It has been identified that currently in Australia there was an effective mix of economic planning businesses, which involve risk in their proposition along with risk-only specialist advisers, and each one of them will be influenced in some way, with the level of influence varying significantly among various business models, depending upon the recent structure of their businesses. There are other concerns behind these types of risks. It has been recognized that currently consumers are having problems with their insurance plans. Insurance plans recently do not have fees, which can be changed, they are commissions, which are paid to the life of the policy. There is a need for an upgraded insurance policy that is percentage based and can be seized if the relationship among the advisers and consumers cease. Insurance plans in a simple language, could be stated a an economic safety net against the loss. On the other hand, currently, insurance policies among the young generations have been increased day by day. Insurance companies should deliberately attempts to launch insurance plans for the young generations. Several Australian insurance companies should take care about this market situation. Keeping these factors in mind investigation and analysis of a new insurance plans will be discussed through problem and need analysis, customer evaluation, market analysis, internal industry analysis and commercial potentialities.
There has been a big issue on the affordability of life insurance policy and the issue of paying commission is there. The financial advice service adds up the charges and a result a person can afford pay $3000 and then the charges, which he or she may or may not receive. In recent days, many of such cases are coming up where a person is paying extra for being financially advised and in some cases; they are not receiving such advices. Affordable financial advice is the out most needed service that need to be provided to the consumers.
There was even a case on a senior executive of a life insurance of doing bad sales practices. It mainly focused upon the weakest and needy consumers. He went so far to be stated publicly “he knows that the intention was not to offer rubbish products to the market”. With cases like these issues some serious public safety questions. That very same company managed to refuse a wowing amount of $1.5 million to nearly 16000 clients throughout the country.
If commission is being removed from the system then the client may end of having a new issue and that is to paying the advisor a lump sum amount at the end. As per Assistant Treasure Josh Frydenberg who is, currently working at life insurance framework otherwise known as the (framework) stated that many negotiation have been made between AFA, FPA and FSC (Carey & Matthews, 2017). These negotiations made it clear that the association failure in negotiation will ultimately result in the government and the government is planning in support of financial system inquiry. This allows the commission to be included in insurance.
At current times, a person is paying 30% upon the premium consumer payments. Whereas, an advisor can take that number up to 80%. The minimum amount being 30% and the maximum being 80% leaving a little to no place to make some money for a client (Better advice, 2018). However, during the running years this amount go between 10% to 20%. The new hybrid commission option is very adequate for both the parties it is being imposed in January 1st 2018 it requires an upfront of 66% and running 22%. As the claw-back provisions are being wide, spread the number of policy that stays as per the first year will be noticed the insurer clawing back of 100% of commission paid.
This new product will help both the parties. The company will also stay in benefit and enjoy a premium of 20% of commission. However, they will not be paid directly it will come through the company itself. At present spouse, a consumer wanted to pay $125 in premium to a particular product, and then the advisor would likely to get $100 as his commission or fees. This is so under the new rule it can be taken place between 30% to a 100%. Out of that $125, the premium would be costing to amount of $87.5. In other words, a commission of $37.5 would be provided.
As it suggest under this law if a consumer is paying $87.5 as insurance premium then 25% is liable to pay to the advisor as commission or fee. Ultimately this result to a payment of $ 21.88 prior to the $103.38 as premium. Leaving the amount of $21.38 to the advisor. It is considerably lower to the newly introduced arrangement but this percentage stays a fixed amount for the life of the policy.
Currently, it has been found out that in the wake of a critical ASIC (Australian Securities and Investments Commission) report, the financial services sector has finally gotten near about to doing something regarding the life insurance commissions that can develop up to 130% of the first year’s premium, in some cases, remain at a lesser rate for the life of the policy (choice.com.au, 2018).
Figure 1: Bridging Debt and insurance products
(Source: seedingtech.com, 2018)
Currently, it has been identified that insurers have long resisted to attract and retain consumers. Various insurers do business in a highly competitive marketplace as well as they sell a service, which many customers consider to be a product (Carey, Dickinson, Malbon & Reeders, 2018). Consumers frequently cite prices as their main issue for purchasing an insurance policy, specifically in property and casualty. Various customers recently purchase insurance through aggregator sites, infrequently communicating with the carrier or agents.
