Proposed commission model 'cross-subsidisation'
A new commission model proposed is a nice idea but won’t work, one former insurance company boss says.
Wednesday, July 11th 2018, 10:05AM 
8 Comments
by Susan Edmunds
Financial Advice NZ practitioner director and PAA chairman Bruce Cortesi and industry consultant Darrin Franks have reportedly developed a new remuneration model concept for advisers.
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 fee an adviser can charge would also be linked to the persistency they have, which is linked to the solution on the issue of churn that has been so topical recently,” he told media.
Trail commission would remain but would be paid to the adviser providing the service, not the adviser who placed the policy.
Former Fidelity Life chief executive Milton Jennings said he was aware Cortesi had put significant effort in recent years into developing the new concept. But he said it was unlikely to succeed.
He said a 60-year-old and 25-year-old with the same sums insured would have vastly different premiums - and it would be much harder for advisers to sell the same policy to the older person, who would have to pay higher premiums. It would be unfair to pay the same in both instances, he said.
“If commission is based on the sum insured you get that subsidising effect. Insurers need to base it on the premiums not the sum insured because of that difference in the age. Any actuary would tell you it’s a pretty hard concept to make work.”
He said however commissions were structured, the problem was the conflict of interest. "The only way to avoid that is to go to a level commission structure."
Michael Naylor, of Massey University, said it was worth exploring the idea.
"I agree with Milton that there are issues with tying commission to policy size and not premium cash-flow, but I like the idea of annual cash flow going to the policy service provider.
"The issue is that based on premium it seems to be a high percentage, whereas based on policy it seems a low percentage, so consumer acceptance could be better. Of course a percentage based on policy size for a young person could be a high percentage and lead to customers buying from an adviser who charges via the old model.
"It could be simpler to base payments on premiums with a capped upfront and a larger trail, tied to service provision, as I have previously suggested. If the insurer is paying it then cash-flow does need to tie to commission."
David Whyte, formerly of AIA and AIG Life, said regulators would likely point to potential risk of over-selling.
Industry commentator Russell Hutchinson said the things to consider around commission structures were who paid, how transparent it was for the customer, what was being paid and who should negotiate that.
A fundamental question, which insurers were not yet differentiating on, was whether the payment was for the sale or for advice, he said.
Adviser business coach Tony Vidler said he had seen an increasing number of insurance advisers charging clients a fee.
Hutchinson said it was something that more could do – but it was internationally recognised that commission of some form was likely to remain a factor in the industry.
The FMA said it had had discussions with Franks and Cortesi.
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Comments from our readers
Rohan Welsh
As far as this being promoted by companies, comes as a complete surprise to me. The companies I deal with all offer benefit pass backs only restricted by reinsurers, outside the companies control.
As a few veterans will testify, allocating a percentage of the sum assured as remuneration was the prevailing method of rewarding agents/advisers until the rampant inflation of the 1960's rendered the model uneconomic. That doesn't nullify examining the current proposal as we live in a completely different financial services environment from the days of the "20 bob" and "40 bob" agency days.
But before diving into the debate, I'd suggest some measured context be provided to the discussion.
There have been commentators asking the question - "What exactly is the problem?" - so let's put some issues on the table.
On many occasions, regulators have stated in meetings that the amount of commission paid to Advisers does not concern them, it is only the structure, style, and manner of the remuneration that creates concerns of conflicts of interest in their minds.
This is understandable as none of the FMA personnel I have encountered has any first-hand experience of running their own financial advisory business. But those who have such experience normally counter any concerns with an "Ask my clients" response. And that is also a fair proposition as some years back, LIMRA conducted a survey of 600 recent purchasers of life insurance in NZ and the least influential factor in their decision to buy was their Adviser's remuneration.
Rohan Welsh's piece in the most recent "Asset Magazine" is a very good summary of the current position of which the FMA should take note - it's not the first time that this point of view has been presented to them!
In my humble opinion, there is far too little evidence drawn from consumers in either MBIE's or the FMA's thinking on such issues. Rohan is certainly not alone in believing that the Authorities have concentrated efforts and resources disproportionately on financial advisers and treated the Big End of Town with considerably more tolerance.
Looking at the alternative remuneration suggestion, charging a percentage of the sum assured - like any compensation methodology whether based on fees or commissions - is open to abuse.
A fixed percentage of the sum assured is complicated in the area of Income Protection, but simple in the capital benefits area. However, the larger the sum assured, the greater the dollars paid to the Adviser and no doubt, there will be someone within MBIE or FMA that will point to the potential over-selling risk.
Also, I suspect that our Actuarial colleagues will have a view on linking Adviser remuneration to the amount of capital benefit insured.
So my initial thoughts are a) to place the proposal in context, b) to engage and encourage debate with open minds invited to participate, c) to conduct objective and properly structured research into consumer attitudes on Adviser remuneration and associated issues.
Insurers need to step up and start reducing upfront commissions immediately. The FMA can do their part by disciplining the advisers with a pattern of churn.
I do agree with the part that the servicing adviser should be paid and not the adviser who put the policy in place.
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How about the following model.
1. Replaced premium only qualifies for a 20% ongoing commission, no upfront. Any increase over and above the existing premium can, at the discretion of the adviser, attract upfront commission.
2.The replaced premium does not qualify for any incentives.
3.An adviser must disclose that they are replacing existing cover. If they don't, and take full upfront commission and are caught, their license is cancelled.
We need to encourage new premium into the market, not recycling (call it replacement/chun whatever). This way you will never again see in excess of 200 advisers qualify for an overseas junket with the one provider.