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The life insurance commissions journey – a historical perspective
Phil Anderson
Ten years ago on 24 June 2015, the Life Insurance Framework was born. This wasn’t something that came out of fresh air. It emerged after four years of deliberation by the Government on changes to remuneration arrangements for life insurance that eventually ended with the implementation of the LIF caps and the introduction of a two year clawback. It took more time until the reforms came into force with a transitional period between 2018 and 2020. For many, this time was a very intense period and one that still holds a great deal of anger.
The LIF reforms were very drawn out, yet some seem to think it all happened with no warning as part of some compromise deal that was done in a backroom. This was a process that gradually unfolded over time, and continued to be an area of regulatory attention through until the Quality of Advice Review. There is much to this journey that is on the public record, however the past can be easily forgotten.
Nearly everyone involved in life insurance advice would look back at the LIF reforms and what has happened to the life insurance market since that time and conclude that it was a very poor outcome for all involved in the market, including consumers, life insurers and advisers. Whilst we can probably all hold the view that life insurance is a critically important product to protect consumers in times of need, what has happened to the life insurance market in recent years is a worrying journey. Some would describe it as a vicious downward spiral. Others have described it as a burning platform. There is no doubt that what we have seen in the last 10 years has been highly problematic, with a heady combination of substantial decline in advisers and new business volumes, substantial increases in premiums and an overall decline in life insurance clients. Advisers tend to spend most of their time on administration or saving existing clients in the face of premium increases and a cost of living crisis. For many practices less than half of new business is new clients. More lives are continuing to leave the risk pools than enter. This is not what a sustainable market looks like.
No one should deny the important role that commissions play in the placement of life insurance and without adequate remuneration, advisers have found it difficult to operate in this space. We are left with a small number of risk specialists who naturally focus on the high income and high premium end of the market. The LIF changes have had a hugely negative impact on the overall market and the time has come to address this problem and provide some momentum towards some form of recovery and better access to advice and insurance for everyday Australians.
Recalling the LIF journey is one that will generate some intense emotions for many, however now that we are at a point of the 10th anniversary of the first announcement of LIF and more than 10 years since the release of the Trowbridge report, it is worth recounting. Please have a read of this to understand what really happened.
Introduction
26 March 2025 was the 10th anniversary of the release of the Trowbridge report, something that stands out in the minds of many risk advisers as a key turning point for the worse.
John Trowbridge recommended a change to life insurance commissions, based upon level commissions at a maximum rate of 20% plus a $1,200 Initial Advice Payment (only payable once every five years). What Trowbridge recommended, was not what the Government eventually went with, however it marked a point at which the level of threat and uncertainty within the sector was at an extreme level. It would take years for this regulatory threat to be resolved.
Whilst I can’t avoid naming John Trowbridge, given the critical role he played and the report that bore his name, other than reference to the politicians who were central to this story, I will avoid naming other individuals.
The years 2014 and 2015 were critical years in determining the pathway that the risk advice sector would take. There were many critical events at that time that will be stuck in the minds of policy boffins and the risk advisers who were paying close attention, however that was only a short period in this extremely contorted journey.
Life Insurance Remuneration Changes as part of FoFA
In many ways this journey was commenced as a part of the FoFA reforms. On 28 April 2011, the then Minister Bill Shorten, issued a media release with an updated policy intent on the Future of Financial Advice reforms. In that media release he stated an intent of “banning all commissions on risk insurance inside superannuation”.
That announcement generated a substantial response. That outcome was not in the interest of either life insurers or advisers, and insurance inside super made up a very significant part of the market. There was intense lobbying on this proposal in the lead up to the release of draft legislation. Bill Shorten made a further media release on 29 August 2011, in which he included the following statement:
Treatment of insurance commissions
In April this year, Minister Shorten announced the Government would ban up-front and trailing commissions and like payments for both individual and group risk (life) insurance within superannuation from 1 July 2013. The ban would not extend to risk insurance outside of superannuation.
Following extensive consultation and feedback from industry since this announcement, the Government has decided to modify the final position such that the ban will apply to commissions on group life insurance in all superannuation products (including both Default/MySuper products and Choice products) and to commissions on any life insurance policies in a Default/MySuper product from 1 July 2013.
This means that commissions on individual life insurance policies within superannuation would only be allowable on Self Managed Superannuation Funds and Choice products.
