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 
16 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.
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Comments from our readers
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. On 17 February 2019 at 9:29 pm Briskinsurance said:
I appreciate Bruce and Darrin to propose something rather than nothing. Of course, the Insurers would do all the pros and cons before moving to sum assured model with caps on the sum assured. I am glad Baybroker touched on trail commission and would like to add my thoughts. I agree that it should belong to the servicing adviser.
I have acquired in the last three years probably 20 or 30 orphaned clients just because the bank employee cannot assist/existing adviser retired. They are all ageing clients and I have had to charge a nominal fee for the time I have put in for servicing the policy either assisting with a claim or reviewing the policy. In most instances I have made their existing policy affordable to match current situaion or got a long standing exclusion removed with the same provider but cannot do anything more due to other health issues so I have to charge them for my time.
At the same time I am aware a servicing commission is being paid on these policies to an advsier who has retired or not contactable by client.
This is not fair on client so if the new proposal of servicing adviser gets trail comes through I would not be charging a fee for my review engagement. This is positive for the client.
The other factor to consider is the multiple used for arriving at resale value of book will reduce . Why will an adviser buy a book of business if the clients can move on to anyone of their choice. The selling adviser cannot guarantee clients policy will stay and purchasing adviser will have to really be good in client contact and retention. This can have an effect on the multiple values being used for sale and purchase of book which is a good adjustment.
On 18 February 2019 at 1:10 pm Murray Weatherston said:
@ Briskinsurance
You need to RTFM. Contractually is a renewal commission
(a) deferred commission; or
(b) servicing commission?
You need to be very clear on this fundamental point in each case.
Given the way I understand books are traded, in the great majority of cases renewals in NZ are legal deferred commission (trail) - so they vest in the original broker or subsequently to anyone they on-sell their book to.
If it was any other way, then the multiples on which books were sold would be less as you so rightly point out.
Short of legislation interfering with private contracts (which politician will be dumb enough to do that?) the trail goes to the original broker or his successor.
Where you take over servicing, you have to either buy the client (and get the trail), or charge a specific fee to the client, or to switch them to a different provider (as you say easier said than done where health has changed).
On 18 February 2019 at 3:24 pm JPHale said:
@Murry exactly, that is how it works today.
Though we seem to have an implied responsibility to deliver service under the current framework because there is a trail commission involved.
Regardless of the contractual situation that may exist that says the money paid is a reflection of the long term value of the policy to the insurer and the introducing adviser, the perception is more about servicing and being paid for it.
On 18 February 2019 at 4:44 pm First Time Caller said:
I really dont understand peoples issue with "deferred commission". You didn't give the advise initially, and you have every opportunity to buy it from the other adviser, just stump up and buy it. If the advise was so bad and the client needs different benefits now then the existing policy will be replaced, internally or externally. Either way if benefits remain in place because of good advise, what right do i or anyone have to just take the renewals. Seriously this is such a small issue, but think of the business that would aggressively target anyone with a policy should this be the case. Think about it On 18 February 2019 at 6:17 pm Dirty Harry said:
Poacher.
Gamekeeper.
Clearly Brisk is the poacher.
Bet let's follow the argument all the way through. The argument is: I have to charge the client a fee, because;
A) their 'servicing adviser' is not doing the job, and
B) I cant re-write them to bring them safely under my umbrella.
Well, A is simply an opinion, and B, well....
OK. Two things.
Number 1. No, you dont. You dont have to engage with any particular client. You don't "have" to re-write business or charge a fee. You can refuse service and refer them to their current provider or adviser. If their adviser is unable or unwilling to do the work then that's his problem, not yours. It's the provider's propblem, not yours. It's for the regulators to determine whether an adviser ought to "earn" their servicing commission, not you. Besides, the whole point of a fee is to de-couple your pay from the product. If you can't separate the two, you're doing it wrong.
If you are willing to do the work, for a fee the client is willing to pay, then well done to all and happiness abounds.
