12 December 2019
A new MLC Life Insurance commissioned whitepaper into the cost and efficiency of life insurance advice reveals risk advisers must examine their cost base to be sustainable in a reduced commission environment.
With maximum upfront commissions decreasing to 60% (plus GST) for new life insurance policies from 1 January 2020 as part of the Life Insurance Framework reforms (LIF), the whitepaper – The Cost and Efficiency of Delivering Life Insurance Advice - suggests that commission only advisers may need to reduce their expenses by as much as 20-25% to return to profitability.
If this cost gap is not addressed, risk advisers may need to commence charging their clients a fee in addition to commissions received from product issuers to remain sustainable - a practice that would impact accessibility of advice for all Australians.
Sean McCormack, Chief of Group and Retail Partners, MLC Life Insurance, said the whitepaper allows advisers to benchmark their businesses relative to their peers while also highlighting opportunities for business improvements and change.
“What is clear from the research is that there is a need for more detailed knowledge of the true operating costs associated with providing advice, and how each facet of the process – such as marketing, administration, client servicing and compliance, can impact overall profitability. With upfront commissions reducing further next year, it is imperative that advisers act.
“The analysis shows these advisers should take the opportunity to better understand peer relative industry averages and use this information to review their own business’ costs and, potentially, make changes to their business model.”
In other major findings, the whitepaper highlights:
- On average, a total of 10 hours is required by a risk adviser to prepare and implement life insurance advice for a client in simple cases, and up to 15 hours for more complex cases.
- Life insurers must do more to improve the efficiency of the advice process, by simplifying and speeding up the policy application and underwriting process.
- While 67% of risk advisers say they have experienced a reduction in profit since the introduction of LIF in 2018, a surprising 42% say they haven’t made changes to their business model to accommodate the reduction.
- Less than half (48%) of risk advisers said they felt they were ready for the next phase of LIF.
Prepared by Plan For Life, Actuaries and Researchers, the whitepaper examined the costs and time involved in providing life insurance advice. It was based on an online survey distributed to a wide range of financial advisers, followed by face-to-face interviews with advisers.
Sean McCormack says that unless the costs are reduced, commissions alone would be unlikely to support the profitability of current advice models, impacting the number of Australians who are able to access advice. Further, life insurers must invest in technology to improve its efficiencies.
“We strongly believe in the value of quality, lifelong financial advice and believe more Australians would benefit from receiving it. However, unless advisers can remove 20-25% of the current cost base for each business, advice will not be profitable, leaving many Australians to make important financial decisions on their own. At a time when Australians are taking on an increasing debt, access to advice is critical for the prosperity of our nation.
“As a member of the Nippon Life Group of Companies, we see investment in technology, including digital and data, infrastructure, and support services as the best way to reduce cost and better serve advisers. Our new digital underwriting platform, for example, can now assess and admit a customer’s life insurance application in just seven days, down from 15. In the last 12 months, more than 7,200 policies have been accepted automatically without the need for any manual underwriting.
“While this is only the beginning, we believe that delivering an efficient experience that is digitally enabled can reduce the cost of advice and give advisers confidence that their businesses can be sustainable in the future.”