Two big finance industry associations have joined forces to fix problems in Australia’s life insurance industry.

The Association of Financial Advisers (AFA) and the Financial Services Council (FSC) will form a working group to address retail life insurance product structures and distribution practices, with an independent chair to facilitate industry and policy solutions.

John Brogden, CEO of the FSC says: "It is critical that remuneration models in the life insurance industry are sustainable and practical for consumers and the industry."

The group has been formed in response to an ASIC report, which found that the industry needs to improve the quality of advice and prioritise the interests of consumers.

ASIC's review of more than 200 advice files from large, medium and small AFS licensees found that 63 per cent were compliant. However, more than one third (37 per cent) of the advice consumers received failed to comply with the laws relating to appropriate advice and prioritising the needs of the client.

"The ASIC report requires a serious response from the industry. We have formed a working group to achieve this," Mr Brogden said.

"The working group will consult with the regulators and Parliament on its solutions."

The first report is expected within two months and a final report early next year.

“Australians are chronically underinsured,” Mr Brogdan said.

“Life insurance helps protect Australians against the social and economic impact of premature death, illness, injury or disability that impacts their ability to earn an income - arguably the most important financial asset a person has.”

“The contribution of private life insurance will be critical for the Australian economy as our population ages and workforce declines.”

The ASIC report notes: The FOFA reforms did not extend the ban on conflicted remuneration to individual life insurance sales under personal advice. That is, commission payments for life risk insurance products (with the exceptions in paragraphs 42(a)-42(b)) are exempted from the ban on conflicted remuneration.

The Financial Planning Association of Australia (FPA) has today responded to the report too.

The FPA says that while is not sure any of its members have been involved in the poor advice given, the report reinforces the benefits and need for robust professional standards.

"We will review the ASIC report and suggested recommendation to review training and the proposed checklist,” FPA CEO Mark Rantall said.

“We are happy to work with other professional associations in the advice space to see how the advice process, guidance or education can be improved.”

“Most financial planners do the right thing and act in their clients' best interest, providing high quality advice to their clients.”