Advisers slam Southern Cross commission change
Advisers are unimpressed by Southern Cross’s move to limit trail commission.
Wednesday, July 24th 2019, 6:00AM 
19 Comments
Regan Thomas
From the middle of next month, advisers will receive trail remuneration structured as a set fee per client, instead of a percentage of annual premium.
The health insurer said that was designed to better represent a fee for ongoing service to those clients.
Advisers who signed clients up to Southern Cross tier one policies before August 18 would receive $200 a year per client. Clients added after August 18 would generate $135 a year for the adviser.
Upfront commission rates will lift about 5%, which Southern Cross said was designed to acknowledge the increased work required in selling a new product.
Adviser Jon-Paul Hale said the insurer had “completely wiped the retail value of adviser books”.
He said the move would wipe about 50% to 75% of the remuneration his business would receive to service a typical middle-aged client. “A 5% increase in sales commission is tokenism. It’s insulting.”
He said some advisers would need to switch to an hourly-rate model to service those clients because the amounts offered by Southern Cross would be insufficient. “It barely covers the cost of answering the phone and taking the time to fill in the claim form.”
The idea of a fee tied to a particular client flew in the face of general understanding that an adviser’s total commission package was designed to cover the cost of catering for all clients as and when required – not specific individuals, he said.
Hale said the move indicated Southern Cross wanted to be in the group space. But in making the change it was effectively exiting the market for the 97% of New Zealanders who did not work in business big enough to offer health insurance schemes, he said.
Another adviser, Regan Thomas, said the wider question for the industry was whether Southern Cross was simply the first “cab off the rank” to make the changes. “What problem are they trying to solve here?”
Advisers would end up adding new clients whose trail commission would never grow, he said, which meant the amount going to an adviser business would decline over time. “The value of that client will never increase.”
He said it sent a signal that Southern Cross did not value advisers.
Insurance commentator David Whyte said it was symptomatic of wider change in the industry and advisers should expect to see more tweaks that would affect their business models.
Other insurers do not look to be rushing to follow suit.
Fidelity Life has told advisers it will not change its commission structure at least until mid-next year.
In a statement, nib chief executive Rob Hennin said it had no plans to make any changes.
“Clearly we need to be mindful of the conduct and culture oversight of the regulator, and any future legislation that may impact adviser remuneration, but we respect the provisions of our intermediary agreement with advisers and value the role advisers play in helping New Zealanders protect their health and wellbeing.”
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Comments from our readers
On 24 July 2019 at 8:43 am Elephant1 said:
The industry is moving to lower upfront and higher spread. As AFA's a review which would include quite a time consuming process and has to be done on a regular basis, for $135.00 . As stated before Rob Hennin , provides a lot more lucid leadership , than his opposition. On 24 July 2019 at 10:37 am Backstage said:
I think JP's comments are right and it does unfortunately feel that again, SX does not value advisers. In addition, the value of our SX books just dropped significantly... certainly not a collaborative approach. Their distribution will suffer and their competitors will benefit from this approach. On 24 July 2019 at 12:27 pm MediCare said:
We love dealing with Southern Cross, their claims fulfillment process is truly exceptional. Having thought about the matter, we are on Southern Cross's side in this matter and would prefer to ease their long term cost pressures. We will continue to be their advocates. On 26 July 2019 at 9:28 am Barry Read said:
Adviser incomes increasing because the premiums increase has no direct correlation to an increase in effort by the adviser. Same applies to real estate agents commission increasing because overall house values increase. The cheese is moving people and this is just the start. On 26 July 2019 at 1:10 pm Backstage said:
Bazza, sure the cheese can move and or the bait could change but... a conversation about a change of menu and some context is good.
On this occasion you will find the mice will move. Its enough they dont vest... we know this will change with other suppliers as well. What about some conversation with the mice? How would you value a SX book for sale now Baz?
