurers should:

(a) review their remuneration arrangements to ensure that consumer interests

are prioritised and that conflicts of interest are better managed; and

(b) develop simpler products that may better balance affordability issues

against insurance needs.

252 Advisers should:

(a) review and amend, as appropriate, business models to address structural

barriers to the provision of compliant life insurance advice; and

(b) when presented with a conflict of interest, act according to what a

reasonable adviser without a conflict would do.

253 Advisers are in the business of giving personal advice in most situations. The

value of personal advice is that it:

(a) is tailored to the client and their relevant personal circumstances;

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(b) considers the client’s insurance needs and balances those needs against

their other priorities;

make inquiries of the client to test or challenge their assumptions; and

(d) leaves the client in a better position.

254 Observations drawn from our surveillance, recent case law and industry

experience give us an opportunity to reflect on the value that life insurance

advice should give to consumers.

255 Advisers can help consumers in making key strategic decisions such as

setting, and as personal needs change, revising their sum insured. Such

strategic advice can help the client balance the competing priorities of

insurance needs against cost.

256 Unlike the direct market, consumers who retain the services of an adviser

should have the benefit of the adviser’s expertise and judgement.

257 Competent advisers know, or ought to know, the importance of exercising

particular diligence when recommending a client switch their insurance

product because of the remedies available to an insurer where the insured

person fails to comply with their duty of disclosure.

258 Advisers can help clients ‘triage’ their insurance needs by prioritising the

essential and the non-essential and explain the costs, benefits and value of

different options to the client to help them make an informed decision as to

their insurance needs and priorities.

259 Advisers can give essential assistance to clients when a claim is made,

reducing the need for lawyers to advocate for their clients where a claim may

be denied or only partially paid by the insurer.

Giving high quality advice

260 There is both a need and a demand for quality life insurance advice. We

include the following examples from our surveillance so as to illustrate how

advisers, who are already giving compliant advice to their clients, may lift

the quality of that advice.

Case study 7: Pre-FOFA advice that complied with the law

Personal

circumstances

Indira is 54, self-employed and earns $250,000 per annum. Sandeep is 50 and earns

$100,000 per annum. Indira and Sandeep have two children aged 11 and 7. Their living

expenses are unknown beyond education fees of $20,000 per annum and Indira had some

minor health issues which have been resolved.

Assets

Jointly held assets include their home valued at $1.8 million. They have a combined

superannuation balance of $120,000 with no other cash or investments/savings.

REPORT 413: Review of retail life insurance advice

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Debts

Indira and Sandeep have a $580,000 mortgage.

Insurance

Indira and Sandeep had no insurance outside superannuation. It is unclear if there was any

insurance inside superannuation.

Reason for

seeking advice

Indira had been a client since 2007 and wanted wealth accumulation advice. The adviser

specialises

in personal life insurance only, and so refers clients for wealth accumulation

advice. Indira had declined to implement previous insurance recommendations. She was now

looking for insurance to cover debt and provide income to her family in the event of sickness,

accident or death.

Advice

The adviser conducted a needs analysis and considered Indira’s objective to cover her

income, debt reduction and education costs for her children until age 24, and to provide

replacement income of $50,000 per annum for Sandeep for 20 years. The adviser took into

account Indira’s superannuation balance of $60,000 as a realisable asset in the needs

analysis. The adviser compared four insurers and recommended Indira take out:

 life insurance of $2 million and TPD cover of $1 million for any occupation (inside

superannuation);

 stand-alone TPD cover of $1 million (own occupation) outside superannuation;

 $500,000 of trauma cover in her own name; and

 income protection of $15,625 per month, with a 30-day waiting period and a benefit

payment period to age 65.

The premium was stepped and the total payable in year 1 was $23,305.

No insurance recommendations were made for Sandeep.

Commission

The commission was 110% or $25,635.69 (less any fees payable to the AFS licensee).

Commentary

The advice to Indira and Sandeep was compliant with the law. The adviser had:

 made reasonable inquiries about the client’s financial and health circumstances;

 compared four different insurers before making a recommendation;

 explained and documented the basis for the recommended sum insured relative to Indira’s

personal circumstances; and

 told the client that income protection premiums are tax deductible.

