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21 April 2021

Address to the 12th Annual Financial Services Council's Life Insurance Summit 2021

I want to start today with a reflection on the long history that has brought us into this room.

The life insurance industry has been through revolutionary change in the past 30 years.

And that’s why I’ve brought this little red book along with me today.

I came across this the other week - Stone & Cox. Australasian Life Assurance tables 1973-4.

I think I was about 4 years old when it was published.

What is remarkable about this is how much the industry has changed since this red book was published.

For one, I’m not sure that anyone still prints physical copies of life tables.

And today, about three quarters of life insurance coverage in Australia is purchased through superannuation - that’s a big change from the days before the advent of compulsory super at the dawn of the 90s when individual life cover was the norm.

But more than that, the scope of the data collection, calculations and computations that we undertake today is a long way from where we were 50 years ago.

And that is continuing to change and evolve.

We have more data than ever before.

With more data about customers, insurers are able to price more accurately.

They are able to better tailor products to a buyer’s risk profile and coverage needs. They can identify, quantify, place and manage risk better than ever before with the volume and quality of data available to us.

And we have better technology to crunch this data. Better processing power. We have the beginnings of artificial intelligence, and within that machine learning and deep learning.

As Minister for the Digital Economy alongside my financial services responsibilities, I can tell you that this government supports businesses that choose to innovate and embrace technology.

Last year was challenging for the life insurance industry. There were substantial losses across the board.

Some of this was cyclical, while some was clearly the result of the pandemic. COVID, by increasing claims, increased the pressure.

So long term sustainability of profit margins is on everyone’s minds.

Long term, technology will help with sustainability.

Better pricing and tailoring of products will allow players to compete on factors other than price.

Improved technology will help by facilitating better service, better products and better prices for consumers, with more sustainable margins for insurers.

Insurers all over the world are starting to differentiate their product offerings through technology.

This includes incentivising healthy behaviours through wearables and mobile data collection. It includes using innovative data sources to assess risk, price products and tailor them to customer needs and preferences, and developing new ways to interact and communicate with customers digitally.

There is and will continue to be more automation and technology in back office operations and claims management, which will enhance efficiency for insurers who adopt these practices.

Automatic claims processing is something that will one day be standard. In a few years from now, most insurance claims will be processed instantly and without the claimant needing any human interaction.

That is good for industry operating costs.

And it will also lead to more affordable products, which will allow more Australians to better protect themselves and their families.

But, there are barriers that distract or prevent insurers from focussing on innovation.

One of those is legacy products.

Legacy insurance products still impose significant costs on the industry. I’m sure many of you still have products on your books that were around when my little red book was published.

I know that the FSC has estimated that there are - conservatively - 286 outdated life products, and $22.6bn of funds under management that are allocated to aged products.

That is a huge inefficiency. Even a small number of outdated products on an insurer’s books leads to significant diseconomies of scale.

Each closed financial product requires a broad range of services to maintain it.

From my conversations with industry, my understanding is that these maintenance requirements for old products are not much lower than for current on-sale products.

They require the maintenance of old technology, and specialist accounting, audit, disclosure, legal, actuarial, product, tax and administrative services. I could go on.

Running outdated systems leads to higher costs, greater operational risks and higher chances of fraud. These costs are ultimately borne by consumers and shareholders.

On top of that, managing old products keeps the industry trapped in the past.

It makes businesses pile money into maintaining filing cabinets and COBOL computer programs, rather than investing in product development or innovative claims management technology.

When insurers spend too much of their time looking after aged products, they spend too little time thinking about how best to serve their customers.

The customers aren’t well served by these products either.

In many cases, consumers are paying for these products when they aren’t even aware that they have them.

Some of them are probably unnecessary - I’m sure most of you are familiar with the statistic that for the 12.5 million working Australians there are 22 or so million active life insurance policies. That’s a few too many.

What’s more, for consumers legacy products can have higher risks, lower returns and higher fees when compared with modern products. They may not have protection from Unfair Contract Terms. They may use outdated definitions, in particular for medical conditions. They may not be internet enabled.

Currently there is a swathe of legal, consumer and tax issues that prevent insurance providers from rationalising legacy products in an efficient and cost effective manner.

The ability for insurers to rationalise legacy products is an important issue, and one that I will be looking at closely.

But back to the revolutionary change. I recognise that the industry has been through a lot over the past thirty years.

There was the introduction of compulsory superannuation in 1992. That shifted consumers away from individual and toward group insurance. They moved away from whole of life insurance and toward term life insurance. The industry demutualised.

Then there was FOFA. Best interest duties and increased consumer protection came with a slew of new regulatory requirements. More recently, we have had the Financial Systems Inquiry, LIF, and design and distribution obligations.

It hasn’t been easy.

But we have also seen great examples of industry proactively taking the lead in creating change and improving the functioning of the life insurance industry for all Australians.

In 2015 the industry commissioned the Trowbridge Review to implement ASIC findings and prohibit licensees from receiving benefits from insurers.

Another great example was the Life Insurance Code of Practice that the FSC spearheaded and introduced in 2016.

I believe that there is another industry initiative due to be announced today.

I applaud the Australian New Zealand Institute of Insurance and Finance for their hard work and proactive approach in putting together Professional Standards for life insurance claims and underwriting professionals.

I welcome and support the life insurance industry creating codes and standards for itself.

In a world that is being continually disrupted by changes in technology and consumer preferences, it is fundamental that those who are at the coal face - those of you sitting before me - are proactive in creating a life insurance industry that works for all Australians.

The experience of COVID-19 last year taught us that the way that financial products are sold is changing.

Around 20% of life insurance policies are sold through an adviser. For several months - and for most of the year here in Melbourne - customers could no longer meet a life insurance adviser in person.

