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How ‘bout those commissions

Friday, June 6th 2008, 9:12AM 13 Comments

by Philip Macalister

A story this week on commissions and soft dollar incentives paid to risk advisers caught my eye.

The story, it's here, is based on the independent report prepared for Tower shareholders in respect to GPG's partial takeover offer. The report is written by Grant Samuels and is strongly critical of the commission levels paid to advisers.

This should come as no surprise as New Zealand pays the highest commissions on life products of any country in the world (so we are told).

What is worth noting is that it isn't Tower making these comments, rather it is Grant Samuels.

As I understand it the company has been looking at a number of other life companies and had already come to this view about commissions before it walked in the door at Tower.

(This, I will note is in line with last week's Blog, which mentioned changes in the ownership of some companies in the financial services sector in New Zealand).

One of the issues for the life industry, and it is not a new one, is the commission amounts being paid. While there has been a bit of a competition in recent years to see who can give advisers and brokers the most, I hear that some of the leaders in this field have started to pull back.

This is good news and is something that is well overdue. It's time that commissions became more realistic.

Just for the record I'm not against commissions per se, rather the issue is having them at sustainable levels.

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Comments from our readers

On 6 June 2008 at 10:54 am Denis said:
I work for a provider in the investments area and am exposed to the wants and needs of many Advisers who make their living primarily through life insurance. Their stance is that KiwiSaver and investments generally are irritating and not worth their while because the commissions are so low. Low compared to what? - Life insurance!

Life insurance commission levels are seen as the benchmark in commission payments generally across all financial products. I don't blame an Adviser for specialising in life insurance. Good on him/her!

Providers have made mistakes in the past by trying too hard to replicate the life commission levels inside investment products. Nobody thanks you for it in the long run. Advisers tend to forget the upfront commissions ever existed - and clients get rubbish returns and complain.

Overall, I have no stance on the level of life insurance commission, I just resent it being used as a bargaining tool when talking about investment products. It's like expecting an aardvark to lay a golden egg. It's highly unlikely because it would be very difficult to engineer manually and it is a completely different animal.
On 6 June 2008 at 11:17 am Majella said:
Phil - who's "pulling back"? I've recently had offers of increases from two large companies. One was introduced "temporarily" last year, but has since been made "permanent". This week, another issuer is offering a furtehr 10% on base commission for a period of 4 months. Once offered, I believe companies have a great deal of difficulty in winding them back again.

"Sustainable levels" - who is better placed to determine what this actually is than the companies who pay it? The commission levels offered are corporate decisions, made with a view to their profitablility. The shrinking (and now further threatened) cohort of advisers & brokers is a likely factor in the increasing inter-company competition for market share - hence escalting commissions being offered.

Personally, I do not chase, or accept, the soft-dollar stuff (who wants a two week trip with a bunch of insurance agents????). I'd rather have it paid as assessable revenue, through commissions, to assist in dealing with constantly rising overheads.
On 6 June 2008 at 12:32 pm Justin Smith said:
Phil

you're out of touch. "How about" the cost of getting the business on the books. I reckon anything up to half the commission's spent running around with forms, pmars, negotiation with underwriters, avoiding non disclosure and offers of terms.

If the commission's so good, why are there less and less people coming into the industry? Why isn't the guy at Grant Samuels out there selling it.

Remember, the commission's not earnt till the case has been on the books two years. Even then, production bonuses are partially calculated off total book persistency. Commission's not as black and whate as Grant Samuels, or yourself, are painting it.

