Banning life commissions will spell “disaster” for the advice industry, which is presently facing a host of other challenges such as increased running costs and extra compliance requirements, a life insurance adviser has warned.

Removing commissions will also not lead to improved consumer outcomes as multiple surveys have shown a majority are unwilling to pay out-of-pocket for life advice and they also cannot afford the fees that advisers will charge if a ban is introduced, KPRM Insurance Services Director Brett Wright says.

Mr Wright has prepared a report on how life commissions work ahead of a review next year by the Australian Securities and Investments Commission (ASIC) into the remuneration model.

The review is a recommendation made by the Hayne royal commission in its final report to the Government last year. The aim of the review is to determine if the commission cap has improved the quality of advice. Commissions paid for new life policies obtained via advisers have gradually been reduced as part of reforms made under the Life Insurance Framework.

He says he wrote the report amid indications from the Government, Opposition and regulators that they may support a commission ban.

Those against commissions have often flagged a fee-for-service model as a better option but this would be out of reach for most Australians. At the very least, it would cost a minimum $3000 on average upfront.

“My argument isn’t trying to say that life insurance advice should be funded by commissions only,” Mr Wright told insuranceNEWS.com.au. “I believe there is room for a fee-for-service model and consumers who want and/or can afford it can access this option already.

“I wrote this report with the sole purpose of starting open, honest, transparent and fact-based conversations with politicians, regulators, life insurers, associations, licensees, advisers at the coal face, and most important of all, the consumers we serve.”

He says it is essential that consumers maintain their right to choose between the commission and fee-for-service models, and decide which is best for them.

About 70% of new life policies written are made through the advised channel, Mr Wright said. Under this model, commissions will only be paid by the insurer to the adviser if a policy is taken up and it is a fixed rate, so there no incentive for one product to be recommended over another.

Under a fee-for-service model, advisers will have to charge consumers directly even if applications to buy a policy are declined by insurers. The fee – ranging from $3000 to $5000 on average – is to cover for the advice and preparation work to help consumers with their insurance needs.

“A fee-for-service model makes insurance advice unaffordable for 90-95% of consumers and forces them to rely on inferior direct or group insurance products that generally cover less, cost more and deliver poorer claims outcomes,” Mr Wright said. “Or even worse, consumers will not bother with insurance at all.

“The life insurance sector is at a critical point in time. The main goal and focus for all stakeholders, needs to be ensuring life insurance advice remains accessible and affordable to consumers, and remains profitable for advisers.

“Without these two things, advised life insurance dies and a collapse of life risk pools will follow.”

Click here for the report.