A claw-back provision enables life insurance companies to recover some or all of the commission paid if a policy turns over early. The Government will work with industry and consumer groups to introduce uniform “claw-back” provisions to remove the incentive for some advisers to shop around for the most generous claw-back arrangements.
High upfront commissions have the potential to increase churn. Level commissions on replacement polices are an effective way of addressing this issue. The Government will work with industry and consumer groups on the most effective way of implementing this reform.
The message from the Minister at that time was clear. He wanted to see uniform clawback arrangements put in place and he had serious concerns with upfront commissions and had a preference for level commissions. It is understood that he continued to apply pressure in this regard with some of the key stakeholders.
FSC Policy on Churn - 2012
The next stage in the process was the release of a consultation paper by the Financial Services Council (FSC) in March 2012 on “Churn”. Whilst this consultation paper does not appear to be publicly available anymore, it was discussed extensively in the media at the time including in an article by RiskInfo. There were a number of elements to this proposed policy, including a standard two-year clawback period and the limitation on only paying upfront commissions on a client every five years. By August 2012, as reported by RiskInfo, the FSC had backed down and limited the proposal to a standard three year clawback arrangement. This proposal did not progress, however it signalled clear intent.
ASIC Report 413 – October 2014
Whilst things seemed to quieten down for a period of time, ASIC had been directed by the Parliamentary Joint Committee on Corporations and Financial Services to undertake work on monitoring the quality of life insurance advice and in 2013 they commenced a project that would ultimately come to be known as ASIC Report 413. The report was released in October 2014 with what can only be described as an explosion. ASIC released this report at a press conference and it achieved front page coverage in the mainstream media on 10 October 2014. The ASIC media release included the following statement:
“This is an unacceptable level of failure, and the life insurance industry is now on notice to lift standards and professionalism”.
The media coverage included stories about clients who had been disadvantaged as a result of misconduct.
We were told and understood that this review was a targeted review, not a random review. The positioning of this changed at the last minute, and the results were published with the interpretation that they applied across the entire market. This was very harsh, and circumstances related to the licensees involved later arose to highlight this, however the disclosure of those entities who were involved was never sufficient to fully demonstrate this.
ASIC chose two large licensees and three medium sized licensees. They also added two small licensees, although they had a minimal impact on the result. 202 advice files were reviewed as part of this project. The overall result was that 37% of consumers received advice that failed to meet the relevant legal standard that applied when the advice was given. Importantly however, where the adviser was remunerated on a hybrid commission basis (80% plus GST), 93% of the advice files were assessed as compliant. For many, the answer was clear in those results – life insurance financial advice provided on the basis of hybrid commission rates of 80% (plus GST) delivered a more than acceptable result.
It was later discovered that three of the licensees involved in the review were Synchron, Millenium 3 and Guardian Advice (noting that within months, Guardian was subject to enforcement action by ASIC and as a result closed down by the parent company (Asteron)).
The form in which ASIC Report 413 was release and the messaging around it was very different from later ASIC reports on the subject of financial advice quality. In fact, the later reports demonstrated much higher levels of non-compliance, without the same emotive response, or political reaction. The relevant reports were the following:
| Date | Report name | Non-compliance rate | Consumer detriment |
|---|---|---|---|
| October 2014 | Report 413 - Review of retail life insurance advice | 37% | N/A |
| January 2018 | Report 562 - Financial advice: Vertically integrated institutions and conflicts of interest | 75% | 10% |
| June 2018 | Report 575 - SMSFs: Improving the quality of advice and member experiences | 91% | 29% |
| December 2019 | Report 639 - Financial advice by superannuation funds | 51% | 15% |
Unlike ASIC Report 413, where there was no measure of client detriment, in the later reports, there was information on the issue of likely consumer detriment and the reports included an acknowledgment that the fact that customer files reviewed by ASIC were assessed as non-compliant, does not mean that these customers were significantly worse off as a result of following the advice. Many of the breaches in Report 413 were likely to have been administrative.
ASIC Report 639 on advice provided by super funds had a materially higher non-compliance rate, however when this was issued in December 2019, it came with messaging that there was “nothing to see here”.
The risk advice sector has good grounds to be very disappointed with the way that the ASIC Report 413 results were presented and the disproportionate pressure that was applied to the sector as a direct result of the manner in which these results were published.
The Trowbridge Review – 2014 and 2015
What is now known as the Trowbridge Review, commenced as a joint response by the Association of Financial Advisers (AFA) and the FSC to frame a set of unanimously agreed recommendations with respect to addressing the material problem that the public response to ASIC Report 413 had created.