On 26 July 2019 at 1:12 pm Backstage said:
In addition, Real Estate is very transactional where most good advisers want a relationship with their clients. On 26 July 2019 at 2:59 pm all hat, no cattle said:
@Barry I'm lost on the real estate comparison. This is a story about trails. I paid an agent to sell my house but have not paid a cent since. You could put the argument about property managers and rents, but it would have the opposite effect to your point.
Adviser effort is a reasonable point, to the extent that it does remain relatively constant. But costs dont remain constant. That, and the amount of productive effort diverted to remaining compliant and qualified and CPD'd and documented isn't exactly reducing.
On 26 July 2019 at 3:27 pm Pragmatic said:
A naive perspective; but shouldn't advisers put their clients into the most appropriate solution for that client, and have a direct billing relationship with the client (rather than relying on the goodwill of a product supplier)? On 26 July 2019 at 4:06 pm JPHale said:
Bazza, while I agree there is little evidence that there is a correlation between higher premiums and higher service need.
The on the ground coal face reality is a client aged 40 and looking at a medical situation is much more able and capable of managing a good part of the claim process than an individual who is 60-65 with significant health conditions and lack of understanding of the process.
While we continue to measure outcomes on the basis of where we stand today, we overlook the reality of the people advisers are helping, those that don't have the ability to navigate phone and internet like a fit healthy 40-year-old. They struggle to get out of bed, let alone drive a computer. They need to support of an adviser because they have impairment the people making these decisions have not faced nor do they understand.
If they did, they would be increasing the support not pulling the rug out.
The pointy end of the support advisers provide at this end of the scale is not seen by SX, because their call centre people aren't out there.
It is the 50-year-old with a crap diagnosis who doesn't know where to go or how to access what's needed. There's a fantastic example with a testimonial from a client on my website on exactly what this looks like from their perspective.
And often, under the current approach, with SX not paying for that help on that client. Because they originated from an SX scheme.
The social contract that we have had has been swings and roundabouts, what we don't get paid for in service comms another will. It is the pooling of this revenue from SX that enables us, in the field, to help the people most in need.
So while there isn't a link between commission and service, we know from what we do as advisers in this space that the time and energy needed to help a difficult medical claim through the process for an older life is much more than that of the younger ones. Which is why the linking to premium made a fair representation of the need.
On 26 July 2019 at 8:23 pm coach1770 said:
I agree Barry. Brave move, bold move and the right move by Southern Cross. They have a fantastic claims team and I’d far prefer insurers focussed on ways to make premiums more sustainable.
Paying renewal commissions based on age or premium is nuts and thoroughly unsustainable. I’d like to think we provide splendid service irrespective of a customers age or ‘book value’.
Bravo Southern Cross!
On 28 July 2019 at 2:31 pm JPHale said:
@coach agree with the first half.
However, I would challenge your understanding of the metrics in an advice business. That is unless you see the market as one where the consumer pays fees for advice.
While this may be the ’new’ approach, it doesn't stand up to scrutiny when it comes to the desired client outcomes people have with insurance as we have seen in report after report here and overseas.
As soon as it gets wobbly, SX’s fantastic claims system becomes a nightmare for policy holders.
Generally no trouble for group pre-existing conditions covered members, it's the rest that have the issues.
This is a move that heavily reinforces the outcome for the ’lucky’ ones and makes life damn hard for the less fortunate.
And that's the point, insurance is about transferring the risk for the less fortunate. And the reality for the less fortunate, is they need more direct help not less.
Those that think this is a great idea either haven't seen real hardship, or they have never managed a claim with someone so compromised they can't do it themselves.
And to then lump additional fees on top so they can get help just rubs salt in the wound.
Compassionate and empathetic advisers involved with claims get it, the rest have no real understanding of the reality. Because they don't see the impact and don't have the costs in their businesses. Which is also seen to be somewhat of an issue when advisers don't help at claim time.
On 28 July 2019 at 2:45 pm JPHale said:
@pragmatic in an ideal world yes, however, the reality for clients presently is they don't.
