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Sum-insured remuneration model progressed

As regulatory attention goes on upfront commissions, two insurance industry commentators have released a discussion paper on how they propose the sector should be remunerated in future.

Wednesday, February 13th 2019, 6:00AM 7 Comments

The Government has flagged that it will crack down on sales incentives that could drive poor customer outcomes – it is expected that will mean a move away from high upfront commissions for life insurance advisers.

Darrin Franks and Bruce Cortesi have followed up last year's release of their proposed new commission plan.

It would involve advisers receiving commission based not on annual premiums but on up to 1 per cent of the total sum insured. The maximum an adviser could charge would be linked to their persistency.

Trail commission would remain but would be paid to the adviser providing the service, not the adviser who placed the policy.

The proposal was criticised at the time because the premiums involved in a policy for a 20-year-old would be lower than the premiums for a 50-year-old with the same sum insured.

But the pair said change was needed.

"Current commission models are complex, cumbersome and confusing. Many advisers find the commission models for the various product providers a challenge – especially if trying to reconcile accounts."

Their meetings with product providers had been positive.

At OnePath, it was noted that the model they proposed had not been thought of. 

"It was even considered to have potential for other countries to follow given it was so different to anything ever previously presented. Other countries have simply reduced the upfront commission – but still retained a commission-based model," the paper said.

"Early meetings with the head of one of Sovereign’s key distribution channels showed enthusiasm for the model, but also with concerns on how insurers would be able to effectively compete if they could not use adviser commission as a lever."

Advisers were shown the plan at the Share conference and PAA regional meetings.

“Whilst some comments were less enthusiastic, overall, the feedback was encouraging from the perspective of the first point, and that advisers were prepared to have a conversation, and the impression was that the solution should be driven by product providers and advisers as they are best positioned to create a solution that each can work with. Clearly there was less appetite for a solution to be driven from a regulatory perspective or based upon what has occurred in Australia recently."

Franks and Cortesi said their plan would address churn because a clawback of implementation or set-up fees would be incurred within a set period.

They also proposed changes to the offshore conference model, which the Government has signalled it wants gone.

“Contrary to some industry commentary, this paper suggests the term ‘incentive’ (as it relates to offshore conferences for example) would not be a problem if some structure is placed around them.

“It is also acknowledged that such incentives (often referred to as ‘soft dollars’) and that they have been a marketing program just like any other commercial identity to gain business. This paper would also propose that any method of acknowledging support an adviser gives a product provider in the way of volume should be focused on business support or business growth – which could be in the form of a business conference for an adviser. The most critical component to disincentivise advisers is that any offshore reward or acknowledgement as currently offered by some product providers are not advertised or marketed within the industry.

“Rather, product providers monitor the performance of advisers relative to their own business model and invite those they feel qualify to attend at a future point in time.”

Franks and Cortesi propose a six to 12-month consultation process to adopt the new proposal.

"This will send a strong signal that the industry is capable in taking on responsibility to reinvent itself for the benefit of the consumer. It is noted that some product providers have indicated the lead in time for introduction may not be any greater than six months."

They are now seeking industry feedback.


Read the Commission Restructure Discussion Paper here.

Tags: Commission Life insurance

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Comments from our readers

On 13 February 2019 at 2:23 pm TedC said:
You would have to be a stupid insurer to go for this! Doing some quick math, if I have 25yo’s, male & female, no-smokers, who requires $750,000 of level premium to 80 each, it will cost them $2,289.96pa.

Are you seriously proposing that insurers would be willing to pay a commission at 1% sum insured or $15,000 ($7.5k x 2)!? That is a repayment period of more than 6 and half years alone, not including interest and financing costs. Add to that renewals. C’mon! As if…

How would commission work for medical insurance, disability income, premium waiver??

The only logical way for all parties is for commission to be based on premium. I can't believe anyone would think this is a good idea.
On 13 February 2019 at 3:31 pm Ron Flood said:
TedC, I agree with you on this, based on previous experience. In 1980, a very well know adviser in Hamilton negotiated a deal with a provider to pay him a commission based on sum assured. The provider agreed on $6 per $1,000 of sum assured (0.6%).

