Life Insurance Regulation

Brokers and Financial Advisers

When you see a broker or financial planner they must provide you with a Statement of Advice with their recommendations for your insurance cover. Failure to provide this document is a breach of the Financial Services Reform Act (FSR).

Some companies may try to avoid providing you with a Statement of Advice by claiming that they have provided general advice only, which is essentially a method of trying to avoid any responsibility for the information that they have provided.

If you are seeking information on insurance only, ideally a Statement of Advice (SOA) will be provided, however this SOA will be for limited advice (i.e. your insurance quotes). This is compliant practice under FSR.

A full SOA is what would be provided by a financial planner and covers your entire financial situation and recommendations. However if you are just seeking insurance recommendations then a limited advice SOA is compliant.

To make sure that you are dealing with a compliant organisation, when you receive an SOA the following should be contained in the document:

• It must have the words Statement of Advice somewhere in the beginning of the document.
• It must have the recommended insurance company, and the premiums payable.
• Ideally it will provide you with 2 options for your cover.
• It should provide reasons why companies are recommended, for example independent research ratings.
• Commission that will be payable should you proceed must be disclosed.
• Details on the Australian Financial Services Licence (AFSL) must be detailed, this ensures that the company you are dealing with is licensed to provide advice.

Regulation of Australian Life Insurance Companies

The Australian Prudential Regulation Authority (APRA) supervises life insurance companies authorised under the Life Insurance Act 1995 with a view to maximising the likelihood that these companies will be able to meet their obligations to policyholders. Prudential requirements for life insurance companies are set out in Prudential Standards and in Prudential Rules, as well as in Actuarial Standards determined by the Life Insurance Actuarial Standards Board.

Commissions and Payments

Built into the premiums that are provided by the life insurance companies are commissions that are paid to brokers and financial planners for the introduction of your business. This commission rate is usually based as a percentage of your annual premium, and can vary from 25%-120% of the first years premium. On an ongoing basis renewal commission ranging from 0%-25% will be paid.

Over recent years commission and commission structures have been in the public eye, however this is only because all commission must be disclosed to the client. To best explain let’s look at the work that is involved.

Firstly, in order to provide you with insurance advice a broker or planner must have undergone extensive education and be licenced. The licence will either be held direct with ASIC or through a dealer group. The costs of running such a business can be extremely high due to Professional Indemnity Insurance, compliance costs, ongoing training requirements, software expenses, research expenses etc.

Then there is the work that is involved to get your insurance application completed, the time spent in the processing can be extensive depending upon the requirements of the insurance company.

For someone with a $750 a year policy this could mean initial income of $375 for a broker with a wide range of fixed costs and time input. To say that commissions are high would be an incorrect statement, if you went into a store and purchased a $500 suit and the shop that sells it to you makes $250 margin do you complain?

People operate businesses to make money; if the commission structure for life insurance did not exist you would find that you would be charged large direct fees to get your application completed.