And many that are with the likes of Southern Cross can't change providers without exclusions. So they are a bit stuck.
The social contract since forever, is advisers help and don't charge additional fees. On the basis the income for this comes from renewals, across all client's. With maybe this one not generating income but another client being serviced elsewhere does.
Southern Cross pulling out of this social contract is more the issue. It forces advisers not only to deal with the issue of loss of revenue in 3 weeks, which is significant in it's own right, but also how they interact with Southern Cross clients that have need but there is no longer a balance of payments for the work.
It is change and for Southern Cross with in the terms of their agreements, but it is also brutal for the adviser force.
While Southern Cross talks new business being 20% adviser introduced, they have not discussed how much business is adviser serviced.
Partly they don't know, it's listed under authorised caller, not adviser. Secondly, probably 1 in 4 maybe 5 in my book is adviser introduced, the rest was take over cover.
We’re not paid for that, but it also hides a significant portion of current client's being serviced by advisers. Many of which are in groups and this becomes part of the overall plan for the client.
My beef isn't the change in $ personally, they are bugger all for me anyway. It is the wider issues it creates. As too, for those businesses that have large books on retail group rates, they're going to find the next few months pretty tough.
Especially if the impact is similar on the revenue from the view me and those I have talked to have.
Those businesses will face laying off staff fairly quickly.
On 29 July 2019 at 9:18 am Frustrated Adviser said:
Surely the question in all of this is are the clients going to see a reduction in premium - they should given the premium is apparently high due to the high commission we are paid and yet they won't. Did premiums reduce with affiliated providers and reduction in costs - no they didn't
I believe this is more about the share holders and less about the client and definetly nothing about us Advisers - it is very sad indeed that commissions can be changed retrospectively I have no problem with new clients and new commission structure but to change existing commission terms with no consulation is appalling and I would say has us all wondering about the value of our businesses going forward if other companies follow suit.
Reduce commission should surely benefit the client and it won't.
I find Southern Cross as arrogant as AMP when working with Advisers.
On 29 July 2019 at 11:25 am Barry Read said:
Frustrated Adviser - Southern Cross doesn't have Shareholders, they are owned by the policy holders. So the benefit of any reduced premium increases only benefits policy holders.
JP - I agree that the renewals paid cover costs of servicing work that clients don't pay for directly, like claims support. Though I know that not all clients need help with claims and that not all advisers complete annual reviews of health insurance with every client. I agree there will be an impact on profit lines, but this is an inefficiency of the business model some advisers run allowing renewals to cross subsidy of other work for some clients. Aligning revenues to actual work/services provided for each client is something advisers should review and will potentially come under scrutiny by the regulator once licencing comes in to place (The FMA have unlimited powers when it comes to licence conditions). Just look at the Aussie Royal Commission findings on fees/commissions for advice services and our own CCCFA which limits fees lenders charge to actual costs.
My point though stands, things are changing and advisers can't control commissions paid by insurers and need to start planning for a future that is different from the past.
Backstage - Valuation of a book is usually based on a multiple of revenue. The multiple the buyer is willing to pay is determined by the value that business sees in the book. For purchasers buying books as an investment this would likley reduce the multiple they may have paid prior to this change. But a business that sees value over and above the renewal, i.e. the opportunity to develop a client relationship it may not change at all.
On 29 July 2019 at 1:42 pm Frustrated Adviser said:
Quite correct Barry re no shareholders which I momentarily forgot however my main point still stands will those clients who have been on the books for a while see a reduction in there premium given the change in the commission being paid and the answer will clearly be NO.
I agree our models relying on commission are not the best however i offer clients the options to pay a fee or allow me to be paid commission for which they know the amount now and ongoing and in every case regardless of education, job, income they choose commission.
Would love to see a decrease even slightly in the premium being charge but of course we will be told the increases going forward will not be as large - highly unlikely and almost impossible for us to check if it is really getting passed back which is a shame for transparency if nothing else.
