Diversified financial services company Suncorp (ASX: SUN) says financial advisers and planners have become reliant on high upfront commissions to sell insurance.
Addressing a business lunch in Sydney, Suncorp boss Patrick Snowball lamented that Australian life insurers had failed to build relationships with customers and had become over-reliant on financial advisers. He said, "Life insurers can't sustain the present business model of paying high upfront commissions to advisers, dealing with increasing claims volumes and losing disengaged customers at the current rate, without addressing the current relationship between the insurer, adviser and customer."
He added that adviser business models have come to rely on high upfront commissions. Customers have become more savvy and are shopping around for the best prices and cancelling high-cost, existing life insurance policies. At the same time claims are soaring for stress-related injuries.
Australia's largest life insurer, AMP (ASX: AMP) issued a second profit warning just last month, due to problems in its life division, while the second-biggest, Tower Australia (TAL) recorded a 34% fall in profit for the six months to September, thanks to higher than expected claims.
Suncorp's life insurance division saw a 76% fall in full year net profit over the last financial year. Insurance Australia Group (ASX: IAG) and QBE Insurance (ASX: QBE) are likely to be experiencing similar issues with their life insurance policies.
Mr Snowball also said that lawyers were contributing to the costs facing the industry, as the number of claims with litigation support have risen by 63% over the past four years. It's either policies have become more wordy and complex, or customers are finding it difficult to get insurance companies to pay out.
Geoff Suimmerhayes, Suncorp's life insurance chief says that Australian life insurers need to overhaul the structures of life policies if they want to address the problems across the industry.
Foolish takeaway
Sounds to me like the gravy train has been given a shake, and Suncorp is warning advisers that high upfront commissions are unsustainable and therefore likely to fall. That should be good news for consumers.