Number two: Clearly, as the poacher you have yet to think like the game keeper. Learn to, or you may end up shot. Because once you have a large herd of your own, you may begin to find the idea of someone poaching yours, repugnant.
Particularly if you don't think they are doing enough to 'earn' the trail.
See; What if running around hoovering up existing clients on nothing but a promise og "better ongoing service" that never eventuates becomes BAU for a few good rogues out there? How will you feel then?
On 19 February 2019 at 10:35 am JPHale said:
@First Time Caller the challenge with the buy the trails approach is it typically only happens when a policy is going to be retained, which sort of indicates to the existing adviser that it's not going anywhere in a hurry so there's little point in quibbling over 3-4 times the trail as it's likely to be held much longer.
And many advisers do seem to take this approach or they have an apathy to the whole buying trails process.
On 19 February 2019 at 10:42 am JPHale said:
@Dirty Harry the challenge with the quality of the advice and servicing is it is in the eye of the beholder. So it really is a matter of opinion.
And rightly so your comments outline one view. On the other hand, I've seen the work and effort Anand has put into the clients he works with and many have struggled to get the engagement from their existing adviser for the situations they have.
Many have been claim situations that have got way off track that he's brought home successfully. Ironically they started as advice enquiries and end up claims, which the previous adviser either missed or didn't respond to requests for help. Again the other side is a matter of opinion.
There is a distinct element of advisers that operate on the basis that claims enquiries are to the insurers 0800 number. I don't have the NZ stats, but the Aussie ones suggest 90% of advisers work this way. I don't think we have quite that approach as we have a smaller market and reputations precede us here more so than in Aussie and other larger markets.
On 19 February 2019 at 2:49 pm Dirty Harry said:
Still doesnt rebut my points. In fact, if the quality of the advice is in the eye of the beholder, then the poacher's opinion of the previously provided advice is still invalid. Because it's conflicted, because the poacher wants the trail.
If the adviser is not doing enough to "earn" the trail, that is an enforecement issue for the regulator, not justification for vesting trails.
JP is Still stuck on rem coupled to product instead of the advice itself.
Besides, in your policy claim example, the claim ends the policy and the trail with it, and there is the built-in Financial Advice Benefit, which pays a qualified adviser's fee anyways.
On 20 February 2019 at 12:05 am JPHale said:
@Dirty Harry, I'm not the one making the rules, just have to play by them. ;)
And yes, I maintain the view that insurance remuneration is linked to the product advice. Not everyone is in the position to pay fees independently of premiums with those most often needing the advice are able to pay a premium but not the associated fees. The fees scare them away too. Which the FMA does also understand at some level.
And this is for many reasons, mostly rooted in past experience that hasn't been particularly great. These clients need to build trust, and that's usually through transparency and hindsight. So yes, fees get in the way of accessing these clients that need our advice at the same time they're quite happy about the disclosure and discussion on how commissions work.
With me they do have a choice about fees, and they choose commission in every case. Because it is a matter of trust, and once they trust what we present they're quite happy not to pay a fee and save what they can for a rainy day, well for those with means, most don't.
And a lot of advisers would say too hard, next, but these same clients once they are in the position of power, so to speak, are loyal clients. They don't cancel, they communicate well, and they rarely have disclosure issues.
So it is very much in the eye of the beholder. And the measuring stick is often the one that reflects how the beholder operates, rather than how the other side does. Which we’re all guilty of at times.
The harsh reality is most clients have sufficient change in a couple of years that tweaking is needed, for those that haven't had updated advice in 5-10 years, there's a good chance things won't go to plan.
It's these ones that Anand has been talking about and for various reasons they won't work with the existing adviser so they end up calling or contacting another adviser to help.
One that did for me had three advisers, one for each company they had cover with, and none were looking after the holistic picture. Which was daft, as at least two of them could have. And not to mention expensive as they hadn't been reviewed in over 7 years at the time and had cross overs with some cover.
It wasn't a case of missed cancelling some because of a move, it was specifically done that way, but servicing hadn't been tidied up for whatever reason. Which left the client in no mans land for advice.
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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.