What would have made this advice high quality advice?

High quality advice to Indira and Sandeep would have addressed key strategic

considerations such as:

 the affordability of the premium over time as there was no evidence on the file that this

issue was considered;

 the advantages and disadvantages of holding insurance inside superannuation;

 the insurance needs of Sandeep as the SOA was silent on this issue; and

 existing insurance Indira and Sandeep may have had inside their superannuation.

Case study 8: Post-FOFA advice that complied with the law

Personal

circumstances

Eric is 55, single and self-employed earning $100,000 per annum. He is in good health.

There was no other information on the file about his personal circumstances or any

dependants.

Assets

Eric has $43,000 in superannuation. There was no other information on the file about assets.

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Debts

There was no information on the file about debt.

Insurance

Eric had the following cover in place:

 life insurance of $515,000 held inside superannuation;

 income protection insurance of $6,180 per month, with a 30-day waiting period and a

benefit payment to age 65, also held inside superannuation; and

 life and trauma insurance of $82,400 held in Eric’s personal name.

Eric’s existing annual premiums were $8,213 with insurer A.

Reason for

seeking advice

The adviser contacted Eric to discuss his upcoming annual premium renewal with insurer A,

review his circumstances and make sure Eric was satisfied with his current levels of cover.

The adviser offered Eric a full needs analysis, but Eric declined and stated he would like to

maintain his existing cover, but he was concerned with the increasing premium cost.

Advice

The adviser recommended that Eric switch to insurer B, maintain the existing type and

amounts of cover, and hold all his insurance inside superannuation with the exception of the

trauma insurance.

Eric’s existing annual premiums were $8,213 and would be reduced to $6,757 with insurer B.

This represented a 17.7% premium saving.

Commission

The commission was 105% or $7,955.14.

The SOA stated that the adviser would receive

100% of the commission, with no payment to the AFS licensee.

Commentary

The advice to Eric was compliant with the law:

 The client file and SOA demonstrated the client’s instructions to maintain the amount of

existing insurance cover but seek a cheaper premium.

 The SOA documented the client’s instructions, including a warning about the limitations

and risks of this approach. The client’s objective of obtaining a premium saving for

comparable cover was achieved.

What would have made this advice high quality advice?

The adviser has been advising this client since 2008. The client expressed affordability

concerns in 2011 and again in 2013. The adviser did not adequately consider alternatives to

Eric’s affordability concerns and alternative solutions other than switching insurers and using

superannuation to pay for premiums: see the appendix to this report for the life insurance

advice checklist.

High quality advice to Eric would have:

 canvassed with Eric a range of alternatives to deal with his affordability concerns balanced

against his insurance needs;

 considered the advantages and disadvantages of holding his insurance inside

superannuation. Instead, the SOA stated that unless Eric makes contributions to his

superannuation account, funding insurance premiums through his superannuation will have

a detrimental effect on his retirement outcome;

 explored with Eric that, given his age, modest superannuation savings and the fact the

premium payments represented 12% of his current superannuation balance that the trade-

off of being insured versus his retirement savings should not be ignored; and

 compared the existing insurer A with more than a single alternative, the recommended

insurer B.

REPORT 413: Review of retail life insurance advice

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Appendix: Life insurance advice checklist

The checklist in Table 9 sets out a list of factors to consider when giving life

insurance advice. The checklist covers existing obligations under the

Corporations Act, as well as further considerations for giving good or best

practice advice. We recommend reading the checklist alongside ASIC’s

guidance in RG 175.

Table 9: Issues to consider when giving life insurance advice

Issue

Considerations

What are the client’s

objectives?

Good life insurance advice should ensure a client’s objectives are specific, measurable and

prioritised: see RG 175.218(c). Objectives may include:

 debt reduction/repayment;

 emergency/cash funds;

 medical expenses or home renovation expenses;

 education or business-related expenses; and

 a lump sum amount to produce a level of regular income for financial dependants for a

period of time.

Note: This is not an exhaustive list.

