Commission ban “one private members Bill away”
The insurance sector remains "one private members Bill away" from a ban on commissions, according to new Investment Savings & Insurance (ISI) chief executive Peter Neilson.
Friday, May 27th 2011, 1:31PM 
31 Comments
Speaking at the Life Brokers Association (LBA) conference in Wellington, Neilson said that the ISI was not working towards a ban on commission.
However he said in the wake of the commission ban in Australia greater consumer and political pressure will be brought to bear, particularly on upfront commissions.
He said that pressure would result in a move towards trail commissions over upfront commission payments to advisers.
While he acknowledged that the situation in Australia differs from New Zealand, Neilsen said commission is "an issue we have to address" and that the ISI was looking at the matter.
He said part of the examination would be around possible conflicts of interest that can arise between policy sellers and holders when large upfront commissions are involved.
His comments on commission prompted a response from advisers in the audience, with TNP managing director Jeff Page arguing "not one widow in New Zealand would say her husband paid too much commission."
Audience members also raised the issue of client reluctance to pay upfront fees as an obstacle to alternatives to commission.
Neilson also said the ISI was widening the sample for its survey on underinsurance saying it intended to exam issues around two groups; those who cannot afford insurance and those who can afford cover but may be unaware they are inadequately covered.
He said the purpose of the survey was to be able to present Government with solutions, something he advocated industry and professional bodies become more proactive on.
As a former politician he was aware Government's often felt the need to be "seen to be doing something" and he wanted bodies such as the LBA to play a more constructive role in offering solutions to issues such as underinsurance.
"The industry needs a solution before most people realise there's a problem," he said.
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On 27 May 2011 at 5:30 pm Brett said:
It seems like I have heard this song and dance before! If the job was easy and we were overpaid there would be a lot more agents in the market and we wouldn't be underinsured as a nation. I have disclosed commissions for years and found the public don't care what we get paid! Sorry Peter, you are off the mark here. On 28 May 2011 at 9:55 pm blackjaguar said:
Yes, that might have been the case, but now you have ensured that it will be.
How unwise. Better to have said nothing, and to have beavered away quietly to ensure (on behalf of those who pay you) that provisions which might be in context in another jurisdiction are not imported out of context into ours.
On 30 May 2011 at 11:49 am Broker said:
So on one hand Peter says upfront commissions are a problem and on the other he says we need to address the underinsurance problem. Go figure. Here's an idea - how about supporting the work insurance advisers do and the current renumeration structure that seems to work OK? On 30 May 2011 at 1:54 pm IRIS said:
If you really knew how UF commission was funded then every ethical advisor would cancel their contract. The insurer keeps an accounting on how much premium sales accumulate over time vs how much UF commission is paid out. Why? Because it is a cash flow game. It funds from sufficient positive cash flow premium income in against funding UF commission out. In other words, your previous sales are funding your UF commission today. Tell that to your existing customers. But wait there's more.... On 30 May 2011 at 3:37 pm Johnny said:
IRIS, sorry I'm concerned clients get their claims paid. Your comment is hardly a revelation by the way. On 31 May 2011 at 11:31 am Edward Richards said:
In reference to the ISI CEO's comment that we are one private members bill away from banning commission, this is not particularly helpful - and is adrift from reality with all due respect. Experienced advisers in the market know that commission on insurance is a win-win and affordable approach to insurance providing there is adequate client disclosure consistent with the specific requirements of the new disclosure regulations. As has been mentioned many times, the debate on commission is something of a red herring; it is about transparency and long term relationships with clients and - notwithstanding the role of the internet - always will be. Jeff Page's comment is spot on. The current Minister of Commerce has publicly stated that banning insurance commissions is not on the table at the moment. Would clients pay a fee for insurance advice? Only the well heeled. The PAA is happy to contribute further to the ISI's underinsurance study, as a leading sector Professional Association in the sector.