The adviser then commenced to sell very large, Childrens Deffered Whole of Life policies, in the farming market. Annual premiums were around $500 - $600. Commission ended up to be $3,000 as he sold $500,000 policies, based on the childs potential future Death Duty liabilities, as the duty was still applicable then.

Unlike other providers at the time, the commission wasn't restricted to 120% of the annual premium. The provider hadn't foreseen that they wouldn't get a cross section of ages when making the arrangement.

As you can probably guess, this arrangement only lasted just over a year before it was changed. At the time, I was amazed that they let it go so long, but, as is still the case today, the provider didn't want to 'upset' a high producing adviser.
On 14 February 2019 at 8:35 am birkdale broker said:
Well done on thinking outside the box but it has been tried before and did not work. As mentioned above the model means very very high commission for younger ages.
If you go to Quotemonster and put in a female 28 occ 1 life cover stepped the premium is around $200 pa for $200,000 (Sov just over and Partners just under $200). This proposed new model pays $2,000 "fee" / commission on this case (1% of SI) which is ten times (1,000%) the annual premium. Different for higher ages but one can imagine the FMA report on this - "advisers receiving up to one thousand per cent commission".
The mix of business may even things out but insurers would not want the younger cases where the commission would be so high.
On 14 February 2019 at 10:58 am First Time Caller said:
Good on you for thinking outside the square, and i dont have another solution so sorry for being negative but the above model is fraught with issues.

It would create a disincentive for an adviser to discuss level premiums

It would create a disincentive for advisers to discuss 4 week waits on disability

Lets just keep it simple. Every commission model has some degree of flaw, lets just ensure accurate comparisons are provided opposed to allowing banks or direct companies to contract out of advise & disclosure of commissions. Lets not create a whole bunch of other issues
On 14 February 2019 at 2:28 pm SilverA said:
I would propose a maximum cap on commission utilising the current commission structure based on premium. Such as a nominal amount of $10,000 per policy max. My experience is that a client paying $2,000pa requires a similar amount of time to provide needs analysis, on-boarding and maintenance as a client paying $20,000pa.

Either way, the debate about commission driving conduct issues and poor client outcomes is fundamentally flawed in that there is no actual evidence that this is occurring in the market place, apart from a couple of small cases identified in the recent FMA/RBZ report, which largely seem to be from VIO not the IFA world.

However, one thing I have never understood is how some providers who distribute through advisers manage to collect any business at all. For example, I sell on product quality, and therefore the ability to claim successfully. This means that probably 95% of my business goes to 1 provider, the other 5% is the exception where a better product exists elsewhere for the client’s needs (such as new to business).

If products are sold and advised based on quality, then how do product providers with inferior products manage to survive and win business? Is it because the advisers are diversifying their clients to protect their own business from single supplier risk, because they are lacking training skill to understand the difference between product quality and provider, is it commission and production bonuses, or because the better insurers won’t grant the adviser an agency?
On 14 February 2019 at 11:18 pm Graeme Lindsay said:
Do they really want to turn the clock back that far. I started as an agent (now "adviser") in 1969. Sum insured based commission systems then meant that we got better paid for young lives than older lives. Older lives inevitably were far harder to put on risk.

When premium-based commission started, i.e with the demise of whole life and endowment, we were, probably for the first time, fairly paid for the work we do.

Let's recognise that it isn't easy to sell life and health insurance. If it was easy, everyone would be doing it. We get paid for performing a very difficult job that has us helping our clients face their own mortality and morbidity and developing affordable solutions to the problems that those issues bring.

Commission is not the problem. People with a lack of integrity will operate irrespective of the remuneration system. Lower commissions will mean that the bad guys will sell more product that is not in the client's best interests.

#First Time Caller. Most people can't/won't pay the premium for stepped premium for the cover they need. Whilst 4 week wait on IP might be ideal, the cost is prohibitive so 13 week wait might be a good compromise.

I agree that every possible commission model will have flaws ( and unscrupulous people will exploit those flaws, so accurate comparisons of the strengths and weaknesses of products is vital to ensure the integrity of the advice system
On 15 February 2019 at 11:39 am BayBroker said:
I like that they are thinking outside the square, but the only part that I see merit in is that trail commission would stay with the servicing adviser.

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