Australian regulators are being asked to cap the amount of commission paid on life insurance.

Late last month John Trowbridge, an actuary and former member of the Australian Prudential Regulation Authority, released his Review of Retail Life Insurance Advice, a study commissioned by the Australian Financial Services Council and the Association of Financial Advisers of Australia.

In the report, he suggests that the industry requires new remuneration arrangements in order to minimise conflicts of interest, "especially the perverse incentives or temptations associated with high initial commissions," as well as to address churning, a practice by which advisors receive large financial rewards for replacing existing life insurance policies with new ones.

The remuneration model put forward by Trowbridge would cap initial life insurance commissions at $1,200. For clients with annual premiums of less than $2,000, payments should be no more than 60% of the first year’s premiums. Level commissions would also be limited to a maximum of 20% of annual premiums.

To address policy replacement issues, Trowbridge’s proposes that advisors be subject to a five year rule: they would only be paid the $1,200 upfront commission when the client first buys life insurance, and would then have to wait five years before collecting any more initial commissions from a subsequent sale to the same client.

In addition, the report recommends that all commissions "be fully transparent to the client", with the insurance advisor being required to disclose clearly whether any payment received from an insurer is a full or partial commission.

Sally Loane, the head of the Australian Financial Services Council, says that the regulator is considering Trowbridge's recommendations but has not committed to implementing them.