Figure 2: Current life insurance status in Australia
(Source: Carey, Dickinson, Malbon & Reeders, 2018)
Insurers in Australia find it challenging to differentiate themselves in front of the eyes of their consumers, since they communicate frequently with them. in this situation when customers around markets prefer high-touch, insurance, personalized products, by its industry nature, remains a low-touch service sector (willistowerswatson.com, 2018). It has been identified that around the globe in the service and product categories of auto, health and life insurance, most consumers buy an insurance service only each three to six years. In already developed markets, like Australia, just half of the consumers have had any communication with their insurers for any reason in the past twelve months. Several insurers have made concentrated efforts in current years to create consumer loyalty (Newson, Tiller, Keogh, Otlowski & Lacaze, 2017). They have developed digital platforms, retained workers and have launched redesigned consumer episodes.
Currently, the life insurance companies are concentrating on the services that does not pay any type of commission, but rather the adviser adds on a fee, which can be removed. The new services should create a situation in which customer can discuss the amounts paid as well as agree to paying extra or not (Customer Behavior and Loyalty in Insurance: Global Edition 2017, 2018). The new service will provide consumers a chance to decide on the fee percentage to be paid. The fee percentage will vary and amounts of fees can be agreed upon. This way, the new life insurance will provide customers to decide on their fees and amounts along with the fact that it will provide total provision for the client in how much of premium is paid to the advisers. On the other hand, the new life insurance product will be focusing on the young consumer segment in the market as well as developing communication with them so that business profitability of an entrepreneur along with acceptability of the policy could be retained (Nagle & Müller, 2017).
The life insurance industry and market in Australia is formally over 180 years old. Currently, there are over 20 active providers in this country’s life insurance marketplace, developing every other out with competitive discounts, pricing and other additional profits (ibisworld.com.au, 2018).
Figure 3: Australia’s life insurance market from 2007 to 2017
(Source: Thach, 2018)
Current life insurance market has been confronted significant challenges in few previous years that have portraited a rough market landscape. While there are a series of contributing factors, this is significant that agents understand the recent trends and observations to be well structured of how the present market will move in 2019. There are functions that can be undertaken prior to the renewal date for young group insurance plans, which will place the entrepreneurial businesses in an important position from a life insurance market perspective (Sornette, 2017).
Market competitors
For establishing the new group life insurance policy for the young generation, direct insurers such as Virgin Money, REAL insurance that do not offer advice would one of the important and potential competitors in the Australian market (Valdez, & Molyneux, 2015). Before launching the polices, analysis of the recent policies of major market competitors need to be done effectively along with the comparison of the current and future policy plans based on their acceptance to the customers.
Market Size
The Australian life insurance has effective revenue volatility over the previous 5 years, due to the fluctuations in investment returns. The sector revenue has been decreased over this period due to developed cancellation as well as lapse rates. However, this was slightly curbed by effective investment returns for life insurers in 2016-2017. The premium income rates have developed for most of the previous 5 years’ time, with the 2013 introduction of “MySuper” regulations to increase insurance uptake (Chomik & Piggott, 2016). The overall industry is anticipated to decline at an annualised around 2.9% over the 5 years through 2018-2019, to around $58.5 billion (ibisworld.com.au, 2018). On the other hand, effective investment returns are predicted to provide support a 7.3% revenue growth in the upcoming years.
Figure 4: Market size and growth
(Source: ibisworld.com.au, 2018)
Market Potential
It has been find out that current fluctuations in the investment returns have developed important industry revenue volatility, which is effective for starting an entrepreneurial venture in this market. On the over that, recent recovering share market has kept investments high for most of the 5 years period with developing mortgage debts and need for life insurance plans are likely to provide support for development of insurance coverage (ibisworld.com.au, 2018).
As this company is working for over 15 years in this industry, it has gone through all the necessary experience. As per the head of ASIC’s recent speeches in which he stated that in order to avoid conflict of interest removal of commission was made but there was not any intention to put up with life insurance commission and therefor there is no such plains to remove them.
James Shipton was the one making the above statements. Right before economic senate legislation hearings committee in Canberra in front of John Williams (riskinfo.com.au, 2018). The above senator is also running for a counter to ASIC’s role in introducing the Life Insurance policy.
Seeing the current market climate there are wide range of personal who are associated with our team starting from a person who is working on the product to a life insurance advisor. There are also some of our associates, who has a work experience on sales team for over a period of 5 years. Hence, it can be concluded that our team recognizes the need of an advisor and how to pitch to them.
