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Sovereign reducing adviser commissions

Sovereign is looking to balance the hit of life insurance tax increases by dividing the cost between itself, policy holders and advisers, who will get reduced commissions.

Wednesday, May 19th 2010, 6:26PM 20 Comments

by Jenha White

The new life insurance legislation, which was introduced in draft form nearly two years ago, will significantly increase the tax paid by life insurers from July 1.

Current tax rules were set at a time when most life insurance policies included both risk and savings components. While the industry shifted to term life policies (with no savings component) in the late 1990's, the legislation remained the same, arguably leaving the new type of life policies under-taxed.

The tax changes are expected to reduce profits across the insurance industry as a whole by as much as $75 million per year.

Sovereign today confirmed its intent to limit the impact on policy holders and said adviser up front commissions for term life insurance YRT will be cut from 230% to 200% and accidental death and level term will be cut from 87.5% to 75%.

Sovereign will also absorb some of the impact of the increases taking a $5 million hit a year.

Sovereign chief executive Charles Anderson says the tax impact on premiums could have been upwards of 30%, but it has mitigated that for its customers by passing on half of the potential increase at 15%.

"For a typical customer with $300,000 in life cover, the changes will equate to approximately $3 a month."

Bay Insurance Brokers adviser Simon Beaton says Sovereign term life commission was one of the highest in the industry and that even with the cut it's paying higher than a lot of companies.

Phil Jones Insurance Services director Phil Jones says for years insurance companies have had a preferential tax regime.

"Now it's caught up with them and they expect everyone else to pay for their previous advantages."

Anderson however, says the taxation treatment allowed Sovereign to pay higher commissions and he believes advisers have had the benefit of lower taxation as much as the company has.

He says the challenge for all life insurance providers is to ensure that no one group is unfairly disadvantaged.

"It would be unreasonable for one party alone to bear the cost."

He says there is potentially an affordability issue for the public with premium increases and the New Zealand public is already under-insured which is why it tried to reduce the premium increase impact.

Jones says that if Sovereign's reaction to impending tax changes is more adverse than others, then logically brokers will direct new business to other companies.

However, Anderson believes the commissions Sovereign is paying are neither the largest nor lowest so given its high claim rating, its service and premiums, he is expecting the company to be positively positioned because of the balance it has looked to achieve.

"As industry leader we are better placed than most to absorb the cost of the life tax changes and have carefully considered how to do this while maintaining our competitiveness, stability and superior A+ claims rating."

Anderson says consumers, will face slightly higher premiums in future, though most existing customers will be protected from the immediate impact by the transitional provisions which allow for most existing term life policies to effectively continue to be taxed under the old rules for up to five years.

He says a small group of about 7000 policy holders will be affected by the changes.

There will be no premium change to disability income protection, living assurance and total permanent disablement policies.

Jenha is a TPL staff reporter. jenha@tarawera.co.nz

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Comments from our readers

On 20 May 2010 at 9:31 am cynic said:
Great PR spin; but 230% commission on $1,000 API is exactly the same $$$ as 200% on $1,150 API. So adviser earns same commission on the sale. Policyholder pays extra 15% to Sovereign to pay the extra tax. Advisers aren't having commission reduced at all!
On 20 May 2010 at 10:28 am Darren said:
Short term gain for long term pain. Next it will be give us 100% of your business. The trap is being set; surely advisers are smart enough to see what this provider is like in 2010? The Sov of old was sold and the current coy is not on the side of advisers. Be careful!
On 20 May 2010 at 10:56 am DN said:
Isn't it funny that the company that pays by far the highest commission also has the biggest market share!
And some people argue the need for regulation!
I use two companies (in general) and there is a big difference to what I get paid, BUT it is the clients needs that come first not my back pocket.
It is a shame that there are so many out there that don't care about anything but what they make from a 'sale'.
The sooner the salesmen are gone and it becomes a service industry the better.
On 20 May 2010 at 11:01 am Regan Thomas said:
@ cynic: I'm sure will send your cheque for $300 to Sovereign Services, Private Bag Sovereign, Auckland Mail Centre. And use your real name.
On 20 May 2010 at 11:20 am JW said:
DN - couldn't agree more!!
On 20 May 2010 at 11:54 am Brent Lewis said:
It seems to me, as this only applies to term life policies, can anyone tell me how one term policy is better than another, other than price? The commission on term life policies is totally irrelevant, if the premium is competitive. I personally rarely use Sovereign , for my own reasons. But here's a thought.
Maybe all insurance sales persons should morph into financial planners or financial advisers, if it makes them feel better about themselves. We could all hide behind a pretentious title. Personally, I'm proud to tell people I sell insurance.
On 20 May 2010 at 1:04 pm Mr and Mrs Smith said:
They didnt include this announcement in the Sovnet conference did they?!
Feeling duped much all you Sovnetters?
On 20 May 2010 at 1:07 pm bw said:
Well said DN, well said indeed......
On 20 May 2010 at 3:24 pm Johnny Adviser said:
As far as I can see they haven't told advisers this at all yet. I found out about this on GR. Nothing in my inbox from the Smales Farm area at all.
On 20 May 2010 at 3:29 pm John said:
Agree DN, it is about the client, relationship, about solving & serving more than about selling in today’s competitive business market, but this is just a strategy to get the sale because there’s a lot of sameness out there so smart companies/sales people need to create pod. To assume that “salesmen” is not a good thing further fuels the stereo typical mentally people have about sales in general, it’s no wonder the general public think sales is an evil word! At the end of the day whether you’re a financial planner/advisor, acc-mgmt, bdm, client service mger etc…it’s still about sales & instead of trying to disguise this fact & appear to be everything else but sales, people in sales should be embracing it otherwise sales may not be for you!
On 20 May 2010 at 4:49 pm Independant said:
Hi Johnny, It was in the hotline from Sov which was sent yesterday.
On 20 May 2010 at 8:30 pm Interested party said:
As a Sovnet conference attendee, i certainly didn't feel duped. Whilst this announcement only came yesterday it has been signalled for some time. That conference reinforced for me that commission (regardless of how much) is only part of the package, and Sovereign's total business offering for their advisers sets them apart from the rest of the pack.
On 20 May 2010 at 10:10 pm The boss said:
Here is Russell's take http://chatswood.typepad.com/moneyblog/2010/05/more-from-goodreturns-on-sovereign-commission-reduction.html
On 21 May 2010 at 12:03 pm jonesy said:
I wonder why they did their PR spin the day before the budget and not after like the rest. Tower's increase is 7% to clients, Sovereign's is 15%.
Has the drop in company tax affected Tower's decision here?
And by the way it would seem as though the circle is turning full circle and probably within 5 years we will all (or most of us) will be aligned advisors once again :-(
On 21 May 2010 at 3:26 pm Craig said:
Maybe they wanted it buried in the budget announcement. From what i can see, a 7% increase is significantly more given that the existing client base won’t be taxed on the new rules for 5 years. Loyal customers will subsidise their new business, but the profit hit can’t be sustained forever. So, if anyone really believes that they can absorb the new tax on life with a 7% increase then they believe in a fools dream. Interesting debate, i reckon expect future increases from this provider.