The review included representatives from the leadership of the AFA and the FSC, and from the life insurers, risk advisers and licensees. Obviously, the membership of this committee had their own perspectives on the issue, and their own conflicted positions.
An interim report was issued in mid-December 2014, with 130 formal submissions received in response. Many of these submissions came from individual advisers. After a period of further consultation and tense negotiations, the final report was issued on 26 March 2015.
A summary of the recommendations of the Trowbridge Review were included in a RiskInfo article from March 2015.
Whilst the FSC were supportive of the Trowbridge recommendations, the AFA were strongly opposed and as was reported by RiskInfo at the time, described it as “unworkable” and having failed to deliver on the agreed Terms of Reference. When the sensible solution was so obviously a matter of backing a cap based upon the existing Hybrid Commission model (80% plus GST), why would the advice profession have supported a proposal where it was acknowledged that remuneration for advice would not cover the cost of preparing and delivering that advice.
Financial System Inquiry
The Financial System Inquiry (FSI), otherwise known as the Murray Inquiry, released their final report on 7 December 2014, which was after the commencement, but before the completion of the Trowbridge review. This report included a surprising recommendation to limit life insurance commissions to level commissions only. This recommendation, was clearly heavily influenced by ASIC Report 413 and was not subject to any consultation with the financial advice profession. The recommendation specific to Life insurance commissions was:
Recommendation 24
Better align the interests of financial firms with those of consumers by raising industry standards, enhancing the power to ban individuals from management and ensuring remuneration structures in life insurance and stockbroking do not affect the quality of financial advice.
Better align the interests of financial firms with those of consumers by:
- Government amending the law to require that an upfront commission for life insurance advice is not greater than ongoing commissions. This would reduce incentives for churning and improve the quality of advice on life insurance.
Earlier in July 2014, the FSI released an interim report, that made no mention of banning life insurance commissions or limiting them to level commissions. In fact, this report placed much greater focus on the issue of underinsurance, as opposed to commission arrangements.
The fact that their stance changed so significantly between July 2014 and December 2014 was quite surprising, especially in the context of no consultation with the advice profession, despite the release of ASIC Report 413 in the meantime. Evidently, powerful forces had managed to leverage ASIC Report 413, in order to push through a recommendation, that would ultimately become very influential in driving significant change to life insurance commissions.
LIF Reforms – Initial Announcement
On 15 April 2015, Josh Frydenberg delivered a speech at which he made what could only be described as demands for reform, including the following:
“This follows the ASIC Review of Retail Life Insurance Advice of October 2014, which criticised the quality of advice and the remuneration structures of advisers.”
“Through the commissioning of the Trowbridge report, it is encouraging to see industry taking responsibility for these issues and acknowledging that the status quo is no longer viable.”
“Appropriate reform, made as soon as possible, must be led by the industry itself. Industry should not force the heavy hand of government to act.”
“In the case of Government, while David Murray’s Financial System Inquiry and the Trowbridge report provide us with a number of options for reform – the extent to which we intervene will ultimately depend on the industry’s own actions.”
No one was left in any doubt by this blunt warning that the then Minister expected material reform, with the FSI recommendation of level commissions only representing one influential option that would come to have a big role in later so called ‘negotiations’.
On 24 June 2015, Minister Frydenberg issued a media release to announce the LIF reforms. He framed this announcement as an industry proposal, however in reality, the two core elements of the package of reforms, being a cap on life insurance commissions and a three year clawback, were proposals that emanated from his office, that were presented to the industry parties on the basis of accept this, or we will move to implement the FSI recommendation of level commissions only. The positioning of this as an industry consensus outcome, made for good politics and theatre, however was a long way from reflecting reality.
Whilst the FSC were pleased with this outcome, the advice associations were certainly not, however felt that they had been forced into this arrangement in the context of a specific threat of something that would have been far worse. There was no other party to turn to for support.
Included in this ministerial media release was the statement that “Should these reforms proceed, the Government will ensure that there is appropriate monitoring of consumer outcomes – including the impact of the reforms on the cost of premiums”. With the benefit of hindsight offered by time and the experience that we have had in terms of substantial premium increases over many years, it is difficult to see how the Government could claim that they delivered on this commitment.
The LIF announcement caused a significant disturbance in the financial advice community and particularly amongst those who were operating in the risk space. Some may not have been aware of the history of pressure from the Government, including across both sides of politics for change in this space. Most would have had no idea of the pressure that had been applied.