Good advice should be able to identify further client objectives relevant to insurance, such as:

 nominating a beneficiary on the policy; or

 seeking legal advice on a will.

Good advice should also use a client’s objectives to define the scope of the advice.

What are the client’s

financial situation

and needs?

Good advice is founded on a solid strategy that requires identification of the client’s relevant

personal and financial situation and needs. The adviser should identify, discuss and document

the client’s:

 financial position (income, expenses, assets and liabilities);

 personal circumstances (age, relationship status and family circumstances);

 foreseen changes to their personal or financial position (inheritance, home renovations,

divorce, new baby, sale of business);

 existing insurance arrangements (including insurance held inside their superannuation fund);

 health status (including any hereditary or genetic conditions that may affect their ability to

obtain insurance);

 insurance needs (life, disability, illness or income) and the relative priority of these needs;

and

 willingness and capacity to pay insurance premiums and over what time period.

Good advice should explore with the client alternatives that may be available if the client

wishes to self-insure in part or in whole, and an insured event arises. Such ‘self-insurance

strategies’ may include:

 the client’s leave entitlements, employee benefits and liquid assets;

 the client’s ability to rely on extended family support or to downsize their home to access

capital;

 returning to work or increasing working hours; and

 any entitlements the client has to social security and/or workers or transport accident

compensation arrangements.

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Issue

Considerations

Providing balanced

scaled advice

When providing scaled advice, good advice will respond to the client’s stated objectives and

implicit needs. For example, a client may state they wish to obtain cheaper insurance and the

adviser and client agree to scope the advice to this issue. Good advice should include further

considerations relevant to obtaining life insurance, including:

 the costs and benefits of holding existing levels of cover and the client’s priorities regarding

their insurance;

 the coverage of any replacement insurance product;

 how long the client wants to hold the insurance and of what type;

 alternative options, including revising down the sum insured or modifying the selection of

optional extras; and

 the merits and hazards of switching policies as a strategy to manage affordability (such as

s29(3) of the Insurance Contracts Act).

Good advice should also consider:

 giving clear and specific warnings to the client about the cost impact of their insurances

relative to their income, debt, insurance needs or retirement goals; and

 giving practical guidance to the client about self-insurance strategies (see the list above on

self-insurance strategies).

Making a

recommendation to

retain a current

insurance product

An adviser must:

 conduct a reasonable investigation into the financial products that might achieve the client’s

objective and meet the client’s needs that would reasonably be considered relevant to the

subject matter of the advice (s961B(2)(e)(i)); and

 assess the information gathered in the investigation (s961B(2)(e)(ii)).

Good advice should consider the client’s existing insurance arrangements and consider

whether the best solution for the client may be to retain their existing insurer but modify the

type or amount of cover. An adviser may consider:

 the amount of leave the client may have, including sick leave, annual leave and long-service

leave; and

 any alternatives that may be available if the client wishes to employ self-insurance strategies

(see the list above on self-insurance strategies).

In some cases, it is unlikely that a product recommendation will be appropriate. For example,

a client nearing retirement may have accrued long-service leave, more than a year of annual

leave and be a member a defined benefit superannuation fund that will pay out a defined

lifetime benefit if the client ceases work permanently (even before retirement age). To achieve

such a client’s objectives of having sufficient income if temporarily disabled, a product

recommendation is unlikely to be appropriate.

Making a

recommendation to

replace an insurance

product

Replacement product advice must be appropriate to the client. Good replacement product

advice should carefully consider important risks to the insured in switching policies. This is

particularly important where an adviser recommends a switch to a cheaper premium because

such a strategy can have significant risks for a client.

In addition to documenting the client’s objectives, financial situation and needs, good

replacement product advice should:

 consider and address affordability issues in the strategy for achieving the client’s objectives.