On 31 May 2011 at 12:18 pm Bruce Cortesi said:
If only life were that simple Peter. I would wager any day that 99.9% of clients have no problem with Insurance Advisers receiving commission REVENUE NOT INCOME for the work involved. Commission does NOT have a huge impact on premiums - why do you think otherwise. Why not do a quote yourself and see what happens to the premium if you dial 0 commission. Perhaps this is a case of sour grapes from other quarters of the industry? Don't forget also that if the client cancels the policy within the first 12 months, the Adviser receives a big fat $0. So in fact, you could say that the Risk Adviser only earns his or her revenue after the policy has been in force for 24 months. Remember also that insurance is something SOLD not PURCHASED. I don't see lots of clients lining up to buy Life Insurance. On 31 May 2011 at 1:39 pm Geoff Peterson said:
Commission a hot topic of interest, as no one wants their income source reduced by a 3rd party.
The issue is Underinsurance, and so let's focus on that folks.
What do we do, and how do we do it?
1. As an industry we educate and promote the value we create for Mum and Dad Kiwis, so their level of awareness is raised, and understanding of the benefits to them is clear.
2. As Advisers/Distributors of the product, we get more proactive in looking at how to reach those either under or not insured.
There are many ways to do this, and educating and regulating ourselves is a first step, and activly educating clients and asking for new ones is a good 2nd.
A 3rd can be the main stream media posting positive outcome stories, as they have been recently.
Above all the industry needs to set some goals, and collectively work toward them.
On 1 June 2011 at 1:02 am Nick Kirwan said:
I completely agree with Bruce's comment and would go a stage further. I personally led the industry discussions with the regulator in the UK (the FSA) when they were considering a ban on risk commissions around 18 months ago. We made the argument to them that fully disclosed risk commissions are entirely aligned with the consumer interest because, as Bruce says, the adviser has a huge financial interest in ensuring that the customer is happy with their purchase over time - not just at the outset. We also presented consumer research evidence that people would not be prepared to pay fees for risk business. I am pleased to say that the FSA has now agreed that commission for risk business will not be banned. The industry in NZ needs to win this argument and needs to start building a compelling evidence base to make its case. If the argument is lost, the risk market will be devastated with dire consequences for insurers and advisers, but more importantly for the already under-insured Kiwi population. On 1 June 2011 at 2:35 pm Simon said:
Peter Neilsen's comments demonstrate an incredibly bad appreciation of what it is that risk advisers actually do for clients and their families every day in New Zealand. As Bruce says clients are not lining up to buy Life insurance! On 1 June 2011 at 4:08 pm Bemused said:
Anecdotal evidence suggested that the ISI had a very large job ahead to restore the confidence of the industry following a spate of ill timed and ill considered 'initatives' over the past 18 months. It therefore strikes me as very odd that Peter Neilson would make such a contentious statement - at best its naive and at worst, extremely arrogant. Did Peter research the make up of his audience before making such a statement? I can't help but think he didn't bother becuase to understand the LBA membership and to still make such a statement is beyond conmprehension! Did he really expect it to land any other way with this audience? (whos' views seem entirely consistent with professional insurance advisers all over the country).
Peter's experience as a politician seems at odds with his claim that changes to commissions will be initiated through a private members bill. It seems unlikely Peter, given the arguments to end risk commissions in both Australia and the UK stemmed from activity of the regulator - not the politicians. If industry is concerned that risk comissions are in jeopardy, the ISI ought to be collaborating with advisers and consumers to develop compelling arguments in advance of the FMA making their move...not after the fact.
In truth Peter - your comments have me worried. Your job is essentially to lobby on behalf of industry yet you appear to be sitting on the fence. Who's side are you on??
On 1 June 2011 at 4:31 pm Sue Laing said:
What an inauspicious start for this new incumbent! The situation in Australia is so much more complex than portrayed and in fact in the context of life risk has nothing to do with conflict of interest or the adviser remuneration methodology debate.
1. No Aussie govt has yet deemed that commissions on life risk business per se are a conflict of interest - that's why a blanket ban has never been proposed by govt during all of our reform years to date while the debate re investment commissions has raged - FACT.
2. The ban on commissions in super has no support from the opposition and dubious likely support from our independents holding the balance of power in a hung parliament - there is little chance of it getting through, for the right reasons.
