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Market pressures could prompt commission change: Report

Insurers are paying out 40% of their annual premium income in distribution costs - a pressure point that could force them to cut advisers' commissions, a new report says.

Friday, May 13th 2016, 10:51AM 9 Comments

by Susan Edmunds

The New Zealand Institute for Economic Research has presented a report analysing the New Zealand life insurance market structure.

The number of people with life insurance has been static over the past three years and annual premium income growth has come only from the increasing cost of existing customers’ policies, it said.

“New business has not be sufficient to offset the loss of premium income from terminating policies since at least 2012.”

The estimated average premium for new business being written is 20% to 30% lower than that of existing policies.

NZIER said policy acquisition and maintenance costs were high for insurers, at more than 40% of annual premium income. The cost was split between commissions paid to salespeople and the company’s own costs.

Insurance company premium revenue averaged $1.948 billion over the past three years, with claims averaging $1.334 billion.

Companies spend an average $864 million a year on acquiring or maintaining policies, of which $441 million is paid in commissions.

The report said the lack of growth in the market and the scale of distribution costs gave insurers an incentive to look at changing their distribution models.

Insurers’ policy acquisition costs can be up to 100 percentage points higher for insurers using advisers than for those who do not.

“Strategies to lower distribution costs need to consider the efficiency of both the independent sales teams and company distribution channels.”

The report said a drop in commission of 50% could cut premiums by up to 16%. But it could not say how much of an effect that would have on customers’ willingness to take out insurance.

“We have not been able to identify any independent estimates of the price sensitivity of policy-holders to increases in premiums. This makes it difficult to answer the question of how much the scope of the market might expand if premium rates per cover were lowered due to reduction in the costs of distribution and how long those gains would persist in the face of annual adjustments in premium cost."

Asteron, OnePath and Fidelity Life had a heavier reliance on commission payments to acquire new policies and were paying slightly above market average levels of commission to maintain business, the report said. Sovereign was at about the middle of the market.

Partners Life was not included in the analysis because it was less than 3% of average premium revenue between 2012 and 2014 and because of its reliance on reinsurance.

“Policy acquisition and maintenance costs consumer a substantial part of premium revenue for all insurance companies but vary widely across companies and do not appear to be subject to economies of scale. For many companies less than half of policy acquisition and maintenance costs are commission payments, suggesting that strategies to lower distribution costs need to consider the efficiency of both the commission and company distribution channels," the report said.

"The difference between company levels and commission payments as a share of premiums and also the balance between commission to acquire and commission to maintain policies suggests opportunities to change commission structure."

Tags: Commission Life insurance

« Terminal illness cover launchedAnti-commission argument not winning: Ballantyne »

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Comments from our readers

On 13 May 2016 at 12:15 pm Backstage said:
Start with Insurance Company executives packages and performance, then get back to us after that...
On 13 May 2016 at 2:34 pm Jason Davis said:
You can already save 16% on the your premium between the highest cost to the lowest. Cutting commission rates will not lead to a higher level of insurance among kiwis. It may have the perverse effect of less people selling so less insurance being brought. This is similar to the Electricity Industry where the government sponsored the whats my number campaign to highlight the price differences between retailers. This had the effect of pushing up sales costs on the retailers who then pushed up prices for their existing customers whilst offering special deals for new customers only. I also take issue with lumping all of the products under life insurance which is a similar product company to company. The real value add from an adviser is the quality of the Trauma, IP and Health policy sold. Helping clients to choose the best product for their needs takes time and skill and should be remunerated as a skilled profession. Not based on an outdated assumption of the old door knocking life insurance salesman selling his way down the street.
On 13 May 2016 at 3:06 pm Willie Miller said:
Backstage, what a wonderfully intelligent and insightful response. How do we solve the issues within our industry - lack of penetration, inability to halt the increase in rising premiums, inability for kiwis to afford a robust insurance policy when they need it most? Mmm... I know blame the executives. Your type of comment will only encourage those same executives to continue to focus on or consider more profitable, less cost and frankly less hassle distribution models.
You sound like a dinosaur Sir. Lets make Insurers our business partners not enemies and lets work together for the benefit of our end clients.
On 13 May 2016 at 3:36 pm Majella said:
Well said, Backstage.

Besides, those who don't use advisers have poorer persistency overall.
On 13 May 2016 at 4:47 pm dcwhyte said:
I can't find a link or access to this report anywhere, so it's hard to comment comprehensively on the content, conclusions, or statements made.

However, I can categorically state that any life insurer that paid 40% of it's API in commission would be bust in short order. This is a nonsensical statement with absolutely no substance whatsoever, and is either an error in reporting, or an error in the research.

There are so many incorrect and wild assertions in this article that it's hard to know where to start - but here goes.

Silly statement #1 - "New business has not been sufficient to offset the loss of premium income from terminating policies since at least 2012."

Answer - SOME companies, have suffered lapse rates in excess of their new business premium income. If FSC would publish the statistics as previously recommended, the picture would be clearer. However, this superficial statement is ill-considered as it ignores the impact on profitability and sustainability. Furthermore, old generation life policies - whole of life and endowments - reaching the end of their shelf-life, are terminated without equivalent premium replacement. Apart from extinct policy types, constant upgrades and improvement of benefits requires legitimate replacement in order to provide the client with the most appropriate solution - something AFAs are obliged to do under the Code. Life Companies who invest in strategic initiatives other than product development suffer the consequences.

