AIA: Reconsidering remuneration
The commission model has come in for sharp criticism over the years, particularly for its role in customer churn. AIA New Zealand's Head of Distribution and Marketing Darrin Franks considers its virtues and flaws, and argues for a more relevant remuneration structure - in the interests of sustainability and improved customer engagement.
Tuesday, November 1st 2011, 9:00AM
by Darrin Franks
It seems the collective brains trust of the industry is failing New Zealanders
If aliens were to land tomorrow and take a dispassionate view of our industry, they would surely think the consumer was the loser
Churn is an age-old industry issue, but it's getting increased airplay in the market at the moment thanks to the arrival of a new insurance player. What's important to understand is not only what it means for insurers, advisers and consumers in simple terms, but the cynical calculations that swirl away beneath. Reinsurers price for genuine policy lapses, but they also price for churn, so the very people we're trying to engage with - current and potential customers - pay the price for the nonsense at the heart of our industry. It is hardly surprising, then, that for some customers cost exceeds the perception of benefit.
Insurers aren't the only ones to experience churn, though. Banks do too, and suffer equally for what amounts to a simplistic, kneejerk approach that serves only to shrink the financial services industry as a whole. It seems the collective brains trust of the industry is failing New Zealanders.
Clearly, the model is counter-intuitive. What is the solution? One option would be to follow the UK model and outlaw commissions altogether. Commissions have often been spotlighted as some seedy form of incentive revenue.
I don't think that's quite the case, and I believe that banning commissions in New Zealand would raise a raft of issues. Central to this is our high rate of underinsurance, which a wholly fee-based structure could only be expected to propagate. Commission helps people who couldn't afford a fee model attain the cover they need: most people on an average household income (around $76,000) won't have a few thousand dollars sitting in the bank to pay fees for insurance advice, but can and will pay premiums that include commission.
Ultimately it isn't a question of whether commissions are ‘good' or ‘bad', but rather if they are appropriate as a tool to deal and connect with a wider and deeper segment of New Zealanders - which is surely the objective of any insurer and their distribution partners.
Which nations are getting it right? Those which are addressing the sustainability of the distribution model. Without sustainable distribution there can be no engagement or market growth, and at present our industry lacks this. If we were all to focus on the consumer, then we might become more relevant, which (surprisingly) could increase our profitable productivity.
At some point you have to say, this has to stop. Take term life insurance: in the last 20 years, commissions on this product have increased approximately five-fold, and though on the face of it this would seem to give advisers a greater incentive to serve customers, research tells us that if you over-incentivise, the result is a disincentive to produce more - and this truth is there for all to see.
Despite our population growth, and more consumer need than ever due to issues like debt, our industry growth has been stagnant. It's a simple question - how much organic, real new business growth (i.e. customers with no previous life risks cover) do you experience each year?
I wouldn't expect anyone to accept a pay cut on the face of it, but there is an opportunity, with the new financial services regulation, to alter the structure of the industry in relation to remuneration. Each adviser can determine their own model. They can remain within a commission model, or charge fees, or a combination of both depending on customer needs.
For instance, a customer might accept a discount in premiums for the life of the product because they are prepared to pay an upfront fee. With a change in approach, these possibilities emerge, and insurance becomes much more relevant. It follows, then, that with more relevance comes more distribution.
If aliens were to land tomorrow and take a dispassionate view of our industry, they would surely think the consumer was the loser, and that the whole operation is designed to give the advantage to every party but the policyholder. The industry as a whole needs to address the imbalance if it is to engage with the population that, after all, pays the bills.
Until organisations are willing to consider how we move into a more sustainable model, reinsurers will keep pricing for nonsense, churn and lapse rates will roll on, and opportunistic new companies will start up. This will lead to more of what we have seen for the last 20 years, which is the failure of large numbers of insurers and the shrinkage of market size.
What it boils down to is practical wisdom, which everyone needs to apply more than we are - and that's about moral will and moral skill. If we're to get serious about making this industry more relevant to the consumer, we all have a role to play.
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