My nature is that of Libertarian however I do acknowledge the need for some government, but I do believe that it should be “small government”. A classic example in my opinion of why the government should not get involved in sorting out most instances where the market will determine can be found in the struggling Australian Life Insurance industry.
After a number of reports including the Trowbridge report saw legislators introduce the Life Insurance framework to effectively adjust advice practices in the provision of life insurance advice for the notion of greater consumer protection. The need for this reform in my opinion was based on a few examples of misbehaviour but the inevitable costs borne out below far exceeded this problem.
These reforms were instigated notwithstanding the actual experiences such as the United Kingdom that this would not work and indeed have the impact that has since transpired.
The impacts of these reforms were then reviewed by the Quality of Advice Review. They reviewed 521 files from 2017 (before the LIF reforms were introduced) and 522 files from 2021 (after the implementation of the LIF reforms). In short, the review of the advice found there were improvements in compliance with best interest duty and related obligations and that adviser “churn” had improved. Treasury themselves said “it is difficult to conclude the improvement was because of the LIF reforms”. They went on to say, “This improvement could also be attributed to a number of factors, such as professional standards, which introduced education and training standards (for advisers)”.
It should also be pointed out that over this period of time consumers have seen a massive increase in the premiums on their existing and new policies. If I was to say that premiums have probably doubled over this time, I don’t think that would be far off the money.
In my opinion what we can talk about as the effect of the LIF Reforms is the dramatic reduction in the amount of life insurance given to retail clients. I believe this was a result of the LIF Reforms namely the change to compensation and the clawback period being extended to 2 years. Whilst advice had become more difficult to give from a compliance perspective advisers were only getting paid half as much for the same advice, hardly a good deal for the supply side of the equation.
This has seen a large decrease in the number of risk specialists and the amount of generalists that are providing insurance advice are also declining. A lot of those that I speak to in the industry just believe it is too hard to profitably provide this advice and other areas of financial advice are more commercially viable. So, let’s take a look at the level of new insurance policies being written since the LIF Reforms were introduced. The direction or trend of business that is being written is a very bad sign for the insurance market as it continually needs new money and new risks to add to the pool as the existing policy holders age.
This trend will not be a good outcome for the insurance industry or the consumers that rely on insurance policies. Let’s hope they allow the free market to fix it up.
Article by: Rob Coyte, CEO, Shartru Wealth Management