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Size doesn't matter – it's what you do with it that counts!

Much debate has raged recently regarding the disclosure of commissions on life assurance contracts

Tuesday, February 14th 2006, 11:10AM

by Naomi Ballantyne

Much debate has raged recently regarding the disclosure of commissions on life assurance contracts.

On one side of the debate is the belief that disclosure of total remuneration, including upfront commissions, soft-dollar rewards and production bonuses, would act as a sort of hand brake to the quantum of these commissions, ultimately benefiting the consumer through reduced prices.

In addition, commission disclosure would potentially refocus life company competition on to product development and consumer benefits, and away from remuneration structures for advisers. Some also hope that the levelling of commissions will help improve life company profitability through an improvement in persistency and a reduction in bad commission debts. Many see this as a winning outcome for both consumers and life companies.

On the other side of the debate, arguments are raised that disclosing the quantum of point-of-sale remuneration is misleading as the true cost to the client is spread over the life-time of the policy and, in real terms, is very modest.

Also commission disclosure and the expected levelling of commissions that may come from it have the potential to significantly damage the industry. The overheads required to run a life brokerage are very difficult to meet without the cashflow provided by upfront commissions.

Commission disclosures may start a chain reaction that will see the industry consolidating into the hands of a small number of mega-brokers as small practices close up shop, as has occurred in Australia. This may lead to less consumer choice and also, ultimately, higher consumer premiums as these mega-brokers use their leverage to pressure companies into delivering more value to their bottom lines.

How can less choice and higher prices possibly benefit the consumer and how can being held to ransom by mega-brokers possibly help improve life company profitability?

From the outside looking in, it would appear that reaching a compromise between the two opposing groups is impossible. However, I'm not sure the differences are that great where it matters most.

I think both sides can agree that more protection is required for the consumer. Life assurance products are complex and the consumer must be protected from unscrupulous advisers leading them to make poor choices both in their initial purchase and in subsequent decisions to replace that business.

If the ultimate aim is to ensure that advice given to the consumer is not influenced by the adviser's potential remuneration, then disclosure of the quantum of commission alone is unlikely to achieve this. Surely the issue is not the size of the commissions paid, but how the difference between commissions on competing products has influenced the advice given.

After all, if all companies paid exactly the same commissions and removed soft-dollar and production rewards, the size of the commission would no longer be relevant to the advice given.

Likewise, it is difficult to disagree that, given the potential risks, a client should have an understanding of what part commissions have played in the advice to replace their existing insurances with another company.

Unfortunately, even if all companies pay like-for-like commissions, the ability to earn a new commission from an existing client can still significantly influence the advice the consumer is given.

There is an argument that if upfront commissions on replacement premiums were outlawed and upfront commissions on true new business were adjusted to compensate, then any undue commission influence could be eliminated.

It seems clear that changes are on the way, and fighting to retain the status quo would appear to be futile. Surely the best the industry can do is to agree on a compromise strategy that will improve consumer protection and consumer choice, at the same time making sure the industry is not completely thrown out with the bathwater.

Because we all know size doesn't matter – it's what you do with it that counts!

Naomi Ballantyne is the Managing Director of ING Life (NZ) Limited

Naomi Ballantyne ONZM, is the Managing Director at Partners Life.

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