This may include self-insurance strategies (see the list above on self-insurance strategies);

 carefully consider how long the client wants to hold insurance, along with careful

consideration of the client’s current and any foreseeable future health challenges;

 clearly describe the long-term impact of a recommendation to pay the premium from the

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Issue

Considerations

client’s superannuation benefits and consider options to ameliorate the impact on future

retirement income as appropriate to that client’s personal circumstances; and

 carefully consider the operation of s29(3) of the Insurance Contracts Act. This provision

represents a significant risk to consumers where product replacement advice is given

because it allows an insurer to avoid a contract of insurance within three years of

commencement where the client failed to comply with the duty of disclosure.

The operation of this provision is particularly important for a client who has held an existing

policy for more than three years and for whom the insurance represents a significant asset.

Poor replacement product advice may risk the client losing the important protection of an

existing insurance policy.

Courts have recently held advisers liable for compensation to clients for misleading and

deceptive conduct, and negligence, when switching clients from one insurance policy to

another. The advice should clearly explain

 why the new product is better than the old product;

 what specific features are better and what has been lost. Where the rationale is ‘better

policy terms’, those improved policy terms should be spelled out;

 where software has been used to rate policies, advisers should spell out why a particular

product has a higher rating, and what features will be lost in a switch; and

 where new policies have waiting periods, such as trauma policies, advisers should exercise

due care and diligence to ensure that extant policies are not cancelled while waiting periods

are in force (e.g. where a client is managing a current illness or awaiting a diagnosis).

Making a

recommendation to

pay for insurance

from superannuation

Good advice that recommends a client pay insurance premiums from their superannuation

contributions cannot ignore the advantages and disadvantages of this strategy. Specifically,

advisers should ensure their client understands that:

 the insurance policy is owned by the trustee of the superannuation fund on behalf of the

member;

 the Income Tax Assessment Act 1997 dictates how the proceeds are taxed, which differs

from personally held insurance policies. If the client meets the SIS Act permanent incapacity

definition and the trustee pays their superannuation (including total and permanent disability

insurance) balance out, the tax payable depends on a range of factors, including age and

the existing tax-free component of their superannuation; and

 superannuation is not a personally held asset and generally is not dealt with by a person’s

will or estate planning. Clients must ensure their nomination of beneficiaries reflects their

wishes and they must decide whether they need a binding or non-binding nomination of

beneficiaries. If there is no nomination of beneficiary, the superannuation fund trustee will

use their discretion on how to pay death benefits.

Generic warnings to clients that paying for insurance from superannuation has cash flow

benefits but will erode retirement savings are not adequate.

Advisers should address the key risk of funding insurance premiums from superannuation

funds, that is, that it may prevent the client from meeting their retirement objectives. Advisers

should give adequate consideration to this risk when recommending this strategy. This should

include consideration about making concessional or non-concessional contributions that at

least negate the effect of insurance premiums on retirement benefits. If this option is not

appropriate for the client’s circumstances, the risks of the strategy need to be clearly explained

to the client, including communicating the cost impact.

Advice recommending a contribution strategy should also consider the impact on the client’s

cash flow. This may include comparing the value of making concessional and non-

concessional contributions equivalent to the insurance premiums. We expect advisers to:

 communicate that the cost impact of insurance is simply being deferred from today’s cash

REPORT 413: Review of retail life insurance advice

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Issue

Considerations

flow to future cash flow and that the client needs to actively consider the long-term impact of

this and strategies to manage it;

 inform and model for their client the impact on their retirement savings balance with and

without insurance premiums over their retirement horizon (e.g. if the client is 20 years from

retirement);

 communicate that every dollar spent on the insurance premium is a dollar less invested for

retirement, and this impact compounds over time where the client may otherwise have a

long investment horizon; and

 cover the fact that the client may need to work longer to save for retirement.

Statement of Advice The SOA must clearly set out the basis on which the advice was given: see RG 175.159–

RG 175.196. Good advice should clearly document in the SOA the strategy for achieving the

client’s objectives, including the product features and client circumstances relevant to the

subject matter. Regardless of whether advice is comprehensive or scaled narrowly, an adviser

who is acting in the client’s best interests should actively engage with their client to gather

sufficient information, and apply their knowledge and experience, to provide personal

insurance recommendations.

