Insurers have been paying commissions to intermediaries for as long as people can remember.

But from 2012 this could change for companies selling life insurance, depending on which party wins the forthcoming election.

While not proposing to do anything about general insurance commissions – at least for now – the current Labor government wants to abolish commissions paid to advisers as part of the Future of Financial Advice reform package.

Some industry bodies have supported this move, but the Liberal party has said it will allow commissions to be paid after this date.

Various industry reviews have focused mainly on future commissions and not what is happening today.

For financial advisers selling investment products, the period of time where the product provider pays a commission can be short as people move in and out of investments.

But the life insurance market is different.

People tend to stay with the same insurer for many years, for a variety of reasons. So an adviser could have sold a whole of life policy 40 years ago and could still be receiving a commission, or a “trail”, today.

It’s not known how many historic policies are still current.

Bruce Birchall, CEO of financial advice firm Lanyon Partners, says while he can’t accurately estimate how many policies his company has on the books that are more than 10 years old, it could be as much as 20%.

“We do have older policies on our books, but compared to a few years ago, a lot have been updated,” he told insuranceNEWS.com.au.

So far the debate about older products with long commission trails has been almost non-existent, but attempts to remove them could put older risk advisers on a collision course with insurers and the government of the day.

Industry Fund Services Chairman Sandy Grant, who was one of the eight-member team on the Cooper Superannuation Review, expects an intense fight against the abolition of all commissions.

“There’s a large section of the industry and the people around it who depend upon commissions,” he told insuranceNEWS.com.au. “There’ll certainly be plenty of opposition to it.”

He says life insurance premiums – particularly those in superannuation funds – were discussed at the panel. But the discussions didn’t progress very far after legal advice was sought on the abolition of historic premiums.

“You can’t retrospectively withdraw a commission without some compensation,” he said “We were mindful that some group insurance products can attract commissions of up to 120% for the first year of the premium.”

Mr Grant also confirmed some life policies can continue delivering commissions even when they are on-sold after an adviser sells their practice.

“Clients have been sold-on and advisers are claiming commissions from people they have never even seen,” he said. “When the annual renewal comes around they just get a form.”

But removing these commissions has implications.

“There is a serious legal impediment to removing commissions from existing members,” he said. “Because commissions are legal property, there may be constitutional challenges to any legislation that removes them unless there is adequate compensation.

“Commissions are a property, and you can’t confiscate people’s property without proper compensation.”

Brett Davies of Perth-based Brett Davies Lawyers says a commission is both an asset and a property that can be bought and sold.

“Insurance rolls have a growing value and we regularly work on transfers when a practice is sold,” he told insuranceNEWS.com.au. “If the commission on the roll was withdrawn, the adviser could sue for breach of contract for failing to pay the agreed commission.”

Mr Davies admits if the Federal Government did pass retrospective legislation banning historic commissions, the legal position might not be so clear.

“But if an insurance company tried to do it, they also have the reputation risk to face as well,” he said. “I think if there was widespread cancelling of historic commissions, it would be a litigation nightmare. The floodgates would open to claims for damages.”

With the potential minefield of litigation claims occurring if these historic commissions are abolished, there is a feeling the topic will be put in the “too hard basket” again.

And if the government of the day allows historic commissions to continue, it is possible insurers will still be paying them for many years to come.