3. The proposal to ban commissions in super policies is not about remuneration methods - it is about concern for diminishing super account balances to pay for insurance. The media coverage [of this proposal] which targets adviser remuneration comes from the anti-advice lobby who are industry super fund advocates. If the govt philosophy behind it was about adviser remuneration then the proposed ban would be for all life risk commissions - it is not.
4. Why should the Australian landscape be the source of the first public communication by this new incumbent when there are so many current NZ issues to talk about?
A disappointing day for NZ I'm sure. There is surely concern that the body representing manufacturers is undercutting the future of its key source of survival. Mr Neilsen needs a fast-tracked education.
On 2 June 2011 at 10:23 am Bruce Cortesi said:
Well said Sue. If one is going to comment publicly one does need to do proper research and homework. On 2 June 2011 at 11:00 am Under-insured and loving it said:
Advisors would be better spending their time dealing with CHCH eq insurers that only pay out 10% of their obligations to customers. If that is the way insurance works in this country you've got far bigger problems - why would anyone insure for that sort of return? I've been self-insuring for years now - and am well ahead of the game - and now vindicated by the insurer's response to the earthquake. Your real problem is that people are beginning to realise the real costs and benefits of the insurance company model. You describe it as under-insurance - I describe it as self-insurance. Abuse me as much as you like - but I'm a customer, and you're better addressing customer concerns if you want to stay in business. You particularly need to look at yourselves and ask why you are squabbling about how much hidden commission you can extract rather than trying to resolve your customer's issues with ChCh insurers. Or are they not perhaps your customers? On 2 June 2011 at 11:41 am Comrade said:
Sorry underinsured. This is a life insurance debate currently rather than the Fire & General you describe.
The discussion is around clients concerns - we are pretty sure that clients wont want to pay us $1500 directly for the work we do in becoming their lifelong adviser. If they are forced to do that by the govt then I'm sure there will be more underinsurance.
I'm glad you have been able to save the $700,000+ (underestimate) required to keep you and your family in your same current lifestyle should the unthinkable happen. Life insurance advisers try to uncover your needs and your shortfall in covering those needs. Its the shortfall that we are interested in helping you insure.
On 2 June 2011 at 12:35 pm Johnny Adviser said:
Don't mean to be rude, Under-insured, but you're one disater away from bankruptcy, so good luck with your strategy, you'll likely need it. On 2 June 2011 at 3:26 pm Under-insured and loving it said:
Thanks Comrade. I wasn’t suggesting that there wasn’t a place for insurance, and I appreciate your focus on customer concern – I was trying to make the point that the debate on commission is less important, in my view, than the CHCH issue. There is a fundamental contract between insurer and customer to be transparent and exercise good faith - I believe the insurers are reneging on that, and in the long term the industry will suffer. Under-insurance, as you describe it, is only going to increase.
I do understand the difference between life and fire - but most reinsurers balance sheets cover both. My PI premium is strangely increasing as a result of the eq! You also miss the issue about commission (with respect). The debate or rather the conflict, doesn't come from the method of calculation - it comes from the source of payment. Charging your customer a commission, and being paid by that customer is fine. Being paid by a 3rd party provider such as an insurance company, is not. This is old law. Check out the Secret Commissions Act 1908 if you like. To my knowledge government has not suggested that there is anything wrong with commission as a method of calculation.
Johnny A? - a rather more predictable response from Johnny A, - no addressing of customer concern whatsoever, and .... its not that you're being rude - just sadly comical and employing the old carpet-bagging technique of scaremongering. You also seem happy to dish out advice without reference to the facts. I have a net worth approaching $8M, and reasonably diversified over 3 jurisdictions and ½ dozen currencies - what single disaster are you envisioning will bankrupt me? I concede there could well be such a disaster, but I doubt there’s any insurance that will cover me for it. Even if there is, can you explain the logic in insuring, say, my house for $2M, paying premium for $2M cover, and "knowing" that the insurer will only pay me 10% of that, say, $200K? Can I take out 10 times the value of the house to get back to square? (I know the answer). But my real question – do you think the ChCh insurance advisors explained all this to their customers before signing up? If not, should they be liable for the shortfall?
