Life insurance CEOs are looking to adjust adviser remuneration structures in order to address the industry’s sustainability issue, a new report from the Financial Services Council (FSC) has revealed.
The 2013 FSC-DST CEO Report found that the number-one nominated solution to maintaining sustainability in the life industry was a change to the remuneration of advisers and employees.
According to the report ‘… current commission structures are exacerbating the ‘churn’ issue that is present in the Australian market’. Suggestions made by CEOs to improve this issue included placing time limits on policies in order to apply a fee claw-back if policies are exited earlier than this time limit. The introduction of retention key performance indicators (KPIs) for sales staff, as well as new policy sales targets, was also suggested.
The second most popular option recommended by the CEOs surveyed was putting a greater focus on attracting new clients to the life insurance industry, rather than competing for existing ones.
FSC CEO, John Brogden, said he was not surprised by the results:
“From inside the industry, and the regular meetings we have with our life board committee, there’s no doubt that there are two things rising at the same time, which is an unhelpful combination. Lapse rates and claims rates are going up, so the remuneration structure is under pressure.
“That is clearly being looked at by us as an industry, and as you know we’re currently reviewing the claw-back proposal. We know a lot of our members are looking at the sustainability of the remuneration structure they have in place, acquisition costs, etc.”
… the distribution chain with the large commissions – that’s a primary concern
While poor claims experience, particularly for legacy products, and high lapse rates were highlighted by the industry as contributing to sustainability risk, Mr Brogden said one of the key problems was that the remuneration structure in life insurance is based on the actuarial assumption that people keep their policies for seven years.
“We’re finding that people are dropping (their policy) after three years. That’s the problem,” he said.
Mr Brogden acknowledged that the issue was not an easy topic to discuss, but that the message regarding the current remuneration model, in particular upfront commissions, needed to get through.
“It isn’t a silver bullet. But the distribution chain with the large commissions – that’s a primary concern.”
The FSC-DST CEO Report is an annual survey of the FSC’s member CEOs on the key issues affecting their businesses, the financial services sector more broadly, and the Australian economy.
What a waste of time and effort.
Level commission is the obvious answer.
Have a look at the general insurance industry – it works!
” The introduction of retention key performance indicators (KPI’s ) for sales staff as well as new policy sales targets was suggested”
So, BDM’s will have new policy sales targets, but these new sales will not be able to come from policies that are already in force, or will BDM’s be unable to assist an adviser in achieving the completion of a sale of a new policy if the BDM is aware that it will be replacing an existing policy within a stipulated time frame ??
Have BDM’s not had any financial incentive provided by their employers in terms of retention of existing business ? I thought or would have thought they did !
If not, then BDM’s have only been able to achieve ever increasing KPI’s and performance bonuses based around new business sales and so it has not had to have been a consideration in regard to where the business was coming from, only where it is going to once that same insurer starts losing business to another competitor.
I don’t know how many times this has already been said…it is countless.
The insurance companies know through their BDM’s who are the serial “twisters” and “churners” and through the information contained within the application process when the existing business was written and whether or not it is to be replaced or retained. It is simple to track,it is clearly and easily available.
Instead of persecuting and labelling the honest, professional, relationship-based advisers as “churners”, why don’t the insurers simply refuse to accept new business from identified and proven “churners” who have had no basis to alter a policy, based on best interest duty principles.
And by the way, lapses based on death, affordability, divorce and the cancellation of a policy due to the payment of a claim benefit is not “churning”.
The other problem that we keep having to clarify is the definition of “churn”.
*** See my response to the article: “Direct Market Suffering From Heavy Lapses”.
40% lapse rate within the first year of the policies sold through direct channels compared to only 8.4% from the adviser retail channel !
Are these statistics included within the 2013 FSC-DST CEO Report (lets have a few more acronyms shall we !) ??
If they are included, are these lapse rates being labelled “churn”, if there are no advisers involved ??
If a direct channel consumer purchases the “commoditised product”, and then cancels that policy in the first year, is it labelled a churn, based on the all encompassing term that is being bandied around for far too long!
Or should we have categories of churn, such as ” solo churn “, ” direct churn ” , “assisted churn” or “churn and burn” !
