This article was written by Jim Boynton and Rohan Cush.
The Australian life insurance industry is receiving a lot of attention by the media, Parliament and the regulators. Various reforms are already underway but more are likely. Parliament has recently announced that it will examine more reforms, an industry code of practice is on the horizon and yet another ASIC review of the industry has been announced.
Reforms and regulatory action will challenge business and distribution models and accelerate the already high level of M&A activity and interest.
Limits on life commissions to become law
On 15 March 2016, the Senate Economics Legislation Committee recommended that the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016 (Bill) be passed by the Senate.
The Bill includes a number of measures designed to implement the life insurance industry’s reform package, which was announced in November 2015 following the release of the final Trowbridge report in March 2015.
The Bill will remove the current life insurance risk product exemptions from the FoFA conflicted remuneration ban and include new more limited exemptions. Under the Bill, a commission or other benefit given to an Australian financial services licensee or representative in relation to a life risk insurance product will be banned conflicted remuneration from 1 July 2016 unless it falls within the existing exemptions for non-life products or:
- the benefit is given to the licensee or its representative in relation to a life risk insurance product or life risk insurance product;
- the products is not a group life policy for members of a superannuation entity or a life policy for a member of a default superannuation fund (these products will no longer be covered by an exemption); and
- either of the following applies:
- (flat benefit ratio) the benefit ratio for the benefit must be equal to or less than the amount determined by Australian Securities and Investments Commission (ASIC) in the year that the product is issued and each year in which the product is continued; or
- (benefit ratio requirements and clawback requirements) the benefit must satisfy certain requirements determined by ASIC. The proposed “benefit ratio requirements” will subject the amount of upfront benefits payable over a period of three years to a cap 60% of the relevant premium and cap trails at 20% of the renewal premium. Under the “clawback requirement” the arrangement under which the benefit is payable must include an obligation that the adviser repay all or part of the benefit to the insurer in certain circumstances.
The proposed reforms are likely to have a significant impact on current distribution models for life insurance products, and will require life companies and distributors to carefully consider their business models before FY16-17.
Senate examining further reforms and claims experience
On 2 March 2016, the following additional matters concerning the life insurance industry were referred to the Senate Economics References Committee as part of its ongoing Scrutiny of Financial Advice inquiry:
- the need for further reform and improved oversight of the life insurance industry;
- whether entities are engaging in unethical practices to avoid meeting claims;
- whether a life insurance industry code of conduct is required;
- the role of the ASIC in reform and oversight of the industry; and
- any related matters.
Submissions close on 15 April 2016. The broadened terms of reference leave open the question of whether we are likely to see further, more direct government intervention in the life insurance industry.
Life insurance industry to release Code of Practice
In response to the Trowbridge Review, the life insurance sector committed to implement a Life Insurance Code of Practice (Code) by 1 July 2016, which “will commit life insurers to strong standards of customer service, and will enhance consumer protections in the key areas of underwriting and claims”.
Certain details of the Code were released on 16 March. Some key take-aways are noted below:
- the Code will take the form of an FSC standard and so will be mandatory for FSC members;
- governance will be enhanced through an independent governance framework, with compliance monitored by an independent committee of experts (sitting outside the FSC), including a consumer representative;
- improved disclosure and communication with consumers will be a central tenet of the Code;
- key information will need to be provided in plain language, so consumers can properly understand what product has been bought, or what changes have been made; and
- the Code is still “a living document, and will be updated as relevant”. In response to recent criticisms, the FSC will also include a Steering Group, comprising consumer representatives, the Financial Rights Legal Centre, the Consumer Action Law Centre, and senior life insurance executives, to the development process.
As noted above, the expanded terms of reference for the Senate Economics References Committee’s financial advice inquiry (see above) include examining “whether a life insurance industry code of conduct is required”. The FSC has said it will be providing information about the Code and its development to the inquiry.
ASIC examining life industry again
In addition to the expansion of the Senate Economics References Committee's noted above, and in response to recent media scrutiny regarding certain industry practices, the Assistant Treasurer has also asked ASIC to report urgently on “dodgy practices” across the industry.
This latest ASIC review has been requested less than two years after ASIC released its October 2014 report concerning retail life insurance advice, a catalyst for the Trowbridge Working Group. No doubt there will be even more regulatory focus on the behaviour of industry players, particularly in relation to the handling and processing of claims.
Increased mergers and acquisitions activity
In addition to regulatory changes, the level of M&A activity and interest in the Australian life insurance industry is the highest we have seen it for decades.
We recently advised Macquarie on the sale of its life insurance business to Zurich Australia.
We believe there will be other industry-changing transactions, such as the sale of NAB’s life insurance business to Nippon Life.
For potential sellers of Australian life insurance businesses, now is the time to consider divestment in the face of changing economic and regulatory conditions. For buyers, Australian life insurance businesses are highly competitive, strong brands which offer a platform for investment in a developed and prosperous market on the footsteps of Asia.