Where the client instructions may be ‘I want to keep the same insurance cover, but I want a

cheaper premium’, the adviser should discuss why the client is seeking personal advice and

explore the cash flow issues that inform that client instruction, as well as whether personal

advice is appropriate in this situation. If the client wants personal advice, the SOA should

document how the recommended amounts of insurance were arrived at, by reference to the

client’s circumstances.

When a replacement product is recommended (in full or in part), the SOA must include

information about:

 the cost of the recommended action (i.e. the disposal of the existing product and acquisition

of the replacement product);

 the potential benefits (pecuniary or otherwise) that may be lost; and

 any other significant consequences of the switch for the client.

Personal or general

advice

Good advice should clearly communicate to the client whether the adviser has considered

their relevant personal circumstances in formulating the advice.

REPORT 413: Review of retail life insurance advice

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Key terms

Term

Meaning in this document

advice

Financial product advice

advice provider A person to whom the obligations in Div 2 of Pt 7.7A of

the Corporations Act apply when providing personal

advice to a client. This is generally the individual who

provides the personal advice. However, if there is no

individual that provides the advice, which may be the

case if advice is provided through a computer program,

the obligations in Div 2 of Pt 7.7A apply to the legal

person that provides the advice (e.g. a corporate licensee

or authorised representative)

adviser

An advice provider

AFS licence An Australian financial services licence under s913B of

the Corporations Act that authorises a person who carries

on a financial services business to provide financial

services

Note: This is a definition contained in s761A.

AFS licensee A person who holds an AFS licence under s913B of the

Corporations Act

Note: This is a definition contained in s761A.

APRA

Australian Prudential Regulation Authority

ASIC

Australian Securities and Investments Commission

ASIC Act

Australian Securities and Investments Commission Act

2001

authorised

representative

A person authorised by an AFS licensee, in accordance

with s916A or 916B of the Corporations Act, to provide a

financial service or services on behalf of the licensee

Note: This is a definition contained in s761A.

best interests duty The duty to act in the best interests of the client when

giving personal advice to a client as set out in s961B(1) of

the Corporations Act

best interests duty

and related

obligations

The obligations in Div 2 of Pt 7.7A of the Corporations Act

clawback

A commission or benefit that is paid to an adviser that is

recovered, or ‘clawed back’, by the insurer if the policy

lapses within a certain period, usually within the first

12 months the policy is on foot

client A retail client as defined in s761G of the Corporations Act

and Div 2 of Pt 7.1 of Ch 7 of the Corporations

Regulations

REPORT 413: Review of retail life insurance advice

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Term

Meaning in this document

conflicted

remuneration

A benefit given to an AFS licensee, or a representative of

an AFS licensee, who provides financial product advice to

clients that, because of the nature of the benefit or the

circumstances in which it is given:

 could reasonably be expected to influence the choice

of financial product recommended by the licensee or

representative to clients; or

 could reasonably be expected to influence the financial

product advice given to clients by the licensee or

representative.

In addition, the benefit must not be excluded from being

conflicted remuneration by the Corporations Act or

Corporations Regulations

Corporations Act

Corporations Act 2001, including regulations made for the

purposes of that Act

Corporations

Regulations

Corporations Regulations 2001

financial product

advice

A recommendation or a statement of opinion, or a report

of either of these things, that:

 is intended to influence a person or persons in making

a decision about a particular financial product or class

of financial product, or an interest in a particular

financial product or class of financial product; or

 could reasonably be regarded as being intended to

have such an influence.

This does not include anything in an exempt document

Note: This is a definition contained in s766B of the

Corporations Act.

FOFA

Future of Financial Advice

Insurance Contracts

Act

Insurance Contracts Act 1984

level premium policy

A policy where the premium is calculated at the start of

the policy and remains fixed at the same level for the

duration of the policy

life insurance The lump sum and income stream products, such as life

and TPD insurance policies and trauma and income

protection, sold to retail clients under personal advice.