On 29 July 2019 at 2:29 pm JPHale said:
Thanks, Barry, broadly agree. I think the big part in this is also what Frustrated Adviser has raised.
The double whammy of the retrospective change on the adviser business, and the promises made about claims management and servicing that this directly impacts.
And the lack of premium reductions for policy holders. Which we haven't heard anything about, don't expect to either, but leaving a gap for this if the unlikely happens...
Agree on the book valuation, it has always been a case of what value is seen by the purchaser. Anything outside that is personal justification.
And I get the alignment bit, however, the more we focus on the tighter aspects of actual cost the more unpriced work gets dropped away and the more stories we will see about need without solution.
Frankly, it's a great approach to more complaints and poorer client sentiment. It will also kill businesses if the view becomes payment for the advice and there is no other consideration for the costs of getting to that point.
I get fees, as in additional charges, being limited to cost with banks, there's an element of not being able to go elsewhere which is tied in with this. Not quite the same with advice businesses.
In some ways it's a move against the past approach before the new approach is bedded in. I.e. The requirement to scope and provide service.
And while I have said I'm not impacted significantly financially with this one, it is the move by other providers to achieve the same thing that should have the advice industry concerned.
We may not need a regulator to make changes on commission to fees, the providers may push us all there with this stuff we'll before...
On 29 July 2019 at 5:47 pm JPHale said:
So further to this debarkle I've managed to dust of an agency agreement and have good dig.
A few points if I may:
A variation to the agreement requires the sign off from both parties.
The variation of the schedule containing commissions allows the minimum lives number to be varied but not the commission section as a performance target. Though also in another section SX has the right to amend commission rates with 15 days notice. So the 30 days has been relatively generous.
Renewal Commission is explicitly designated in the agreement. So to change the structure of the commission from a renewal commission to a service commission fee is a change to the agreement. Back to 16.9.
Ahuh, not so quick.
Termination: Either party can notify termination with 10 days notice.
Nett effect, no access to clients and no service/renewal commission rights. Yup, they return to SX.
Which leaves most over a barrel with this. Sign off the variation or face termination of your agency. And given SX's conduct to date, I see no reason for them to hesitate in terminating those that dissent from their intended path.
However, there is more to this can of worms.
Under the covenants section of the agreement, and this one the FMA might want to have a closer look at, the Adviser will not:
Charge fees, commissions or any charges whatsoever to clients in relation to the agency and products. Meaning that advisers are prohibited from charging fees to clients with Southern Cross. Including advice fees and clawback commission fees, among the few, I have seen.
Which is quite interesting as Southern Cross is both able to terminate or remove the renewal commission while denying the adviser the ability to charge fees as a replacement to the loss of revenue.
Now I'm sure that's going to make much of this discussion take a different direction.
Which is to say, Southern Cross has operated in a way that is solely in Southern Cross' interests with little regard to the outside world.
It may well be that advisers are better to charge a fee for all Southern Cross work and be damned about the agency. As it's not worth the paper it is printed on and there are far fewer restrictions to operating without an agreement with Southern Cross than with one.
Some food for thought. As without an agency, Southern Cross is still held to the privacy act and is required to provide information when requested by policyholders.
And you can still access the Southern Cross product through their website.
The only real difference is you won't get paid. But then again with the present changes, it's heading that way anyway, and you won't have the restriction on charging fees for the service provided.
Now, that is going to make it quite interesting.
On 19 August 2019 at 11:15 am 0272715668 said:
This could be an opportunity to look at the insurance product and restructure it to include a provision to top up the insurance claim with an payment to the adviser who actually helped the client with the claim process. On 20 August 2019 at 6:09 pm JPHale said:
@0272715668 one of the discussions I've had with SX since this.
However, like all market distortions it has an undesirable downside, the American ambulance-chasing system they have.
Add payment to claims and we end up with a bunch of people with their hand out doing as little as possible to qualify for it.
A sad but actual reality, remember tax refunds...
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