O’Dwyer waters down the Frydenberg reforms

Actuary and JP Morgan Insurance Analyst Siddharth Parameswaran reports on the revised reforms of the Australian life insurance industry.

Final Life Insurance Reforms

Late on Friday evening 6 November 2015, the Australian government released its final life insurance reforms package. Kelly O’Dwyer MP said that the industry had come around to reach a consensus on the implementation of important improvements to the remuneration arrangements in life insurance.

These reforms are an update to those proposed on 15 June by Josh Frydenberg, who was the previous assistant treasurer under the Abbott government.

Key parts to the reforms

As in the original proposals, there will be cuts to the upfront commission rate to 60% by July 2018, with a cap on trailing commission of 20%.

Details of the changes are shown in the table below.

The key changes are:

  • Transition arrangements have been delayed to commence from 1 July 2016 (previously 1 January 2016).
  • Clawback arrangements have been cut to two years (previously three years).
  • The desire to broaden approved product lists (APLs) has been left with the Financial Services Council.

Industry Implications

These reforms are likely to be a positive for the life insurance industry. Whilst there are some increased risks from a shorter clawback arrangement and the reforms have been delayed by six months, the incentives to churn are much lower than before. 

Comparisons

Aspect Original Frydenberg reforms Revised O’Dwyer reforms
Upfront commissions Maximum total upfront commission of 80% of the premium in the first year from 1 January 2016, maximum of 70% from 1 July 2017 and ultimately 60% of first year premium from 1 July 2018. Unchanged.
Ongoing commissions Maximum ongoing commission of 20% of premiums from 1 January 2016. Unchanged, but from 1 July 2016.
Clawback period

Three-year clawback/retention period to commence from 1 July 2016 to apply as follows:

  • Lapse in first year of the policy, clawback applies to 100% of the commission of first year premium.
  • Lapse in second year of the policy, clawback applies to 60% of the commission of first year premium.
  • Lapse in third year of the policy, clawback applies to 30% of the commission of first year premium.

Two-year clawback/retention period to commence from 1 July 2016 to apply as follows:

  • Lapse in first year of the policy, clawback applies to 100% of the commission of first year premium.
  • Lapse in second year of the policy, clawback applies to 60% of the commission of first year premium.
Non-commission based benefits Ban on volume based payments from 1 July 2016. Unchanged.
Approved Product Lists (APLs) Government to consider measures to widen APLs by 1 July 2016. Industry, via the FSC, to have responsibility for widening APLs through the development of a new industry standard.
Developing Code of Conduct Life Insurance Code of Conduct to be developed by the FSC (Financial Services Council) by 1 July 2016. The code of conduct to be similar to existing codes for banking and general insurance. Unchanged.
Fee for service Life insurance companies to offer fee-for service insurance products to support advisers who wish to operate on a fee for service basis. Unchanged.
Other

Ongoing reporting by life insurance companies of policy replacement data to ASIC starting from 1 January 2016.

Government to conduct a review of these measures by end of 2018.

ASIC to review Statement of Advice to improve simplicity and effectiveness of disclosures.

Government to consider developing a mechanism to rationalise life insurance legacy products consistent with recommendation 43 of FSI.

ASIC to review the Statements of Advice from the 2H16 with a view to making disclosure simpler and more effective for consumers.

ASIC to complete review of impact of life reforms by 2018 – and effectively to consider whether something closer to level commissions should be mandated.

Government to amend Corporations Act 2001 in order to facilitate the rationalisation of legacy products

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