On 2 June 2011 at 5:16 pm Andy Phillipson said:
It amuses me to see so many different takes on the article.
"He said that pressure would result in a move towards trail commissions over upfront commission payments to advisers" and "...possible conflicts of interest..."
Firstly - I see trail commissions as a far better business model; it will ensure we live up to our requirements of regular customer contact. It will also mean that once we have done the hard yards, we can focus on looking after a smaller customer base better, rather than continually seeking sales and UF commissions to stay in business. It will also reduce churning.
Trail commissions could also address the second issue - conflicts of interest, if they were all the same level between companies. However this may cause a conflict with price fixing legislation.
I think an easy solution is out there, we just need to tolerate a small change.
On 2 June 2011 at 5:19 pm Allistar Walker said:
I have seen more bad practice by those selling life insurance for the banks and on salary than those selling on commission. My bet is Peter Nielson really has no idea what he is talking about and would have little or no research to back up his alternative It is time for theorists and administrators to have a back seat. The swing has swung too far their way. On 2 June 2011 at 5:48 pm Regan said:
@Under-insured thanks for your comments. We have two issues you are discussing, that of the chch eq and some horror stories coming out of there, and I don’t doubt there will be more; and the issue of life commissions being "one members bill..."
Your concerns about chch may well be valid, but in this particular thread they are not 'on topic'.
You have commented that 'charging a customer is ok, but being paid by a 3rd party is not, inferring that my commission would be secret. It isn’t. I have disclosed my commissions for years. Customers know that some of the premiums they pay will be directed to upfront and then trail commissions. It is a model that has worked for a very, very long time, and there is compelling evidence that a fee-for-advice model does not work in life, and even domestic insurance.
Further, since you have revealed your personal situation, it is clear you are well beyond the typical mum, dad, two kids, mortgage type customer. A professional adviser who understands your situation and your objectives would only recommend the personal risk cover you have described a requirement for. A good broker of fire insurance will hopefully ensure that your $2M home is properly covered and will therefore be repaired or replaced, regardless of the cost to do so, even of it only takes $200k to fix it up.
On 2 June 2011 at 7:25 pm John Pankhurst said:
Fancy someone like underinsured and loving it even spending their time monitoring a site like this. (How genuine is this person???).Just back from a holiday to Disneyland i'd say. After 32 years in this industry I have yet to come across someone who objects to me being paid a commission for sales made, and especially at claim time when proceeds are paid and families, businesses etc see ensured futures, not financial disasters. On 2 June 2011 at 7:52 pm billy the broker said:
under insured why such narcissistic comments, maybe you should take your 8m investments(if they exist) and sod of to Iran where you can have a good moan, and leave us to do the job we are good at and get paid what we deserve. Don't see people knocking our door down to get in the industry. Wonder why??? Because there are moaning punters out there like you who have deluded value of worth and think they are above Joe average......so take your 8m and donate a bit to CHCH that you so fondly talk about. On 3 June 2011 at 9:12 am sceptic said:
Did Neilsen spend his first three weeks in the job talking to the banks?
Anyone who includes life insurance in asuper contract is not giving good advise. Well done Australia on this point
On 3 June 2011 at 12:19 pm Narcissist Iranian said:
Regan, just disclosing your actual commission doesn't cure the conflict of interest you have in receiving payments from 3rd parties. As a fiduciary/agent you have a duty to avoid conflicts of interest. You can only do that by not accepting payment from 3rd parties.
However, let’s accept we live in a less than perfect world, and you want to try to get around this duty by disclosure. As your customer, it means nothing to me if you only disclose that you receive a 10% commission from, say, Bridgecorp (same with all other fincos/insurers, but I use BC for effect) without knowing what other fincos pay. Accordingly, you also have to tell me what all the other fincos are offering. If that tells me that BridgeCorp is paying you twice what other fincos are offering then I am in a position to weigh up the effect that imbalance might have on your advice. Without knowing those facts, I can’t assess them, so I have to rely completely on your integrity (which leads us back to the paramount duty you have to avoid the conflict and not accept payment from 3rd parties).