These policies may be held or purchased inside or

outside the superannuation environment (excluding group

life policies)

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Term

Meaning in this document

personal advice Financial product advice given or directed to a person

(including by electronic means) in circumstances where:

 the person giving the advice has considered one or

more of the client’s objectives, financial situation and

needs; or

 a reasonable person might expect the person giving the

advice to have considered one or more of these

matters

Note: This is a definition contained in s766B(3) of the

Corporations Act.

phase 1 The first phase of the retail life insurance project that

included two industry roundtables and a survey of

12 insurers that manufacture and distribute life insurance

products under personal advice models

phase 2 The second phase of the retail life insurance project that

included a targeted surveillance of advisers who give

personal advice to consumers on life insurance products

PJC Inquiry Parliamentary Joint Committee on Corporations and

Financial Services Inquiry into the Corporations

Amendment (Future of Financial Advice) Bill 2011 and

the Corporations Amendment (Further Future of Financial

Advice Measures) Bill 2001

policy lapse When a policy ceases due to non-payment or

cancellation by the client

representative of an

AFS licensee

Means:

 an authorised representative of the licensee;

 an employee or director of the licensee;

 an employee or director of a related body corporate of

the licensee; or

 any other person acting on behalf of the licensee

Note: This is a definition contained in s910A of the

Corporations Act.

retail life insurance

Life insurance

RG 175 (for example) An ASIC regulatory guide (in this example numbered

175)

s961 (for example) A section of the Corporations Act (in this example

numbered 961), unless otherwise specified

safe harbour for the

best interests duty

The steps set out in s961B(2) of the Corporations Act. If

an adviser proves they have taken these steps, they are

considered to have met their obligation to act in the best

interests of their client

scaled advice

Personal advice that is limited in scope

SIS Act

Superannuation Industry (Supervision) Act 1993

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Term

Meaning in this document

SMSF

Self-managed superannuation fund

Statement of Advice

(SOA)

A document that must be given to a client for the

provision of personal advice under Subdivs C and D of

Div 3 of Pt 7.7 of the Corporations Act

Note: See s761A for the exact definition.

stepped premium

policy

A policy where the premium is recalculated upon each

renewal. The premium usually increases according to risk

factors such as the client’s age

strategic life

insurance advice

Includes advice on the type, level, structure and

affordability of life insurance cover based on the client’s

cash flow position and which prioritises the client’s

insurance needs. Strategic advice can be stand alone or,

where appropriate, provide the framework for product

advice

switching advice Personal advice that is, or includes, a recommendation

that the client dispose of, or reduce their interest in, all or

part of a financial product (or investment option) and

instead acquire, or increase their interest in, all or part of

another financial product (or investment option). This

includes where the client’s original holding is money in a

bank account

TPD

Total and permanent disability

REPORT 413: Review of retail life insurance advice

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Related information

Headnotes

adviser, AFS licensees, Australian financial services licensees, authorised

representatives, best interests duty, conflicted remuneration, financial

product advice, Future of Financial Advice reforms, personal advice,

representatives, retail clients, Statement of Advice

Regulatory guide

RG 175 Licensing: Financial product advisers—Conduct and disclosure

Legislation

ASIC Act, s12CA, 12CB, 12DA, 12DB

Corporations Act, Pts 7.7, 7.7A (Divs 4 and 5) and 7.9; s763A, 764A, 766A,

912A, 913B, 915C, 920A, 945A, 947D, 961B, 961G, 961H, 961J, 962H,

963A, 963B

Corporations Regulations, reg 7.7A.12A

Income Tax Assessment Act 1997

Insurance Contracts Act, s13, 21 and 29

Insurance Contracts Amendment Act 2013

SIS Act, s29SAC

Superannuation Guarantee (Administration) Regulations 1993

Report

REP 18 Survey on the quality of financial planning advice

REP 69 Shadow shopping survey on superannuation advice

REP 224 Access to financial advice in Australia

REP 279 Shadow shopping study of retirement advice

REP 337 SMSFs: Improving the quality of advice given to investors

REP 362 Review of financial advice industry practice: Phase 2

REPORT 413: Review of retail life insurance advice

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Media releases and advisories

13-019MR ASIC cancels licences of national financial planning business

(6 February 2013)

12-60AD ASIC accepts permanent undertaking from Adelaide adviser

(2 April 2012)