If the CEO’s of the insurers are running businesses that either (a) do not work with the right and ethical advisers to ensure a long term relationship and longevity of business and (b) do not run a profitable business because the ratio of claims to new business is disproportionate, then they are failing the basic principles of business management in that they do not know who their best and most profitable target market is and their costs are beginning to exceed their income.
It is unfortunately about a whole lot of people doing a lot of talking, persecuting the people doing the right thing in a bid to maintain a relationship under a different model with the people doing the wrong thing in order to maximise profit.
Here’s a suggestion:
Don’t deal with the people doing the wrong thing, and the rest will look after itself.
Agree essentially with Tim, but start by abololishing up front commission completely and quickly and move to hybrid with a straight line 2 year clawback position. Then see if this rectifies the problem; if it doesn’t then move to level. Advisers can always charge the client a small initial fee (like they do in general insurance).
Agree with Tim P – get rid of the high upfronts as they are definitely an incentive to establish a new insurance policy. The suggested claw back provisions penalise the original adviser rather than the new adviser who may or may not be guilty of churning. Level commission is definitely the answer
Upfronts have to and need to go. You cannot hope to build a sustainable advice business on these – you don’t receive enough in following years to service the client properly, especially with claims assistance. I have been writing 100% hybrid model with all insurers since the mid 1990’s & my business no longer requires new business to be profitable.
Well said Tim P .. Level Commissions are a big part of the solution
There is really no downside, a very simple and easy way to discourage churning for upfront monetary reasons and probably the best way to ensure best advice from advisers looking for longevity in their own businesses
Of course the Life industry could make a bigger effort to ensure that they price in retrospective benefits to older contracts. This alone I believe would cut down on churning significantly and give advisers the opportunity to regularly pass on good news to clients without having to make onerous changes that are perpetuated by the industry itself!
Whilst I, as a business owner, have a preference for level commissions, I am suspicious of greater regulation in this industry.
One area that continues to fail to be addressed is that the administration and bureaucracy required to improve an existing policy (benefit levels and policy features) is greater than to switch.
I recognise TAL’s efforts to address this and am sure that they will see an increase in policy retention.
Do they really think that removing upfront commissions will stop the lapse rates and claims rates.
One of the issues is that we have an ageing population and the older people (with substantial premiums) are dropping or reducing their cover due to the escalating cost once they hit 50+ (baby boomers).
These people make a determination that if something happens they may have some degree assets to back them up or simply will take the chance.
To replace a person at 55 paying $2500 per year for Death and TPD with 5 younger people paying the same amount. If you then pay advisers say a level commission of say 30% who would go through all that compliance for $150. I don’t think so. There needs to be an incentive to advisers to do the work.
I think a hybrid approach is the best, but I don’t think that churning is a major issue to be honest , life companies make a rod for there own back by continually dealing with advisers that they know do this with there clients ,simply don’t allow them to place business with you.
I have no problem bringing rates down to hybrid, but i believe level only is too far.
I don’t believe there’s an understanding of the cost of providing a professional risk plan to a client. I don’t mean the popping out of a quote as it seems many unskilled advisers do (likley not risk specialists), I mean to present a full risk analysis to the client with well researched solutions involving the provision of appropraite financial outcomes, contracts, structures and tax effectiveness for the client on payment of premiums and receipt of the benefits.
For those that rely on upfront, there could be massive financial issues and the FSC and Insurance Companies will need to consider this impact. Change will have done nothing good for the consumers if more risk advisers were forced out of the indusrty, further deleting the availability of advice to clients. This may also continue to drive advisers back into the tied adviser groups, which will do nothing to create choice and will likely drive industry back to where it was many years ago. Perhaps that’s what they want? Welcome back to the future!
Process of change will need much consideration, but I do believe it is time to at least remove the upfront commissions and then help advisers build more sustainable business models.
Cutting up-front commissions in insurance will only exacerbate the massive problems of underinsurance in Australia.
It’s not ‘churning’ of business that causes lapses. It’s clients not understanding the importance of maintaining their insurance policies.