LIF Reforms – Revision under Kelly O’Dwyer
The change in leadership of the Coalition in September 2015 lead to a change of Minister, with Kelly O’Dwyer taking over as the minister responsible for financial services.
On 6 November 2015, after extensive lobbying by many dissatisfied stakeholders, Minister O’Dwyer issued a media release to announce changes to the LIF reform package, which included a reduction in the clawback period from three years to two years and some additional detail about how the LIF caps would be implemented and calculated. This media release continued the positioning that it was an industry proposal, including the following:
“Today, I am pleased to announce that industry has come together to reach consensus on the implementation of important improvements to the remuneration arrangements in the life insurance advice sector.”
However also reinforced the message that the heavy hand of Government was very present:
“The Government previously announced that ASIC will undertake a review of the reforms in 2018. If the 2018 review does not identify significant improvement, the Government will move to mandate level commissions, as was recommended by the Murray Inquiry.”
LIF Legislation and Implementation
The Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016, was introduced to the House of Representatives on 12 October 2016, passed on 29 November 2016, and ultimately passed by the Senate on 9 February 2017, with very limited debate or opposition.
The LIF legislation enabled ASIC to set a cap for upfront commission arrangements and to establish a minimum clawback period. Thus, whilst it is the Government that made the decision on the level of the cap and the clawback arrangements, they left it to ASIC to establish this through a legislative instrument, which ASIC ultimately issued on 5 June 2017. Importantly, this power given to ASIC to set a cap on commissions and to define clawback arrangements only applies to upfront commission arrangements, and not level commission arrangements. Arguably the Government could now direct ASIC to change the cap, without the need for new or amended legislation.
There were a few important changes in the LIF legislation that was ultimately passed, including a deferral of the commencement date for the staged reduction of the maximum rate of upfront commission, firstly reducing to 80% from 1 January 2018, then to 70% from 1 January 2019, before being reduced further to 60% (plus GST) from 1 January 2020. The other important change was a deferral in the review of the impact of the reforms, which was pushed back to 2021.
Hayne Royal Commission
The Banking Royal Commission was called by the Turnbull Government in November 2017. The Royal Commission ran for the duration of 2018, including a series of hearings that considered a range of issues. Life insurance was a matter that was considered, including the commissions paid on life insurance. Recommendation 2.5 in the final report, took into account the fact that the LIF reforms had only recently been legislated and as a result, chose not to include any further specific recommendation for regulatory change, but rather a recommendation that depending upon the results of the 2021 ASIC review of life insurance advice, consider reducing commissions further and ultimately to zero.
Recommendation 2.5 – Life risk insurance commissions
When ASIC conducts its review of conflicted remuneration relating to life risk insurance products and the operation of the ASIC Corporations (Life Insurance Commissions) Instrument 2017/510, ASIC should consider further reducing the cap on commissions in respect of life risk insurance products. Unless there is a clear justification for retaining those commissions, the cap should ultimately be reduced to zero.
This recommendation demonstrated a lack of understanding that level commissions were not impacted by the LIF caps, however given the zealous implementation of all the Hayne Royal Commission recommendations, it was important that there were no recommendations that the Government felt obliged to implement. In the years that followed the release of the Hayne Royal Commission final report it has become increasingly evident that blindly following his recommendations may not be in the best interests of consumers and the regulated community.
Quality of Advice Review
In a speech to the FSC’s 12th annual Life Insurance Summit in April 2021, Minister Jane Hume addressed the upcoming life insurance review to be undertaken by ASIC, which was a core part of the LIF reforms. In that speech, she made the following points:
“Accordingly, the Government will ensure that rather than conducting two separate reviews – one considering the Life Insurance Framework or LIF and another considering the Quality of Advice – the Quality of Advice Review will now also consider the LIF as part of its wider mandate, removing the need for a separate LIF review.
The Quality of Advice Review will be conducted under the one roof by Treasury, who can appropriately consider the full breadth of issues impacting on both quality and affordability of all forms of financial advice.
In practice, this will mean that once ASIC finishes its data collection phase under the LIF review, this information will be provided to Treasury for further analysis in the context of the Quality of Financial Advice Review.”
