Risk advice businesses under the new Life Insurance Framework

The second phase of the Life Insurance Framework (LIF) reforms come into effect on 1 January 2019. This will see the continued reduction of initial commission advisers receive from insurers to 70% for the duration of 2019.

world map

The Australian Securities and Investment Commission (ASIC) recently confirmed that before it considers the question of removing the exemption for conflicted remuneration currently afforded to life insurance products it will carry out a post-implementation review in 2021.

Traditionally, the higher initial commissions that risk only advisers earned from life insurance products meant they could profitably operate a business model that allowed them to charge commission only. Looking to the future, advising and implementing insurance advice in isolation, may no longer be sustainable. While the doubling of renewal commission will over time potentially help build stronger recurring cashflow, the question mark over the future of insurance commissions cannot be ignored. Indeed, one practical reality is that insurance only advisers may need to embed their business as a specialist service within a broader service financial advice practice.

The need for risk advisers to evaluate alternative revenue models to ensure they can continue to operate profitably is clear. This article outlines potential alternative business models for risk advice businesses.

How will the LIF affect your revenue - now and into the future?

Assumptions:

Calculations are excluding stamp duty

- Base Premium
- Frequency payment loading at 6%
- Policy fee
Total commissionable cost
$3,000
$180
$100
$3,280

Year business written

Commission model (initial/frequency loading)

Basis of calculation

Initial commission year one

Renewal commission

During 2018

Cap of 88/22 including GST

Premium + frequency loading + policy fee

$2,886

$656

During 2019

Cap of 77/22 including GST

Premium + frequency loading + policy fee

$2,525

$656

During and after 2020

Cap of 66/22 including GST

Premium + frequency loading + policy fee

$2,165

$656

What does this mean for your risk advice business?

The changes introduced by the LIF attempt to foster a longer-standing relationship between risk adviser and client. An outcome sought by the LIF is to help the client obtain insurance that is affordable in the long term and better suited to their needs while still allowing the risk adviser to have a profitable business over the long term.

For this reason, the need for advice business models to deliver value to clients must now go well beyond just the point of purchasing insurance cover, but across their whole insurance and advice experience. For some clients, this advice relationship will include the emotional process of claiming on their policies.

Typical insurance revenue models

At present there are 5 revenue models in use by advisers:

  • Commission only – ie, usually maximum initial commission available under LIF, this remains the most prevalent remuneration model, however advisers are starting to move away from this.
  • Advice / implementation fee only - ie, pure fee for service with no commission received and premium savings (typically 20% to 30%) passed onto the policy holder/life insured for the life of the policy.
  • Advice / implementation fee, plus maximum initial and ongoing commission. This is slowly gaining momentum and looks set to become the most common approach
  • Advice / implementation fee, plus level commissions. Please note: LIF left maximum level commissions unchanged typically at 33% including GST.
  • Advice and implementation fee with commission received rebated to offset fee.

What should your new risk advice business model look like?

In basic terms, clients need to appreciate the value of having an ongoing relationship with you as opposed to them believing risk advice is simply a matter of finding the cheapest premium and then ‘setting and forgetting’.

A potential risk advice model, at the top level may look like the one below:

  • Initial meeting, with fact find and medical fact find conducted.
  • Formulating advice options, including seeking underwriting opinions for any medical conditions identified during the fact find / initial meeting.
  • Presenting recommendations and agreeing with the client their preferred options. Usually at a subsequent meeting.
  • Implementing cover.
  • Review.
  • Keep clients on track.
  • Claims management, as required.

Revenue models to avoid

Advisers currently achieving success in delivering insurance advice, tell us the following models can be problematic and may not generate enough money to compensate you for the time you will spend advising and managing clients’ insurance needs.

Once-off Advice / implementation fee only, ie, no commission and/or no ongoing fee arrangement. Put simply this approach is transactional in nature and runs contrary to fostering a long-term, goals-based advice relationship.

Advice / implementation fee only with commission rebated to offset fee. This exposes advisers to loss where the policy lapses within the two-year commission clawback period. Clients may find themselves in financial difficulty for reasons beyond their control not caused by serious illness. Cancellation of their policies is often unavoidable in these circumstances.

The remuneration model currently gaining momentum

Successful insurance advisers are increasingly reporting an approach that includes both maximum commission as well as an initial fee for the advice and implementation. Planners using this approach report fixed fees ranging from around $300 to $2,000 with $800 to $1,200 the most commonly reported price range. This approach goes some way to recovering the costs incurred in delivering initial work done, particularly for clients who due to their medical history are deemed uninsurable following the medical fact-find and insurer pre-assessment process. It also helps dissuade ’tyre kicker’ clients.

Conclusion

Building a long-term relationship with clients who purchase life insurance will certainly benefit your financial advice business. A client who trusts you to insure them is more likely to grow their relationship with you to include other areas of financial advice. Estate planning is a natural and obvious extension of insurance. Over time (at least to 2021), taking the positive revenue impact of higher renewal commission rates into account, the post-LIF world while initially concerning in terms of its reduction of initial commissions, can deliver greater overall benefits to your business by encouraging longer-lasting and deeper relationships between you and your clients.

In the next edition of Adviser News look out for an article which provides further detail on each of the risk advice process steps and how to integrate them into your advice business.

More information

If you have any questions in relation to this article, or would like more information, please contact a Client Solutions Manager.