Banning commissions in general insurance “would give rise to significant detriment” that will be felt not only by the broking profession, but also by consumers, the National Insurance Brokers Association (NIBA) says.

In a strongly worded submission to Treasury’s Quality of Advice review, NIBA listed a number of “adverse effects” it predicts will occur if the exemption from the ban on conflicted remuneration is removed. Treasury is looking at a number of issues including the remaining exemptions on conflicted remuneration as part of the review into financial advice.

These include higher insurance premiums, reduction in cover for unusual or ‘niche’ risks, reduction in the affordability of advice and lower claims settlements.

NIBA says small business owners are most likely to find it difficult to afford advice under a fee-for-service model, if commissions are banned.

It also expects an increase in underinsurance and non-insurance levels, decreased community resilience to recover after catastrophe events such as floods and fires as well as closure of general insurance brokerages, many of which are small businesses.

Another consequence of a commission ban is that clients would be discouraged from engaging their broker at the risk of incurring costs for every advice session sought.

“Removing the conflicted remuneration exemption for general insurance brokers would give rise to significant detriment to consumers, insurance brokers and the insurance industry more broadly that outweighs any proposed benefits,” the NIBA submission says.

“These adverse effects would in particular, impact small businesses and lower income earners who may not have the means to pay for advice under a fee-for-service model.”

NIBA says previous reviews that have recommended the removal of insurance broker commissions under the “pretence” of lowering premiums have done so based on misunderstanding.

“Banning commission would simply shift the cost of compensating brokers for these services from the insurer to the client,” NIBA says.

The peak body cites the case of icare, which in 2017 removed broker commissions for home warranty insurance products to bring them in line with other types of insurance offered by the NSW state insurer.

“At the time, icare announced that the removal of a 15% broker commission would decrease the cost of policies,” NIBA says. “However subsequent premium reductions failed to eventuate with consumers instead being left to cover the cost of their broker’s services.”

NIBA says the topic of whether to abolish commissions has been widely discussed since the Hayne royal commission but points out very little consideration has been given to what an alternative funding model for general insurance broking services would look like and its impact on clients.

Most brokers would transition to a fee-for-service model should commissions be banned, with most clients likely to be charged an hourly rate or a pre-determined fee for each service the broker provides.

“Under a fee-for-service model, clients with complex or difficult to place risks (such as those living in areas commonly affected by natural disasters) would have to pay more than those with simpler risks and more insurer friendly postcodes,” NIBA says.

“A fee-for-service model would also discourage clients from engaging with their broker during the policy period so as not to incur fees.

“This may mean that brokers may not be made aware of changes to the client’s circumstances that could impact how the policy responds in the event of a claim.”

The NIBA submission says while general insurance brokers are paid commissions by insurers, there are major differences with the model for the life insurance sector.

Unlike life insurance where commission can reach up to 60% of the total premium, commissions for general insurance brokers are significantly less, usually ranging between 10% and 30%.

The peak body also points out general insurance brokers do not receive upfront commissions. And importantly, unlike life insurance, general insurance policies are not guaranteed to be renewed.

“Insurer terms and premiums can vary from year to year, or even be withdrawn, meaning brokers are constantly involved in the ongoing renewal of the product or recommending more suitable products when they become available,” NIBA says.

NIBA says as commission is a fixed percentage of the premium paid by the client, the broker receives the same amount no matter how many hours of work is required for the policy.

“There is no way for the broker to know ahead how many hours of work each policy will require over the 12-month period the policy is in effect.”

Click here for the NIBA submission.