Silly statement # 2. "New business average premium is 20% to 30% lower than that of existing policies"

Answer - Of course it is. Most of the contemporary API is written on a rate-for-age basis. Given the demographics of the insured population in NZ, the in-force average policy will always - but always - be higher than the average new business policy.

Silly statement #3 - "Policy acquisition and maintenance costs were high for insurers at more than 40% of annual premium income"

Answer - Acquisition costs are "DACed" - the impact of the cost of winning a new client is spread. Acquisition costs and maintenance costs are subject to different actuarial and accounting treatments and cannot be lumped together. A good deal more research on product pricing needed here.

Silly statement #4 - "The lack of growth in the market and the scale of distribution costs gave insurers an incentive to look at changing their distribution models"

Answer - Every (successful) Life Insurance company CEO I've ever known has been sensitive to all expenses - including distribution. Reducing or removing distribution costs does not automatically mean market growth. Refer to the Oxcera Report from Europe which indicates that regulating commissions does not produce market growth.

Silly statement #5 - "Acquisition costs can be up to 100% higher for insurers using advisers than for those who do not"

Answer - the services of an adviser have to be paid for. Some business models have products with lower specifications and allocate distribution expenses elsewhere; other models have extended and more complex product specifications with advice required as part of the model's process. Both types of model are legitimate and relevant. Basing judgement on price alone can be fraught - see AMI House Insurance policyholders experience in pre-earthquake Christchurch, or HIH policyholders experience in Australia. There is no empirical evidence in life insurance research to suggest that lower prices will create greater market penetration. Again, refer to the Oxcera Report from Europe -

Enough already - the final silly statement (in paraphrase) is that commissions as a percentage of company expenditure should be reduced. Sound familiar? Or am I imagining that MJW, Trowbridge, and ASIC, were barking the same unsubstantiated ill-researched subjective nonsense?

That said, I do not know if commissions are too high (relative to what - claims?), just right, or too low.

What I do know is that this constant flow of poorly researched "reports" characterised by inadequate methodologies, presumptive statements based on foregone conclusions, only serves the interests of stakeholders that seek to promote their preferred business models.

In a free market, they're entitled to do so - but don't dress this up as "research".
On 13 May 2016 at 5:46 pm Alison Renfrew said:
I know; we could get rid of those greedy insurance brokers and give the banks the opportunity to sell all insurance to their customers. Everyone has a bank account don't they? It would be an ever so much more cost effective distribution model. What's that? a voice in my memory banks is calling out? Oh that's right; it doesn't work and never has. You have to pay good people well to get a good job done. Imagine having a distribution model in which you only paid the distributor (insurance adviser) when a new policy was set up. Imagine the adviser having to do independent study, pay for registration and many hours a year of continuing education, their own staff, business costs etc. and they carry their own liability and the boss never needs to think their advisers are skiving around because it's not a problem if they do take time out because when they work long hours with no pay until a case successfully completes they actually need time out to skive off for a while and recharge. Ah, the commissions are so high? Bah and humbug. Only a bureaucrat who has never had the courage to work on a commission only basis would have the audacity to say an insurance adviser is overpaid. The most cost effective distribution model to sell a product that no one wants to pay for but which everyone needs is via the commission model of distribution. In order to inspire these courageous people, who work tirelessly to help people in their community to retain their personal dignity and financial security at times of emotional and/or physical stress when a family member is disabled or dies they need to be very well remunerated. Come on you bureaucrats, come on out here to the coal face and see how much fun we're having. After you've worked a full five years with us then decide if we're overpaid. Until then create the rules for yourselves in your own career but please don't advise advisers that they earn too much. It just isn't so. Every cent earned is well earned. Alison Renfrew - 33 years in the industry - still learning and still fascinated by people who have opinions about us but no idea what it's like to be an insurance
On 13 May 2016 at 10:42 pm RWAW said:
Hi David
Rohan Welsh here. As usual a balanced and measured response from you. How the hell did your Dealer Group CEO role not work out? Look forward to catching up and hope the golf is going well.
On 14 May 2016 at 1:20 pm Mark Ogden said:
I would suggest a big culprit is in fact YRT.
Most consumers are ignorant of the increases imposed as they get older and will obviously shop around as the pain of these increases takes hold, and then cancel.

If you expect a premium to double in 5 years time what's the likelihood of it being around long-term. Why paid big upfront commissions on this?
Pay YRT as earned or level commission, that will solve some of the problem.

"The estimated average premium for new business being written is 20% to 30% lower than that of existing policies."

Obviously, looking at the big picture many Babyboomers are cancelling expensive YRT as it becomes unaffordable, and the new business written on younger folk is lower premium.
Everyone talks about growth in "premium/dollar" terms, what is the growth in policy count. That's where your new business is hiding.

If a policy is only ever written once obviously it will reduce cost significantly:

Underwritten once.
Upfront commission paid once.
Setup cost once.

How much more cost effective is this than a policy "moved" every few years to save a few dollars.
On 16 May 2016 at 12:01 pm Zak said:
Am I missing something here? We live in a competitive market based economy where resources flow to the most efficient via supply and demand.

Commission rates are determined through market forces.

Personally I am sick and tired of the manufacturers looking to play with this variable via badly constructed third party or through regulatory changes.

Why don't they look to their cost base to increase profitability and shave the costs there - one look at the people earning over $100,000 in any number of the manufacturers tells you they have fat to spare.

Where is the critical analysis of their costs?

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