There is a wide range of definition available for a fee only versus commission-based advisor but here are some of the narrowed down concept. Even though these two services contains portfolio analysing as a whole even most of it are being taught in schools as well as used in college financial aid, tax planning and many more there is a significant difference in both of these methods. One of which a fee only advisor only collects money on an hourly basis on the other hand commission based advisor gets most of his or her payments while the account being opened or in case of a sale in any financial product such as share or debentures.
A fee only advisor can be charged with criminal law if he or she does not put the interest of their client forward. They cannot sell a product to their client knowing it is not financially good. On the other hand, a commission-based advisor’s income is depended upon the product he or she sells to their clients or in this case the number of account they open. The basis of their payment is on the higher number of purchases or account openings by the consumers. (Bergen, 2018).
The new commission based system removes any conflict between both the parties as because the end choice is always upon him or her to take (thinkadvisor.com, 2018). The more they make transaction the more they pay hence reducing the number of compliance based cost down the track. It also allows the advisor to have a better relationship with their clients.
References
Australian life insurance market continues hardening in second half of 2017. (2018). Retrieved from https://www.willistowerswatson.com/en/insights/2017/12/life-insurance-market-update-h2-2017
Bergen, J. (2018). Is a fee-only or commission-based investment advisor better?. Retrieved from https://www.investopedia.com/articles/basics/04/022704.asp
Better advice, f. (2018). Life insurance commissions. Retrieved from https://www.choice.com.au/money/insurance/life/articles/life-insurance-commissions
Better advice, f. (2018). Life insurance commissions. Retrieved from https://www.choice.com.au/money/insurance/life/articles/life-insurance-commissions
Carey, G., & Matthews, M. (2017). Methods for delivering complex social services: exploring adaptive management and regulation in the Australian National Disability Insurance Scheme. Public Management Review, 19(2), 194-211.
Carey, G., Dickinson, H., Malbon, E., & Reeders, D. (2018). The vexed question of market stewardship in the public sector: Examining equity and the social contract through the Australian national disability insurance scheme. Social Policy & Administration, 52(1), 387-407.
Chomik, R., & Piggott, J. (2016). Australian superannuation: the current state of play. Australian Economic Review, 49(4), 483-493.
clients?, C. (2018). Commissions vs. fees: What’s best for clients? | ThinkAdvisor. Retrieved from https://www.thinkadvisor.com/2014/05/21/commissions-vs-fees-whats-best-for-clients/?slreturn=20181002133031
Customer Behavior and Loyalty in Insurance: Global Edition 2017. (2018). Retrieved from https://www.bain.com/insights/customer-behavior-loyalty-in-insurance-global-2017/
Insurance Tech – Seeding Tech. (2018). Retrieved from https://seedingtech.com/tag/insurance-tech/
Life Insurance – Australia Industry Research Reports | IBISWorld. (2018). Retrieved from https://www.ibisworld.com.au/industry-trends/market-research-reports/financial-insurance-services/life-insurance.html
Life Insurance Commissions Will Remain – ASIC | riskinfo » News. (2018). Retrieved from https://riskinfo.com.au/news/2018/06/05/life-insurance-commissions-will-remain-asic/
Marston, G., Cowling, S., & Bielefeld, S. (2016). Tensions and contradictions in Australian social policy reform: compulsory Income Management and the National Disability Insurance Scheme. Australian Journal of Social Issues, 51(4), 399-417.
Nagle, T. T., & Müller, G. (2017). The strategy and tactics of pricing: A guide to growing more profitably. Routledge.
Newson, A. J., Tiller, J., Keogh, L. A., Otlowski, M., & Lacaze, P. (2017). Genetics and insurance in Australia: concerns around a self-regulated industry. Public health genomics, 20(4), 247-256.
Sornette, D. (2017). Why stock markets crash: critical events in complex financial systems. Princeton University Press.
Steen, A., McGrath, D., & Wong, A. (2016). Market Failure, Regulation and Education of Financial Advisors. Australasian Accounting, Business and Finance Journal, 10(1), 3-17.
Thach, M. (2018). Life Insurance Market in Australia 2018 | finder.com.au. Retrieved from https://www.finder.com.au/australian-life-insurance-market
Valdez, S., & Molyneux, P. (2015). An introduction to global financial markets. Macmillan International Higher Education.
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