Justin Smith
On 6 June 2008 at 12:40 pm ian said:
I agree with the last comment.
Whilst this is commission- it is reallyjust revenue just like revenue to any other business. Do we need to know how much the salesman at Harvey Norman gets paid to sell us the new TV- I dont really care. It is over to the insurance companies to determine the level of sustainable premium- and commission is only a small factor in determining these.
Also how much does telecom, air new zealand or our banks spend on advertising- mega dollars judging by the level this gets shoved down our throat all the time. Insurance companies spend their marketing budget on paying advisers well to attract consumers to buy a necesary but not desirable product. After all life insurance is hardly a sexy product like a new car or overseas holiday or latest plasma tv.
I am also interested to note the new companies promoting the cheapest life insurance on the market- eg Pinancle life- when comparing their new policy premiums to others in the market- they are pretty close- and what advice or service do you get for that. I wonder what contingent liability they will face in the future when they find out that someone has completed an online application but failed to think the mole they had removed a couple of years ago may have been cancerous! but they didnt put it on the appln. Will be an interesting development.
On 6 June 2008 at 12:45 pm dmckeown said:
I find it very intriguing over the last 30 plus years ive been in this business that proponents over reducing commission have never or rarely been in the business of selling Insurance.If they have they didnt survive or theyre from some other well meaning source with a salary of six figures or more.
We earn every cent we get for commission and the overheads of running an office,staff etc are no different than any other Business.

What is with these people who go on about commission?.....why dont they come and work in this Business and see how quickly they change there tune.

Clients dont mind us getting commission.If this system changes all thats going to happen is people will be even more underinsured than they are now and we wont be able to afford being in Business.
What is a realistic commission and on what is the rationale for it "being good news and long overdue?"
On 6 June 2008 at 1:33 pm Bruce Puddle said:

I read the article in question and am amazed at the incompetence of the writer. He claims the commissions for life insurance (among others) are too high and will cause price increases in the next 12 months. He then uses what appears to be fire and general and health insurance products (which is what I assume he means by "general insurance") as an example to justify this claim. He cannot come up with any examples of pending life insurance products about to go up due to high commissions. Further his claims are nonsense when one considers that the commissions paid on fire and general and health insurance products are much lower than on life insurance!

So the premiums of the very product that has the highest commissions are not going up only those with the lowest commissions. His gross ignorance of the industry is further shown by the fact that he doesn't seem to realise that it is the rapidly increasing claims history that is forcing up general insurance products and these increase have nothing to do with so called high commissions.


On 6 June 2008 at 2:52 pm Brent Lewis said:

Hi


I'd like to add my 2 cents worth.


Everyone seems to like pointing the finger at life insurance brokers/agents as being overpaid, under skilled dinosaurs.


Well as one of those dinosaurs, I'd just like to say, when one of my clients is ill and can't work or can't afford surgery, it's not some analyst or government bureaucrat they turn to. They thank their lucky stars, that I came along.


This year two clients have died. Ask their families, if they think I'm overpaid.


Selling life insurance, isn't for the average paper shuffler, it takes determination, drive and the guts to do what's right. Only 20% survive their first five years.


For the professional 20% out there. Stand up and take a bow, because what we achieve, is so powerful and adds so much to the lives of our clients and society.


Overpaid? I don't think so.


On 6 June 2008 at 3:24 pm Majella said:
I'm not so sure the general/health products ARE that much lower in commission, at (ranging around) 20% annually. The up-front, capitalised commissions paid for life/income contracts appear larger, but a pollicy that stays on the books for 7 years or so becomes highly profitable (absent any claims of course!).

There is always a lot of talk about moving to this "sustainable" commission method of level annual %age. Sure, once a broker has a sizable book of level commission policies, all is well. It's the challenge of migration that needs to be addressed by the companies (viz Colonial).

However, it doesn't make the premium for the consumer any lower, so it's an intra-industry issue and has little to do with the consumer.

What we have in the Grant Samuels report is yet another re-statement that shareholders require a greater return, and that these guys would do it at the expense of its advisors and brokers, but that would be a self-defeating act. What business can survive without distribution? Would they have a "tied" adviser force? Would they rely on internet driven sales? Would they go direct telemarketing, selling "off the shelf" solutions, on a no-advice, no-liability basis?

The only model that really works is face-to-face advice. So, which company would "lead the market" and start REDUCING commissions? They'd have to have the "perfect" product or their net NB would fall away pretty sharply.
On 6 June 2008 at 5:05 pm Paul Woollams said:
I think the other thing many people overlook is that while the upfront commissions can be reasonably large figures (in some cases) there is only very small trail commission in most instances. So this upfront commission is actually the payment brokers receive for the duration of the policy that they may have to service every year ie for 20-50 years!, they are on-call for queries and making changes, many of which do not attract additional payment. If you have a policy you are servicing for 20 years then how high is the commission really?.

