The sustainability of risk advice is under threat, with nearly two in five advisers offering life insurance advice claiming they are not able to deliver this profitably under changes to upfront and trailing commissions.

This is just one of the findings of CoreData’s Q1 Adviser Pulse Check, a new quarterly survey of Australian financial planners.

While two in five planners (42.0 per cent) offering risk advice agree they can deliver it profitably based on a 66 per cent upfront commission and 22 per cent trailing commission, nearly two in five disagree (38.2 per cent).

And with 36.2 per cent of them deriving more than a quarter of their practice income from risk advice, this raises serious concerns over the future accessibility and affordability of life insurance advice.

Under the Life Insurance Framework (LIF) remuneration rules, commissions were capped at 66 per cent of the premium in the first year from 1 January 2020. The changes also impact trailing commission rates, with a maximum of 22 per cent ongoing trail on any new business.

Following the Royal Commission, Commissioner Hayne recommended reforms to life insurance commissions go even further – claiming these should be reduced to zero unless a review schedule in 2021 found “clear justification” for their continuation.

However, the research suggests that as it stands, the cost to advisers of delivering risk advice is already at a level whereby even cost recovery may be prohibitive to consumer take-up, if life insurance was delivered on a fee-for-service basis.

It is costing nearly half of the planners offering risk (46.0 per cent) at least $3000 to deliver risk advice per Statement of Advice, from first meeting through to implementation. For one in five (20.3 per cent), it costs on average $4000 or more.

Cost of service delivery is not the only battle planners are facing

Those who are able to get a policy in place for a client within six weeks are in the minority (12.1 per cent).

More than half of advisers offering risk advice (52.5 per cent) say it typically takes between six and 10 weeks from initial client contact to the implementation of risk cover, while a further quarter (25.6 per cent) say this takes 10 to 14 weeks.

During this time, more than half (54.5 per cent) are spending, on average, at least eight hours with the client prior to implementation of cover, while one quarter of those (25.5 per cent) are spending 12 hours or more.

While time is money, there is also the challenge of trying to keep clients engaged throughout a protracted and often unpleasant process, during which they’re seeking approval for something they need but don’t really want, and are less than excited about paying for.

Given all this, it’s not surprising that nearly three in 10 advisers offering risk advice (28.1 per cent) say risk revenue may not be financially sustainable, while a further one in five (20.5 per cent) are unsure. This is in stark contrast to super and investments revenue, where around three quarters of planners offering these revenue streams say they are possibly or definitely sustainable.

What is the future of DII?

APRA’s recent intervention to address income protection insurance sustainability has also created ripples within the industry.

Most planners offering risk advice to clients (80.9 per cent) don’t support APRA’s decision to remove Agreed Value disability income insurance (DII), however the short-term impact is likely to be minimal.

The large majority (70.9 per cent) say they are likely to continue offering income protection to clients in the next three months, however less than one in five (18.4 per cent) believe indemnity insurance is a reasonable substitute for Agreed Value.

While higher premiums may not be palatable to consumers, when forced to choose, advisers offering DII would overwhelmingly prefer a policy that maintains the sum insured with a rise in premiums, than to lower the sum insured and maintain premiums (68.1 per cent vs. 31.9 per cent).

Only a third (35.5 per cent) would give in-principle support to a change from stepped premiums to a ‘term’ contract, whereby the price is quoted over the term the insured plans to hold the insurance, with no level premium available. However, more than two in five (43.9 per cent) are unsure.

Vast challenges lie ahead for both life companies in redefining sustainable products for the future, and advisers in delivering risk advice under this new paradigm.

Insurers are facing the need to increase premiums following large losses on DII, while planners must interrogate their service models to find efficiencies in the way advice is delivered, or risk advice could become a luxury only the rich can afford.