TAL acquires remainder of Lifebroker.

It is widely accepted that the life insurance industry is in need of transformational change to achieve improved alignment of the interests of insurers, advisers and consumers.

There is a clear need, highlighted by ASIC’s Review in October last year, for the removal of misaligned remuneration incentives, improved quality of advice and greater productivity in the life insurance and advice sectors.

The announcement made today by the Assistant Treasurer, the Hon Josh Frydenberg, represents a set of reforms that will initiate such a transformation. The catalyst for the reforms was the ASIC Review and the subsequent independent recommendations set out in my report released on 26 March this year*.

I am pleased to see that the essence of these recommendations during an initial three year transition period is to be adopted. The reform process is to be closely monitored and a review is to be undertaken in 2018. This review should examine how effective the transformation is at that stage and consider the balance of my recommendations, in order to identify the further reforms needed to overcome remaining misaligned incentives and better support the interests of consumers.

The announced reforms include not only maximum commissions payable to advisers by life insurers but also the development of a code of practice for insurers, a more effective advice process for consumers and a wider product selection, all aimed at enhancing the ability of advisers to act in the best interests of their clients.

It is important that these reforms are introduced quickly and constructively by the industry to initiate the cultural changes needed. The challenge is to strengthen the quality of advice, reduce conflicts of interest, offer improved value and services to consumers and extend the coverage of worthwhile life insurance protection across the Australian community.

I will be a keen observer over the next three years of the industry’s implementation of the reforms announced today by the Assistant Treasurer. The proposed review in 2018 will enable residual remuneration conflicts, quality of advice questions and industry effectiveness to be reassessed at that time and further reforms to be undertaken.

*This report was sponsored by the FSC on behalf of the life insurance industry and the AFA representing a major segment of the advice community but it was necessarily independent. Its primary goal was to develop a set of reform recommendations that would align the interests, across the life insurance value chain, of insurers, licensees, advisers and consumers.

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It has been produced in response to Australian Securities and Investments Commission’s (ASIC’s) Review of retail life insurance advice, released in October 2014. It is an initiative of the Association of Financial Advisers and the Financial Services Council to conduct an independent review of ASIC’s findings and to make recommendations for industry reform.

John Trowbridge, author of the independent report and former APRA member, said: “My recommendations are designed to better align interests across the life insurance value chain, from insurer to licensee to adviser to consumer.”

“Consumers are at the heart of these recommendations which aim to restore trust and confidence in the life insurance sector through eliminating misaligned financial incentives offered to advisers and licensees, and encouraging competition through a wider choice of products so Australians are adequately insured for their lifecycle needs.”

“The recommendations need to be adopted as a package to achieve the transformation needed for the advice and life insurance industries,” Mr Trowbridge said.

“Misaligned incentives that have been found to influence the quality of life insurance advice require urgent attention. It is up to the industry to take the initiative to respond positively to these recommendations.”

Trowbridge proposes a new model for industry reform

Mr Trowbridge’s model for reform includes 11 recommendations: 6 policy recommendations, 4 implementation recommendations and one recommendation to review the changes in 2020.

“To minimise conflicts of interest it is critical that the remuneration that advisers and their licensees receive from insurers is restructured,” Mr Trowbridge said.

“This suite of recommendations is designed to achieve improved alignment of interests, including the removal of conflicts over remuneration and advice, along with productivity gains in the life insurance and advice sectors.”

Mr Trowbridge has recommended that the industry adopt level commissions to a maximum of 20% of premiums supported by an initial advice payment (IAP) not exceeding $1,200 per customer and, for annual premiums below $2,000, to no more than 60% of the first year’s premiums. Importantly, he has proposed that IAPs be available only on advised business and once only unless at least five years have passed and the customer takes out new policies.

Mr Trowbridge has also recommended changes to licensee remuneration, specifically that licensees be prohibited from receiving benefits from insurers that might influence recommended product choices or the advice given by the licensees’ advisers. “These changes are transformative as they are designed to stimulate insurers to compete for customers instead of for licensees and advisers.

They will remove misaligned incentives for new and replacement policies and align the interests of insurers, licensees and advisers,” he said.

Mr Trowbridge has allowed for a three year transition period between current remuneration arrangements and the new model.