On 21 May 2010 at 5:14 pm Johnny Adviser said:
How will loyal customers subsidies new business? I think the reverse applies Craig.
On 21 May 2010 at 8:05 pm GB said:
Good On Ye Johnny A

I think he means that Tower loyal customers get to subsidise new business.

As an adviser who has completed needs analysis for many years with different companies, I'm not happy that I will get my customers complaining (after I was told that the new tax only applies to new business) and I shall have to work out a new budget for them
On 24 May 2010 at 9:46 am Regan Thomas said:
I don't like Tower's strategy at all. 7% probably wont be enough, eventually. We can expect more increases from them, in a year or two. Looks good now though (less than half Sov's move) but I reserve judgement on this.

In the mean time they are playing the captive audience game. Hit their existing customers with 7% now, knowing that if they go to anyone else post 1/7 they will be comparing with higher rates. Clever, but disgusting.
On 24 May 2010 at 2:10 pm Scottie said:
This is starting to get interesting! Each company seems to be taking quite a different view on how to deal with the reduction in profit brought about by the additional tax impost.

Fidelity was first off the mark way back in April last year announcing a 2.5% increase on new and existing Term Life and Trauma for each year from 2010 to 2014 - I think thats about 13% accumulated over the five years.

Then Pinnacle was in the news a few weeks ago talking about a 10% price increase on new policies.

Sovereign has gone out with it's 15% increase on new YRT and Level policies, with no (apparent) impact on existing clients.

Tower has their 7% on both new and existing clients (regardless of the grandfathering provisions) and Asteron has just announced a similar 7.5% increase to new and existing Stepped Term premiums - but a 22% increase to level premiums.

You can't help wondering that if Asteron needed to increase Level term by 22% (because existing Level Clients have "guaranteed rates) then that is probably what they would have needed to increase their new Stepped rates by if they weren't being cross subsidised by the existing clients.

I also wonder what the IRD is making of all of this? I am sure the insurance industry lobbyists would have argued hard for protection of the existing clients from the new tax (and they got a five year exemption), only for some companies to turn around and whack those same existing clients with an immediate premium increase so they can keep their new business rates down - wouldn't it be tragic if the IRD turned around and removed the grandfathering because of this gouging behaviour.

It seems to me that Sovereign and Pinnacle seem to be the only honest and transparent insurers out there - It will be interesting to see what ING, AIG, AXA and AMP do
On 24 May 2010 at 3:37 pm Bazza said:
All these percentage changes mean nothing until you actually sit down and do a quote for a client. The only rate that really matters is what each individual client has to pay and if that is good value or not. The only people who know what is really happening inside each company as far as cross subsidising and 'price gouging' are their actuaries, and they will be using this opportunity to rebalance the share between policyholder, shareholder, taxman, and distribution, not just account for the tax changes. Also Scottie 'Honest and Transparent Insurers' is an oxymoron, isn't it?
Commenting is closed

 

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