It’s easiest just to charge your customers direct (and it’s not important whether you charge a fee calculated as a commission, hourly rate, or a set fee) and not complicate the whole thing by putting yourself in a position of conflict by accepting payments from 3rd parties.
John P & Billy, a couple of reasons why I comment on this website. First, I’m in the financial advisor industry, admittedly on the management/legal side. I spend much of my day managing a team of financial advisors. I believe strongly in the industry, and that a well regulated industry is the path forward. That is why I bother making comments. I suspect you and I would not have a good working relationship.
Second, seeing what the insurers are doing to the homeowners and small business owners down in ChCh really bothers me, as I’m sure it bothers a lot of advisors. If I was unfairly antagonistic or generalising it’s because I think the insurance advisors should be doing something about that, and not arguing about how you can avoid your obligations to your customers.
Don’t bother replying in kind, I won’t be re-visiting up this thread again.
On 3 June 2011 at 3:55 pm Giles Thorman said:
I take it then that the self opinionated Muppet who originally posted on this as "Under Isured and Loving it" has returned as "Narcissist Iranian" to vent his spleen? If he spends much of his day managing a team of Advisers why not take his concerns up directly with the Insurers he deals with? Filling a blog with rants about about something unconnected is frustrating for anyone wanting to air their views on a given article. Anyway as the aforementioned Muppett has said he will not be returning, good! By the way I think Peter Neilson is carrying on the "great" work and legacy of Vance Arkinstall, great stuff. By any chance can we get Companies and Advisers working together for the betterment of the clients and the Industry? On 3 June 2011 at 4:12 pm Mac said:
I feel sorry for the the financial advisors reporting to to the above person. The Chch claim issue relates to business interruption policies 10% claim limit in the event of customers not being able to access their place of business. The full claim would be payable under the policy if damage to the property ceased the business trading.
Re the commission discussion, the life companies are not your friends independent advisers, they would dearly love to cease insurance commission payments not rocket their profitability levels. They are powerful government lobbyists, so watch your back.
On 8 June 2011 at 9:14 am Graeme said:
Sorry this is not part of the commission string but under-insured and loving it's comment cannot be left unchallenged.
Under-insured and loving it shows a complete misunderstanding of the situation in Christchurch.
Business Interruption insurance pays out on the loss once the loss has been quantified. Depending on the Indemnity Period some clients may have a long time before their loss can be quantified.
Insurance companies, where there are long periods or issues with the claim may pay an interim payment.
However, not knowing the full facts of each business owners business interruption cover I can only provide a general comment.
However, as many say its only a simple cat 2 product that anyone can do.
Unlike most of you I am not a risk or investment specialist. I come from a fire and general insurance background including underwriting.
Even after 38 years there are still areas of "fire and general insurance" that I have to do my study on.
On 9 June 2011 at 12:01 pm Cynic said:
Reading between the lines of the ISI's statement, do you think there is any possibility that many of the ISI Members are wanting this change and are quietly getting this change via a private member's Bill? Food for thought. On 10 June 2011 at 10:46 am Craig said:
If we are focusing on the the return from effort for advisors then lets also focus on the Return on Capital that the the Life Companies/Underwriters make who form the ISI. I would suggest it would make interesting reading to see what they make - I suspect much more than we would think. Maybe the ISI could publish an annual list supplied each companies on the ROC. On 13 August 2011 at 9:57 pm geoff said:
I seem to remember the reale estate industry went through the same debate regarding commissions a few years ago. are they still paying commissions? of course they are as any other way just dosn't work. Life insurance is sold, if it wasnt then the amount purchased would drop by at least 90% then how bad would the underinsurance problem be then? How many insurance companys would even stay in nz. The harder it is to sell something the more the person selling it is paid this goes for any product not just Life insurance products. Mr Neilson and technicrates like him should have to spend a couple of years selling Life insurance products as part of their training before being able to make any comments on the subject of commission. Currently he can have a bad week and still get fully paid.As an advisor would that be the same? How many of these commplience people making the rules for the Life insurance industry have ever sold a life Policy? I am not saying we dont need some commpliance but I am saying they should keep their nose out of the areas they have no real practical understanding of. Commenting is closed
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Do you have any more solutions to problems that don't exist Peter?