Also commissions are not necessary high. I am working on a life pollcy for a single young woman now and her premium is likely to be around $25 per month, this will may result in a commission of around $420 gross to me. So after tax, my business expenses, the cost to attract the business and the time taken (it has involved visits and lots of calls etc) I guess I may just earn about the same as a call centre staff member might on an hourly basis, if I am lucky.
On 6 June 2008 at 8:58 pm Ed said:
I'd like to answer directly an earlier comment re Pinnacle Life and hopefully correct some misperceptions...

Regarding Pinnacle 'not offering advice'...

Pinnacle Life distributes its products both online/direct AND VIA ADVISERS. So advice IS available to those clients that want it.... it's just that many clients, in fact a growing proportion of clients, don't! This in spite of a previous comment pronouncing 'face-to-face' as the "only model that works". How long, I wonder, can you keep driving forwards looking in the rear view mirror?

Regarding commission...

In light of the above article and comments... Justin Smith hit the nail on the head when he said "I reckon anything up to half the commission’s spent running around with forms, pmars, negotiation with underwriters, avoiding non disclosure and offers of terms". Exactly! Advisers don't make much on a sale because. Most is burnt up in inefficiency.

I'm personally not against advisers being paid necessarily high commissions (contrary to popular belief), I'm against life insurance companies that use commissions as a strategy to drive more sales. It begs the question... why cant they offer some other real value-adding option... like better products or services?

So why is Pinnacle Life able to retain great advisers and pay them 1/3 the levels of other insurers?? Because Pinnacle Life has enabled it's advisers to issue a policy to their clients in a fraction of the time - online. Often all done in a single visit. These advisers are probably making more money on 1/3 commission AND clients get a great deal. Inefficiency is eliminated and everyone wins.

Finally, regarding price...

Several comparisons between Pinnacle Life's rates and those offered by traditional insurers show the gap is 'on average' 15~20%. You can call this "pretty close" if you like, but in dollar terms this makes quite a difference to consumers today that are struggling to meet rapidly rising costs.
On 10 June 2008 at 11:44 am Majella said:
Ed -

Pinnacle Life's suite of products has significant limitations - max $800K life & TI, no trauma, no DI. Is there a level premium option?

However, it must be highly profitable - the premium comparison for a 50 y/o male non-smoker (on YRT rates, presumably), shows miniscule difference: Pinnacle $96.52, Fidelity $97.27, Asteron $98. Where's your purposrted 15% - 20% gap to be found?

So, someone's making a lot of dough if a Pinnacle Adviser is getting 1/3rd the commission these other distributors pay.
On 10 June 2008 at 2:57 pm Majella said:
...Ha!
And now, the very subject of the Grant Samuel report, Tower, slashs premiums in several age groups and a general reduciton overall. Did they achieve this thorugh reduced commissions??? Far from it. The press release says they saved money through faster & more efficient office processing systems. So, commissions, which if discounted to ZERO generally only save 20% to the consumer (whether paid up-front or spread), are clearly NOT the driver behind increasing premiums.
On 11 June 2008 at 2:04 am MT Head said:

So Grant Samuels reckons we are the highest paid commissioned insurance agents (CIAs) in the known world. I venture to mount an argument we NZ CIAs are not that highly paid. Examining the case of a 40 year old male. YRT rate of let's say a $1 per thousand. Most NZ insurers probably reinsure most of the exposure for our 40 year old at a cost of about $0.37c per thousand. I have ignored the policy fee. Therefore, $0.63 is left to pay the CIAs and the NZ insurers' costs and profit. My next assumption is the NZ insurer should be able to pay the CIAs an annual renewable commission rate of say 40% of the annual premium and still make a healthy profit. I also venture a guess the NZ insurer is still in the money if they pay a upfront of say 200% of AP and ongoing 5% renewal. No doubt an Actuary will show me the error of my ways.


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