But this did not stop the industry: customers and advisers spoke on the phone, they communicated via email and chats, they set up zoom calls.

So it is clear that the way we distribute products is changing.

Nonetheless, it has and will continue to remain the case that many consumers still want an adviser and a human touch to help them understand products, whether in person or via another means of communication.

Decisions about taking out life insurance - how much, what type, what provider - are complex. Product and coverage choices have long term implications for the insured person.

Guidance is often a prerequisite for consumers to have the confidence to invest in these products.

It therefore goes without saying that consumers should, wherever possible, have access to high quality advice when making these decisions.

This is true not only in life insurance but in other financial products too. Access to good quality, affordable advice is key to a well functioning market for financial services.

Consumers need to have means through which to navigate complex financial products and incorporate them in their increasingly complex financial lives.

Advisers will play an increasingly important professional role in the lives of Australians.

That means that advisers need to satisfy more stringent professional standards.

FASEA was established in order to implement standards, including education requirements, a Code of Ethics, a program of continuing professional development and an exam that represents a common benchmark across the industry.

But FASEA focussed on just one piece of the puzzle: creating standards to maximise the quality of advisers.

They did not focus on keeping the cost of doing business low, or making financial advice readily accessible to consumers.

Imposing red tape of advisers increases costs and takes time away from their job.

For small businesses, this problem is even more acute.

90 per cent of financial advisers are sole traders or part of a small business.

The Government is committed to the professionalisation of the advice industry, while maintaining a balanced approach to achieve this goal.

We will do this through promoting regulatory alignment.

Therefore, in December the Government announced that the responsibility for standard setting would be transferred to the Government.

I am pleased to say that the exposure draft for the legislation to do so was released for consultation on Monday.

Though I think I should point out that none of these changes mean that advisers don’t have to sit the exam. Please sit it.

This legislation also includes the creation of a Single Disciplinary Body for advisers, which will be run by industry professionals and administered by the ASIC.

It is my hope that the passage of this legislation will enable advisers to enforce standards within their own profession in a way that not only meets, but surpasses, community expectations.

Insurance advisers have also had their business models shaken up by regulatory change, particularly after the LIF review and the introduction of caps on commissions.

In order to continue the transition of the advice industry to a true profession, it is important that remuneration structures move closer toward alignment with other professions.

That does not mean that there is no future whatsoever for commissions. Parliament has continued to allow commissions in life insurance. FASEA itself has acknowledged that commissions are an acceptable form of remuneration.

I recognise that a flat fee charged for advice can be a challenging business proposition. Consumers struggle to understand what they are paying for. They may not have the cash to pay upfront themselves.

And advisers need to be paid for their work, work that is fundamental to the proper functioning of the life insurance market.

The issue with commissions is not their existence per se. The issue is when they influence the advice provided. In short, the problem is when an adviser receives conflicted remuneration.

Access to high quality advice is important, whether it be in financial planning or life insurance.

To ensure Australians have access to high quality and affordable advice, the government will conduct the Quality of Advice Review next year. This is a post-implementation review recommended by the Hayne Royal Commission.

The Government understands that consideration of an individual’s insurance needs is a vitally important part of their overall financial plan and wellbeing.

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.

As we undertake the Quality of Advice Review, important issues like the degree of underinsurance and maintaining access to affordable, quality advice will be at the forefront of our minds. These elements will enable us to achieve the objective of a thriving life insurance sector that provides access to quality insurance products tailored to meet the needs of Australians and their loved ones at a time when they need it most.

I recently heard a story of a man who ran his own small business. He was in his 40s, he had a young family. He was trying to grow his business. He was a hard worker who was providing for his family. As I’m sure many of you know, running a small business isn’t easy. Sleepless nights, wondering whether you can pay your bills, rent, school fees, busy periods, quiet periods. And then, he was diagnosed with cancer. He stepped away from the business, but he still had bills to pay and a family to provide for. So he made a claim on his trauma insurance. The insurance meant he was able to keep his business afloat and keep his family living comfortably.

This man’s business was a financial planning practice and he understood the value of life insurance.

This anecdote is not an exception - it is a reflection of the widespread benefit that insurance provides to individuals and their families.

In fact, I would go as far as saying that life insurance, as a product, reflects the values of this Government.

When hardworking Australians take out life insurance products they take personal responsibility for the wellbeing of their dependents.

Working Australians are wise to save for a rainy day. They are even wiser to take out insurance. By doing so, their dependents will not need to turn to the state for assistance.

Life insurance and disability insurance are the companions to government social security and the NDIS.

Australia is an insurance-based society. The interrelationship of private and public insurance is the foundation of our welfare system. We have private health insurance and we have medicare. We have superannuation and we have the pension. We have life insurance and we have social security.

There are, without a doubt, times when the government should step in to provide a social safety net for those who need it. That is a prerequisite for a strong society.

But wherever possible, people should be allowed -and indeed encouraged- to take the financial security of themselves and their family into their own hands. That is a prerequisite for a free society.

It is of utmost importance that we nurture and incentivise Australians to make the right decisions for themselves, rather than mandate that the state make the wrong decisions on their behalf.

Personal responsibility, the importance of the family unit and the freedom to choose. These are three values that I hold deeply. They are values which life insurance reflects.

In 1973 the life insurance industry looked like this red book.

In 2021 it largely exists on cloud servers.

But it is still the means that many Australian households depend on to provide for their families if they no longer can.

Life insurance may continually have to adapt to change: regulations change, technology changes, customer expectations and needs change. Society changes.

But there is no doubt in my mind that although in 50 years time life insurance may look completely different to the way it does today, it should and will always play a significant role in Australian society.