Life insurance sales could fall 28%.

The Hayne royal commission has recommended a review of LIF settings, which will be carried out by Allens partner Michelle Levy as part of its wider review of the affordability and quality of advice, which is due to report to the government by the end of the year.

Since the 2018 royal commission, the number of Australians receiving financial advice has fallen from 13.9% to 10.1% of the population as the average cost rose by 40%.

During the same period, the number of life insurance policy referrals fell 4 percent to 3.6 million last year, according to NMG. The number of licensed advisers fell from 24,800 in 2017 to 12,700 last year – of which only half are active life and risk policy writers.

Cases of “shifting” have declined, NMG found, with re-brokerage of products falling from 59% of new business premiums in 2015 to 43% last year.

“Increased underinsurance”

The drop in referrals has exacerbated “under-insurance”, NMG research claims, with 15.6 per cent of Australians under 35 not having income protection insurance in their default superannuation cover.

About 9 percent of that age demographic has an average gap of $300,000 between the death and total and permanent disability coverage included in their retirement pensions and their actual needs, NMG estimates. The self-employed and single parents were found to be disproportionately less insured than other groups.

“Among Australians, there is a widening gap in underinsurance caused by both reduced affordability and affordability, which in turn affects the sustainability of the industry due to the shrinking of risk pools, driving up prices and reinforcing a spiral of adverse selection that will see relatively healthy consumers with a perceived lower risk of choosing to cancel their coverage,” the filing states.

The research comes after about 20 insurers and reinsurers turned their backs on the FSC and formed the Council of Australian Life Insurers (CALI) to forge a new relationship with the Albanian government.

It is understood that the FSC’s submission, which calls for LIF conditions to be preserved, was supported by key members of the life insurance industry before they announced the creation of CALI.

Wealth giant AMP – which sold its life division in 2020 but remains Australia’s second-biggest financial adviser – went further, arguing in its own Levy review that life insurance commission caps should be “slightly enlarged”.

The Association of Financial Advisers and the AMP Compliant Advisers Association have called for maximum commissions to be increased from 60 to 80 per cent of upfront premiums to ensure consumer access to advice.

But powerful stakeholders, including Industry Super Australia, which represents 13 not-for-profit superannuation funds, and consumer advocacy organization Choice, urged Ms Levy to recommend a ban on insurance commissions.

More broadly, the FSC reiterated its call for the concept of “financial product advice” to be scrapped and replaced with simpler concepts of “personal advice” and “general information”.

It supported the consensus view of 12 associations that lengthy advice documents should be replaced by simpler advice letters, which KPMG says can cut the time it takes to provide advice by around 17 per cent, thereby cutting costs.

The FSC also called for a “regulatory sandbox” approach from ASIC to allow financial services licensees to experiment with forms of digital and limited advice that are cheaper for consumers to access.

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