To ensure that all advisers have access to a good cross section of the insurance market, Mr Trowbridge has recommended that all licensees be obliged to include at least half of the 13 retail life insurance providers on their Approved Product Lists.

Also included in his reform recommendations is that licensees and their advisers re-examine the advice process towards improved client engagement and understanding of life insurance and more streamlined Statements of Advice. “Consumers must have access to clear, concise and effective Statements of Advice that are meaningful to them,” Mr Trowbridge said.

His final recommendation is that the life insurance industry develop a code of practice similar to the precedents set by the general insurance and banking sectors, aimed at setting standards of best practice for insurers, licensees and advisers.

“Bringing systemic and cultural change to fruition is no small task. It will involve modifying industry structure and behaviours that will require industry commitment and investment in transition planning.”

“Ultimately the recommendations in my report represent an integrated package of reforms that, taken as a whole, can deliver a more competitive industry with more consumers who are better advised and better protected by their life insurances.”

About the Trowbridge Review

The Trowbridge Review has been a unique process in the context of industry-led reform in Australia. It has bipartisan support as being the right approach to respond to ASIC’s Review of retail life insurance advice released on 9 October 2014.

The review has involved a three step process comprising:

1. An interim report, released in December 2014, that explored options and issues that arise on consideration of the ASIC report
2. Submissions from the industry, consumers and other interested parties, and
3. A final report with recommendations for reform.

As independent chairman, Mr Trowbridge has enjoyed full autonomy in determining the outcomes from this process and has been supported by a working group with high-level representatives from the AFA and the FSC.

Mr Trowbridge received 137 submissions with over 1,000 pages of content and he consulted extensively with industry participants and others including consumer groups, government agencies (ASIC, APRA and Treasury), individual advisers, licensees and insurance company executives.

Download the report here.

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The working group will address issues such as the quality of advice, product design and remuneration structures which were raised in ASIC’s Review of Retail Life Insurance and Advice report released on 9 October.

As independent chair, Mr Trowbridge will convene the working group and facilitate industry and policy solutions. The group will specifically address retail life insurance product structures, financial advice and distribution practices.

Brad Fox, CEO of the AFA said: “Mr Trowbridge brings extensive knowledge of Australia’s regulatory system to the Working Group. This will be pivotal in assisting the group to develop sustainable and workable solutions for stakeholders.”

Mr Trowbridge’s experience spans the private and public aspects of the financial system and ranges from competition in retail financial services, to capital structure issues, system stability and regulation. From 2006 to 2010 Mr Trowbridge was one of three Members of APRA’s executive where he was responsible for life and general insurance and executive remuneration. He was a pioneer of general insurance actuarial work in Australia and held senior management roles with QBE and Suncorp. In 1981 he started Trowbridge Consultingwhich became a leading actuarial firm in Australasia and which merged with Deloitte in 2000. Also, after merging with a US firm (Tillinghast) in 1984, he gained extensive experience in life insurance and, on deregulation of banking.

Mr Trowbridge said: “The ASIC report points to some important issues for consumers and the broader Australian community. These are complex and difficult issues for the life insurance and advice industries to solve.”

“I applaud the Association of Financial Advisers and the Financial Services Council in taking the initiative to set up a Working Group which will make a concerted effort to find durable solutions in consultation with all stakeholders.”

“I am delighted to contribute to this initiative through leadership of the Working Group,” he said.

The Working Group will include three representatives from the FSC and three from the AFA. The FSC’s representatives will be: John Brogden – FSC CEO; Andrew Hagger – group executive, NAB Wealth and CEO of MLC Limited; and Geoff Summerhayes – CEO of Suncorp Life.  AFA representatives will include: Brad Fox – AFA CEO; John de Zwart – CEO of Centrepoint Alliance and Jeff Thurecht – AFA NSW State Director.

A public report on the group’s initial findings will be released in mid-December and a final report in February 2015. The Working Group will consult with the regulators and Parliament on its recommendations.

John Brogden, CEO of the FSC said: “We take the findings in the ASIC report very seriously.”

“It is important that consumer trust and confidence in financial advice and products is restored to ensure Australians have sufficient life insurance cover.”

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