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Reserve Bank calls for lower commissions

The Reserve Bank, which regulates the life insurance sector, has joined the call for lower commission levels for insurance advisers.

Wednesday, May 18th 2016, 6:00AM 6 Comments

by Susan Edmunds

In a submission to the Ministry of Business, Innovation and Employment on its Financial Advisers Act review options paper, the RBNZ said commission was appropriate, provided the interests of the clients were considered and the structures did not threaten the viability of companies offering them.

But it said there had been anecdotal reference over a long period of time to the fact that New Zealand advisers were earning high commissions compared to other countries.

“High commission rates may result in higher premium rates as insurers pass on costs. This, in turn, lowers the proportion of the premium returned as claims and erodes the efficiency of the insurance sector in providing the general public with risk reduction services,” RBNZ said.

“Alternatively, insurers may choose to absorb the costs of high commission rates, reducing their profitability and eroding their solvency position. Under the RBNZ solvency standards, capital may effectively be required to be set aside against the risk that policies will terminate early and that commission costs already incurred will not be recovered. High commission rates increase the amount of such capital that life insurers must hold, decreasing their solvency margins and ratios, and making the insurance sector less sound than it otherwise may be."

The RBNZ said high commission rates presented an elevated barrier to new entrants and to the efficiency of the sector.

It said it was also concerned that high upfront commissions meant value for advisers was maximised by cancelling contracts every couple of years and replacing them.

This would weaken insurers' balance sheets and the sector would become less sound if the churn levels were not priced into products, RBNZ said. The sector would become less efficient and premium rates would be higher than they otherwise would be.

“The bank is supportive of measures to lower commission levels by improving the functioning of the market.”

RBNZ said there should be better alignment of the timing of commissions and incentives to advisers to provide ongoing service. There should also be mechanisms for customers to seek redress for inappropriate sales.

It said it would support ending volume-based commissions and improving the quality of soft-dollar remuneration.

Industry commentator David Whyte said it was surprising that the RBNZ had taken a side on the commission debate.

“Commission restrictions discriminate against cost-efficient life companies which have effective expense controls relative to their chosen business mode.

“The free market should be allowed to find the level of pricing – including all expenses – which the consumer is prepared to meet. I would have thought the RBNZ would have preferred to remain neutral and treat all licensees with equanimity.”

Tags: Commission Life insurance

« Anti-commission argument not winning: BallantyneFSC launches income protection information »

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Comments from our readers

On 19 May 2016 at 9:41 am Zak said:
26th June last year Hamish Rutherford from Stuff reported The Reserve Bank had been told to stick to its knitting by Treasury. The story was in relation to looking to place rules on mortgage borrowing that were not within its mandate.

Here we go again with The Reserve Bank stating there had been anecdotal reference over a long period of time to the fact that New Zealand advisers were earning high commissions compared to other countries. They then go further saying “High commission rates may result in higher premium rates as insurers pass on costs. This, in turn, lowers the proportion of the premium returned as claims and erodes the efficiency of the insurance sector in providing the general public with risk reduction services,”

The conventional definition of Anecdotal is the use of casual observations or indications as opposed to rigorous or scientific analysis. So in the words of The Reserve Bank they are happy to use casual observations to make large sweeping statements about our industry and its need to change. I would suggest The Reserve Bank even out the focus and shine some light on the salaries and benefits of Insurance Companies Executives and those earning over $100,000. Once again it appears the Insurance Companies are attempting to use regulatory frameworks and agencies to reduce competition and their cost base and thus by default improve their profit line.
On 19 May 2016 at 12:29 pm Steven Popodopolus said:
Anecdotally the reserve bank staff are over paid and underperforming. I have no actual evidence though.
On 19 May 2016 at 5:25 pm dcwhyte said:
While the article records my surprise at the RBNZ submission, in retrospect, I'm more disappointed than surprised.

My experience of dealing with the RBNZ has been excellent, and their management of IPSA has been beyond reproach.

And this makes this submission all the more mystifying - and disappointing.

Zak quotes the anecdotal aspect of the RBNZ's evidence, but the truth is ALL the evidence on the impact of commission and the frequency of so-called 'churn' is anecdotal, unless you believe that the statistically insignificant findings in ASIC's report on churn in Australia represents empirical evidence.

The latest polemic from NZIER drew the usual media nonsense about the industry dying, and it is disappointing to note that RBNZ, a respected regulator, appears to be jumping on the bandwagon without any reliable data upon which to base their recommendations.
On 20 May 2016 at 10:40 am Dirty Harry said:
I'm with the Laird here, but will go further. Be careful about simply reacting to this news in isolation.

Look at the pattern.

That the RB would even jump in here is not just disappointing, but it signals to me that there is a quiet campaign going on here. It began with the giving of airtime to the trowbridge report. Then FSC/MJW. Then we have NZIER, and now the RB. All singing the same bollocks from a badly written tune on poorly photocopied song sheets. But who wrote the tune, and distributed the copies?

I would not be surprised to hear that a small group of individuals have tenuous links to all the aforementioned. Who really stands to gain from this?

It's obvious someone wants commissions cut. And they are being quite clever and influential about it. MJW, Trowbridge et al have published many words, but the real reasons for seeking this are yet to be published.
On 23 May 2016 at 9:56 am dcwhyte said:
Harry - good points. But casting aside my tin-foil lined Tam O' Shanter for a moment, it's unlikely that a conspiracy theory is in train.

But I agree there is a trend of 'group think; - a 'halo' effect, with inference, suggestion, and anecdote taking the place of empirical evidence.

ASIC and Trowbridge combined to push FSC Australia into the 'high commissions are evil' camp, and while a similar measure here failed to carry the day with all of the NZ FSC members, there seems to have been further efforts from NZIER and now RBNZ to push the agenda.

The findings of the FMA investigation will be interesting, and while there is little doubt that inappropriate policy replacement occurs, the question about significance remains open.

The Australian so-called 'evidence' was a joke, so hopefully NZ isn't fooled by the same nonsense.

Further comment deferred until the FMA report is released - except, of course, if another piece of suspect research is released meantime.
On 27 May 2016 at 10:50 am Backstage said:
I agree with David and Zak and I am also amazed that the RB would weigh in on this and very curious... I do wish the focus would go onto the fact that we have an under insured population that need assistance and quality advice. If insurers cant manage their expenses that is an issue they will need to address internally. Advisers are a variable expense and only paid if a product is sold... this places pressure on insurers to provide quality products that perform. If they are paying internal executives too much or are not selling product as they are not competitive why place the blame on advisers and imply we are the cost or cost too much?

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