Posted April 17, 2020
Posted By Meghann Cannon
Providing Advice – Insurance
Published 17 March, 2020
Prepared by Peter Hagias
With ASIC set to review insurance caps in 2021, heat on the insurance industry is set to peak once again. With the genesis of the original caps lying in the unacceptable link between commissions and poor advice, it would not be out of the question to suggest that ASIC may have another look at the quality of insurance advice. It’s last review was in 2014 and the results of that review were poor – 33% of files failed! Since then we have also seen a number of advisers banned by ASIC in relation to insurance advice.
Thus, now might be time to review the quality of insurance advice provided by your business and determine whether there are any red flags in the quality of advice or processes that underpin the production of such advice. Red flags that were common in 2014 and which we think to continue to pose a risk to the industry include:
- The advice does not adequately consider the client’s ability to afford the premium – now and in the future. Simply put – advice is not appropriate if the client cannot afford the cover.
- The advice only relies on the needs analysis to determine appropriate levels of cover. Affordability and what the client ultimately wants and can afford to insure are key areas to be explored. The adviser’s inquiries cannot be limited to the needs analysis or insuring a particular level of cover without undertaking further investigations.
- The advice does not consider the impact on superannuation where some or all of the insurance cover recommended will be funded through superannuation. The effect that this will have on a client’s retirement savings and whether that should be mitigated by additional super contributions should be considered as part of the overall strategy recommended to the client.
- The advice is generic and does not consider key features of the strategies and products recommended. Things like ‘stepped vs level’ and ‘any vs own occupation’ should be considered in light of the client’s circumstances and adequately explained in the SOA.
- Documentation is poor. The onus is on advisers to prove they have met the safe harbour provisions of the best interests test. Contemporaneous documentation is primarily, if not exclusively, used for this purpose. Documentation should be promptly uploaded to the file, which should contain an entire and complete account of matters and correspondence with the client. Think of it as the full “advice story” so that in years to come (when no-one can remember what happened) the file shows the full account of what occurred and why.