[Opinion] Risk commission future not all gloom and doom

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Veteran insurance adviser David Pine says the sky won't fall in if life insurance companies are forced to cut commissions like their counterparts in Australia. 

Monday, July 20th 2015, 6:37AM 8 Comments

by David Pine

There is much wailing and gnashing of teeth on this side of the Tasman over recent decisions about risk adviser commission in Australia.

As I understand it, following a phase-in period of three years, up front commission on new business will be limited to 60% of the first year’s premium, renewal commission will be limited to 20%, and the adviser will have a three year responsibility period during which claw back of commission can be made.

Personally I think that’s not a bad outcome, as strange as that may seem. Sure, the 60% up front is a bit harsh, and maybe here in NZ we will come up with a somewhat higher figure. But the 20% renewal is excellent for building long term value in the adviser’s business. In fact it is very similar to the amount of renewal commission for a fire and general book in NZ.

During my 37 years as an adviser, the highest commission rate I ever received was 90%, from one insurer. All the others offered lower rates than this. And we did OK, in fact along with many other advisers, we achieved the MDRT qualification level on several occasions despite these relatively low commission rates (MDRT qualification is based on new business commission rather than API).

What I’m saying is that the sky will definitely not fall in.

One thing I do feel strongly about is the idea of extending the responsibility period from two years to three years. If we end up copying the Aussies on this one then I think there needs to be a graduated scale of responsibility, something like 100% responsibility for the first six months, 85% for the second six months, 70% for the third six months, 55% for the fourth six months, 40% for the fifth six months, and 25% for the sixth six months.

This is important because, through no fault of the adviser, a small number of clients will inevitably lapse or reduce their policies in the early years, for reasons such as separating from their partner or experiencing financial hardship. There is nothing an adviser can do about these events and it would be grossly unfair to penalise the adviser harshly for them.

If risk advisers are keen to maintain their current level of earnings in the new environment, the solution will be in their hands. And the solution need not cost them a cent. They simply need to find more prospective clients than they are at present, see more people, and write more business. They might need to work a few more hours a week, or work smarter in the sense of concentrating their efforts on those prospective clients they relate well to and who are likely to need insurance cover and can afford it. It’ll be a matter of thinking creatively about how they can do more business.

And if they do that, it will be good for them, good for their families, good for the communities they serve, and good for the whole industry. It is well known that us Kiwis are chronically under-insured.

As author J K Rowling says in her new book Very Good Lives:  “The knowledge that you have emerged wiser and stronger from setbacks means that you are, ever after, secure in your ability to survive. You will never truly know yourself, or the strength of your relationships, until both have been tested by adversity. Such knowledge is a true gift because it is painfully won, and it is worth more than any qualification you have earned”.

David Pine was an adviser in Wellington from 1973 to 2010. A life member of MDRT, he remains a passionate advocate for the adviser profession. David and his wife Marg are currently coaches, mentors and trainers to the adviser industry through their company Pine Financial (2010) Ltd. Their website is www.pinefinancial.co.nz

Tags: Churn

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