For many, this was taken as a good thing, given that it would no longer be entirely up to ASIC to undertake this review and it would be subject to separate deliberation by Treasury before any recommendation was made to Government. Many of the risk advisers feared that ASIC’s views on commissions could have lead to an outcome where ASIC would have strongly advocated for further regulatory intervention, as they had at the time of the release of ASIC Report 413.
Minister Hume went on to appoint Michelle Levy to undertake the Quality of Advice Review, that included a consultation stage that had a specific focus upon life insurance and advice on life insurance. The QAR received a lot of submissions and other input on the issue of life insurance commissions, some of which focussed on the decline in life insurance advice and the difficulty for financial advisers to sustainably provide life insurance advice to younger clients and those paying lower premiums. A number of recommendations were put forward, including increasing commission rates or providing a flat fee to be provided by the life insurer on top of the existing LIF capped commissions.
The final Quality of Advice Review report, that was released by Minister Stephen Jones in February 2023, made the following specific recommendation with respect to life insurance.
Recommendation 13.7 – Life insurance
Retain the exception to the ban on conflicted remuneration for benefits given in connection with the issue or sale of a life risk insurance product. Commission and clawback rates should be maintained at the current levels (60 per cent upfront commissions and 20 per cent trailing commissions, with a 2-year clawback).
A person who provides personal advice to retail clients in relation to life risk insurance products, who receives a commission in connection with the issue or sale of the life risk insurance product, must obtain the client’s informed consent before accepting a commission. This consent should be recorded in writing and should be obtained prior to the issue or sale of the life risk insurance product. In order for the client to make an informed decision, the advice provider must disclose:
- the commission the person will receive (upfront commission and trail commission) as a per cent of the premium; and
- the nature of any services the adviser will provide to the client (if any) in relation to the life risk insurance product (such as claims assistance).
Consent will be one-off and apply for the duration of the policy.
This requirement will only apply to life risk insurance
Whilst this recommendation did not propose increasing commissions and the client consent obligation was not considered to be overly demanding, given that it largely reflected current practice, it did not deliver the changes that many risk advisers thought was essential. The QAR did however represent a turning-point, in that many of the submissions and advocacy activity was based around increasing commission rates, not reducing them.
FAAA Recommendations
The FAAA Policy Platform issued in June 2024, specifically recognises the challenges facing the life insurance advice sector and the impact this is having on Australian consumers. We have established the following objective with respect to risk advice:
- Take action to better enable the delivery of life insurance advice to facilitate more Australians being adequately covered.
Under this objective we have defined the following strategies:
- Review LIF caps to ensure commercial viability of life risk advice. This must include covering the cost to service. This should be done with a view to better coverage of a broad-range of consumer types.
- Advocate to reduce or eliminate the practice of upfront life insurance premium discounting to address the negative impact of material premium increases and to enhance consumer disclosure.
The FAAA supports an increase in upfront commissions for life insurance advice and the discontinuation of upfront premium discounting (duration-based pricing) practices.
Conclusion
The journey over the last 15 years for the life insurance sector has been a particularly challenging one with multiple regulatory changes having a negative impact on the uptake of life insurance and a substantial reduction in the number of financial advisers providing risk advice.
In the case of the LIF reforms, it was a combination of zealous opposition to commissions, commercial interest and political expediency that resulted in a forced outcome on a small sector that lacked the political power to prevail. The ultimate outcome for consumers and the sector was clearly predictable and was expected by the advice associations at the time. However, this only serves to demonstrate evidence of a poor process that has delivered a poor outcome for Australian consumers.
Any reasonable assessment would conclude that the LIF reforms have been an abject failure, and have contributed to a decline in the sustainability of the life insurance industry. This is an important issue that needs to remain on the regulatory change radar, and Government needs to keep a close eye on the life insurance market to ensure that it remains sustainable. There are many who fear it is on the wrong trajectory.
The Life Insurance industry has been subject to other challenges in the last 10 years, including APRA’s intervention in the Individual Disability Income Insurance market, and other problems, such as upfront premium discounting practices, however the LIF reforms have had deep and broad consequences that continue to have a material impact on sustainability.
The extent of the problems in the life insurance market is now better understood and finally it was recognised in the 2025 election campaign, by the Opposition, as something that needed to be reviewed. An increase in the LIF Cap is essential to encourage more advisers to provide life insurance advice and for it to be a sector that can re-grow and meet consumer demand.
I trust this paper helps to explain the life insurance commissions journey, and clearly highlights that the LIF reforms did not come without extensive political and regulatory intervention and the operation of powerful forces beyond the public eye.
