Is Trowbridge fixing a problem that doesn’t exist?

As the life insurance industry counts down toward the deadline for resolving adviser remuneration for life insurance, like many in the industry we are asking ourselves – how did it come to this?

We see two primary issues the insurance industry needs to resolve:

• The quality of advice provided to clients and the resulting quality of client outcomes, and
• The economic sustainability of participants (advisers, insurers and reinsurers).

You will note commissions are not on that list, but that’s where the discussion has been focussed in the wake of Trowbridge. Incentives are important, but they are a second-order factor that influences these major issues for better or worse. Presumably there is actually widespread support for incentives that attract new advisers, that encourage advisers to seek higher qualifications and insurers to invest in product and process innovation. We’ve seen just about every conceivable form of incentivisation, and commissions are by no means the most egregious form (they are, at least, disclosed to the client).

The 2014 ASIC review was ostensibly about the quality of advice, but the methodology and approach seemed to focus more on ‘churn’ and commissions and this quickly became the focal point for news flow and debate. That’s because many participants and observers believed that the run-up in lapse rates to unprecedented levels was primarily a result of advisers ‘churning’ customers between different insurers without any benefit to the client. That’s what churn is – the adviser benefits, the client does not. If the client benefits because the adviser found them a better policy at a lower price, that isn’t churn because part of the adviser’s role is to broke the market to find their client a genuinely better deal.

ASIC focused on a group of advisers selected based on very high new business levels and in a significant proportion of cases found the quality of advice wanting. Critically ASIC noted that there were more instances of non-compliance in cases where the adviser had taken an upfront commission, than was the case under hybrid or level commission models.

We worry that with the current debate focused on commission and churn, rather than the broader issues of how best to achieve quality advice, and an enforced timeline to come up with a compromise, we’ll end up with an optically appealing resolution that won’t improve customer outcomes, or advice quality, or insurer sustainability. In fact we think there’s a real prospect that we end up with a solution that increases cost and complexity, to the detriment of these factors.

We believe quality of advice goes beyond increasing ASIC’s monitoring and enforcement activity. It goes beyond choice of insurer. As an industry we need to be thinking about how we ensure that clients understand what premium patterns look like over 10 – 20 years before they purchase a policy, and that if they do buy insurance they buy a product that aligns to their long-term needs. That means we need to think beyond the role of advisers, to consider the type of solutions that insurers make available, and how to better illustrate the comparisons and trade-offs of what is (or should be) a long-term purchase.

We don’t think that a line of inquiry that started off being focused on advice quality and customer outcomes should finish with a focus on what is driving lapses (although of course we agree that lapse rates are important).

In fact, as this week’s chart shows, over the past three quarters lapses in the non-bank adviser channel have declined. We have previously forecast that IFA (non-bank) lapse rates would revert to something like 14% and not below, but based on current momentum the ultimate level may be closer to long-term assumptions.

It appears unlikely this reversal is a result of ASIC’s intervention (‘jawboning’) or an increased focus by insurers and licensees, because the trend started before the ASIC review. But it does match the demographic narrative – a one-off demographic shift driven by a confluence of externalities that drove age increases, and claims, and then lapses, and has now begun to work out of the system. We still don’t believe we’ll get back to 12%, but would be delighted to be proven wrong.

So where does this leave the debate on Trowbridge? It seems certain that there will be changes to the way advisers are remunerated, and we cannot help feeling that proactive moves to cap initial commissions at 80% is as good a solution as any. But maybe the fact that lapses are coming down provides an opportunity to go back to where this began, to look again at how as an industry we lift the quality of advice and customer outcomes.