Life insurance industry reforms will cost consumers as trails increase due to policy longevity, comparator Rate Detective CEO Damon Rasheed warns.

In a submission to the Parliamentary Joint Committee on Corporations and Financial Services’ life insurance inquiry, he says increased trails – up from 11% to 22% – will result in advisers receiving more in overall commission payments.

But the increase in commission payments is not enough to cover the cost of winning the business, the submission says.

“This is perhaps the one point the industry agrees on. The effect of this is that advisers are establishing fee-for-service models to supplement the loss of upfront revenue, where previously the service was free to consumers.”

Mr Rasheed says his company is also considering this. Rate Detective is a low-touch, high-volume personal insurance business specialising in “no advice” or “general advice”.

“Compared with a traditional financial adviser, who provides an advice model, Rate Detective’s cost of acquisition is relatively low,” the submission says.

“Although the company runs a low-cost model, the existing upfront commission is not sufficient to generate profits after subtracting the upfront cost of acquisition. Rate Detective’s business model is, therefore, to break even on upfront commissions against costs of bringing that business on board while building a trail book as an asset.”

Mr Rasheed says while increased trails are attractive, under the reforms an adviser will need a significant cash reserve to continue working as upfront losses accumulate.

“We submit that the proposed changes would lead to a reduction in the [number] of advisers in the industry or advisers would have to charge a fee for service, which would increase the cost of insurance to consumers,” the submission says.

Mr Rasheed says Rate Detective is reducing the number of advisers it has on staff, preferring to focus on other areas of business.

On top of advisers charging for life advice, premiums will rise to cover the cost of higher trails, its submission says.

“We cannot find a single insurance company that will go on the record that prices will decrease as a result of these proposed changes.”

Mr Rasheed says at least five price rises have been announced since the reforms were unveiled. “We believe the timing of these price rises is no coincidence and is the first sign of things to come,” he said.