Cutting up-front commissions will mean many current professional advisers will abandon insurance sales on mass as it just won’t be a viable business proposition any more. Adding further claw-back on advisers is simply another risk to doing business in this space at all.
Why should advisers pay if a client decides to exit their policy early, and what’s this got to do with Churning. In my experience very few advisers Churn policies. I find most people change products as they do in the general insurance world because of a more competitive price, which is their right.
The government haven’t thought this through. These proposals seem to be driven by the big-end of town who want to mass market ‘no-frills’ policies to their members(banks & industry funds would love this). It’s a massive step back from where we have been headed over the past 5-10years trying to get individuals to be adequately insured
It seems to me that there is an agenda out there that is driving towards domination of the personal insurance industry and elimination of competition.
The massive direct marketing insurance providers would love this as it opens up there marketplace to sell more overpriced rubbish policies to the public. The playing field is so un-level now it’s not funny.
The latest FOFA regulations are adding massive amounts of regulations to the small and medium operators in this space, yet the direct marketers, and industry funds get away with minimal regulation and minimal cost. Where is their ‘statement of advice’ everytime they engage their clients. Are the regulators seriously saying that ‘no advice’ is given by these companies(Unbelievable)
This thinking just goes to show how out of touch our decision makers are with the truth.
I have been part of this industry for 15 years and there has never been as much compliance/regulation loaded on to advisers as there is now. Unfortunately it hasn’t solved any problems. In fact I would argue it has created them. It has raised the cost of advice 10-fold to the consumer over this time.
From regulation the costs of ‘paraplanning, client admin, compliance, and advice itself’ have all risen. You need to ask yourself for what purpose? Does this stop the fraudsters that it was intended to, probably not. The large majority of advisers are honest and highly ethical, but they get punished because of a few crooks.
A classic example is that of the bank robber. Banks thought that if they made it all electronic and they kept the actual cash out of the bank, then they wouldn’t get robbed. The truth is the reverse has happened, the criminals are still there. Now cyber criminals are fleecing more money than ever from banks and individuals from a laptop without leaving home.
The point is that heavy regulation is simply a cost burden it doesn’t stop dishonest people being dishonest, the only way to stop that is harder enforcement.
Life companies turning away business that ‘may’ be churned?
A review of the various KPI systems applied to sales teams may have to be revisited before that ever happens
Level commission is not the solution!! Whislt I agree in principle that “upfront’ commissions should go, some form of Hybrid commission is the only logical longer term solution.
Why?? well may you ask…….
You cannot compare the Level commission arrangements offered for general insurance products with life insurance products. The cost of procuring business for an adviser in respect of life insurance (& associated products) is significantly higher, the implementation process is far more onerous then placing general insurance on cover. Advisers need to be paid for the work they complete upfront and receive a reasonable ongoing income to maintain service standards.
If the manufacturers ever find a way of processing business similar to how they process general insurance business, then level commission may be an option. Similar consideration must be given to increases and alterations to existing cover and our compliance obligations.
Oh! and I see, The FSC members want to see ‘retention introduced as a KPI’ – how does this work with the Best Interest Duty of an Adviser??? Perhaps if they brought in ‘automatic upgrade’ of products instead of closing of a policy series this might assist.
So what is it FSC?? Is it churn or sustainability?? (The latter I can accept) Oh! and by the way, what about the Group Insurance offered by Industry Super Funds??? How can Insurers get their priicing so wrong??? Surely they would not be under-pricing to secure the business for the benefit of a short term increase in their share price, only for it to come back and bite them on the as* 3 years later, no, surely not!………….they would never be that silly…….or would they?
Interesting statistices on the lapse rates of the ‘direct’ market as well just released………………massive lapses in Year 1…….. so is the FSC ever going to provide supporting evidence of how they formulate their lapse reports? Is ‘advised business’ (where the lapse rates are considerably lower) lumped in with ‘direct’ business.
It is no wonder that advisers feel marginalised.
I agree Level commission is the way to go
All Product manafacturers should provide the same % , of the premium to the distributor so adviser income is negated as a potential conflict of interest for them
I propose a range of between 15 and 25% as the ideal level % similar to what is offered in the general insurance industry
Garry, at that level of commission you either don’t need the commission to survive as you make a living from Super & Investments or you won’t be around for long on that amount of commission as you couldn’t cover your costs, let alone make a profit…
Gee not only are we evil people responsible for lapses we are now also responsible for so many clients claiming.
Pay a success fee for new cover over and above existing level of cover
Any existing cover levels remunerates at level commission rates
I think hybrid commission is a sensible option. If we as a collective industry are going to move toward this structure, how about placing more responsibility on Life companies to improve there administration & claims services to ensure they earn the right to keep the policy holders on the books. This should be a balanced collective moving forward that benefits all parties including the policy holder, the insurance company and the advisers.
As a risk specialist adviser, I really dont believe commission rates are the main issue. I manage a very large risk book with an average “in force” policy rate of approximately 14 years so obviously, I do not churn my book. No matter what change you make to commission levels, the churning element will remain.
I would prefer to see level premium rates “reviewed” to be more attractive for clients, as it will become increasingly difficult for another adviser to compete for the business, and will lead to both greater sustainability and profit for the underwriter over the long-term.
Frank, too true..Commissions are NOT the real issue. At an Insurer adviser council meeting, I proposed a rollout of level premiums that pay commission based on what the stepped premium would be, similar to Onepath. This would make the level premiums about 20%+ cheaper for the client. I received silence from the particular Insurance company CEO..I said that I would be happy for it to come off my end, as long as it made the premiums sustainable for the client to hold long term. Maybe they are worried that the policy holders might actually claim? The only way for the industry to make premiums more sustainable (that is the real reason for the problem..in my opinion) is more palatable guiaranteed level premiums for clients.
Yes Frank, the Level PREMIUM comment finally!
Sustainability for the long term has to be the answer, and level premiums are the way to go. Bring them in across the board on Death TPD and Trauma and the levels of long term in force policies will increase. Its a no brainer!
Combined with a reasonable Hybrid to pay for the costs to set up and a reasonable renewal advisers will make a living and have the money to service clients when the need arises.
Insurers have already moved to pay only renewal on CPI increases, pocketing it all for their profits…. just shows how banks think of their independent distribution channel in my view.
It seems to me that the insurers are bucking the responsibility they have in keeping meaningful stats on all NB – how hard would it be for advisers to tick a few industry standard questions as part of the adviser page online or paper… get the facts together – it would only take 12 months, and come up with a real solution, which may involve a few measures.
1. Remove the churners from the industry – they should be gone with best interest law .. the BDMs know who they are so just do it!!
2. Remove upfronts altogether and replace with a good hybrid/stepped up model to encourage retention
3. Bring in Level Premiums across the board of the lump sum products so you keep the clients for decades not years…
4. Stop tweaking products to encourage advisers to move their books…. this is the real driver
AND stop doing the Krudd thing and keep shooting from the hip with half baked “convenient” policy based on superficial “convenient” information!!
Nothing will change, Insurance companies know if they make to many changes advisers won’t be bothered selling insurance to there clients. Level ongoing is great for sale of practice with a 3 times multiple.
I dont believe level commisison is the answer. I believe there are a couple of additional furture risks that will come about down the track with that model.
With the current FoFa reforms an FDS disclosing all revenue is required for advisers with investment and risk. The issue on a level premium will lead the client to see and perhaps question why is it that 30% of their premium is going towards you the adviser. I believe this will lead to margin squeeze where the client requests some form of reduction or if not provided the client may shop around. The result being another adviser takes ownership of the policy [perhaps by rebating a little back] or the policy is reviewed and replaced [which assist the churning debate]. Yes the FDS is not required today for risk only clients but what about tomorrow?
There is no FDS requirement for risk commissions at this stage only investment.
As I said what about tomorrow when they are. required
I reckon the way to go is choice with Hybrid comms and Level comms. Clawbacks to stay the same. The insurers know who the churners are so just tell them hybrid or level if you want to play with us. The churners are not delivering any value to your life company business so why take them just for volume?
EG: they give you 100K in 2013 and 40K is gone in 2014? Why Bother?
The many hours work an adviser has to do for a new insurance client is worth the upfront commissions, I know i would rather my adviser be paid from an insurance company instead of my own pocket.
Also Clawbacks could work as long as money paid to an adviser cannot be clawed back if the reason the policy was changed or cancelled is for a legitimate reason e.g loss of employement.
I think hybrid commission is the way to go with a two year responsibility period – first 12 month lapse 100% claw back.
Give the financial industry a break we are continually being hammered, the insurers know who the churners are stop them leave the rest alone.
Level servicing remuneration for the life of the policy has always been the answer – problems solved. All this carry on about “churning” legislation is laughable. It is your ball court, life companies.
Life companies in the past have been greedy as well as supporting churning.
They know the habitual churners and they keep offering incentives to them to place their book of business with them.
Has the direct sales market affected the lapse rate. Read the article in risk info “Direct Market Suffering From Heavy Lapses”
Has unemployment been taken into consideration, as well as the cost of living going up?
I thought that insurance was put in place to cover claims situations.
Why don’t the life companies reduce their in house costs
Why blame the adviser who has put the cover in place and met the needs of the client.
How about no commission upfront no ongoing commission either, advisers can just do it for free. Give the industry a break already.
Insurance bought from a an adviser has a much lower lapse rate compared to that bought online as the person in most cases has little idea what they are buying and how it helps them.
I too don’t have an issue with Hybrid or Level, but lets be brutally honest, the life actuaries got it wrong and the insurers continually keep improving the product so the likelihood of claims is going to go up.
Why is it such a surprise all of a sudden.
The old premise of putting the client in the same position they enjoyed prior to the loss seems to have gone out the door, I don’t begrudge anyone a claim benefit but now for some it is more like a lotto win.
I can’t hear any of the FSC members putting their hands up about their affect on sustainability, have a look at their remuneration benefits and the HO infrastructures seem to grow as they bring in experts to improve the market share.
It is not just one component that determines sustainability, everyone has a part to play and the sooner the FSC wake up and finds a barrow to push with all the items in it the better instead of just the adviser’s remuneration.
Why don’t life companies offer incentives/rewards for keeping risk business on the books with one company. Eg a bonus for 5 years, 10 years, 15 years ($ or % of renewal) etc.
To compare life insurance to general insurance is ridiculous. Brokers are required to “shop” a clients general insurance policies each year and they do. There is a responsibility to the client to ensure their money is spent wisely. If it is left at level commission then you are faced with the lazy broker – clients will not necessarily get the best result – why would a broker move to a better policy if it requires work for no financial benefit. You are switching one problem for another but not dealing with the real issue.
Churning in life insurance – deal with the real problems. An attack on adviser commissions is irresponsible at best. Life insurance companies need to face up to 2 key points. Firstly they know who the industry “churners” are – black list them! Secondly, and I think more of an issue, life insurance companies need to make it easier to make alterations, increases, decreases, adjustments, etc to existing policies. Currently there is more work involved to increase an existing policy – it is time consuming (often requires more effort) and completely frustrating because their systems are not structured for it.
The Life Insurance companies don’t know what to do with applications to increase!!
With ‘compliance gone mad’ it is too costly for an adviser to recommend an increase particularly if it takes up to twice as long for a minimal amount of commission. If the system is easier to use then as an adviser you don’t mind taking a closer look at retaining existing policies.
Stop blaming the risk adviser for life insurance company issues. A majority of advisers have been and are still providing quality advice with quality outcomes on recommended policies and implementation!!
We know that on liners have a high lapse rate in year one and two, but I would be interested to see the lapse rates for organisations with employee advisers that have to hit targets to get their bonuses. I’m self-employed and write hybrid where possible.
Remember the whole of life comm structure. Pay the large comm sure BUT have a longer deferred period. BUT in reality a change is fine BUT it needs to be considered , say a 7 year phase in starting with a Hybrid option to an eventual level option with say a “Persistency “bonus after 10 years if the cover is kept in force and serviced properly
Oh dear. The same PR style report from the FSC as last time. Brogden was(is ) a politician. There is never any detail , just spin.
Profitability is the issue, but new business, wherever it comes from, will always be king. Brogden says people are only staying for 3 years ( not 7 ) but are those stats impacted by the 37% lapse rate for direct sales as announced this morning by Plan for Life? Is the IFA market getting pinged for the failure of the direct sector. What about the issue of the direct sector initiating the IFA lapses without the IFA adviser being given a chance. Insurance companies are the only winners in that mess
Are those figures also influenced by higher claims in group TPD, as announced this morning. Anyone else see a PR plan in these co-incidental announcements?
If we cop this, we deserve everything dished up
I heard tales of insurers falling over themselves to pay high comms and bonuses just to be PART of the action from the big operators in the market with the big TV advertising budgets. That money comes from some where.
Everyone knows who the churners are. Put them on level. Speaking of level, insurers dont really like level commission because if the policy stays on the books for 10 years they have paid out more than if the policy was upfront on a 10% renewal. In those circumstances why would an adviser bother to replace a legacy product, particularly if the client is disadvantaged by the new contract. No incentive there!
Re comment on level comm & small fees in General Insurance. Problem is, that system breads slackness. A GI broker often builds up to level of income they want and just “mantains ” that level. No need to look for new customers constantly, just churn ( sorry, review ) your existing clients every 3 years, and keep people happy with lots of lunches and golf games. Hardly addresses the issue of under insurance.
Message to Garry Crole:
Do you work in this business ??
Example:
New client for risk business.
Initial meeting for 45mins to 1hour min.
Assessment of client position,product research and assessment, discussions with Underwriters based on pre-existing health conditions to ensure parameters which may produce best possible acceptance terms for client.
Statement of Advice and associated compliance requirements:
Second meeting to deliver recommendations approx. 45mins.
Third meeting to complete documentation approx. 1 hour.
Submission of application to insurer, follow up progress, chase up medical report from Doctor, liase with client during process, meet with client again to complete an additional Questionnaire requested by insurer following assessment by Underwriting of application.
Wait for 4 weeks until Doctor returns from holiday for completion of report.
Receive final acceptance terms from insurer and then meet again with client to explain the exclusion wording in detail and then have client sign exclusion document.
Process from start to finish approx. 7-8 hours min.
Annual premium $2000.
Level Commission only @ 15% = $300.00 !!!!
Hourly rate @ 8 hours = $37.50 p/hour
Enough said.
Agree with Craig here. Garry Crole’s remarks can’t surely be taken seriously. If his philosophy was adopted there would be no advisers left in the industry. Then what would happen to the under-insurance issue? This isn’t a solution.
Thought that comment by GC may prompt a response…. not all advisers are able to practice in the large premium sphere….
Unemployment in month 6 = Death in month 6 = lapse of policy and the remuneration for efforts is “$0”
This one advisers wear quietly.
Enough said
I have been a risk specialist since 1973 and have seen many changes to commissions including the introduction of Hybrid & Level commissions. We campaigned heavily through the 80’s & 90’s for both Level Premiums & Level Commissions only to have some insurance companies change the goal posts by changing policy wording & changing premiums (increasing) thus making the policies less competitive in the market place.
As a Broker, what was I supposed to do when the insurance company changed definitions & increased premiums on a whole group of business. The clients had no say. The clients that were now medically unable to change companies had to keep their altered policies. Medically standard client were able to take advantage of better definitions & rates.
An Agent or Broker always need to keep their options open for executives of companies & insurance companies change. Sometimes there are reasons to churn business.
Do we really want to turn more advisors and clients off this industry? Australia is massively underinsured now as it stands.
Unfortunately in politics J Brogdan was not too good & since he’s been involved in the Life Industry his lack of understanding has caused him to be a continuing pain to advisers. Blind freddy knew that when banks got involved in the life industry that there would be a focus on commissions and premiums rather than where it should be on product, service and delivery. Banking has a lousy culture which does not allow bankers to understand the true philosophy behind life insurance. I refer to Huebners human life value or the good of an insured life. Doing something that helps a customer or client’s life directly or to be socially responsible is alien to a banker. The only thing they are driven by is bottom line, nothing else counts. I am a twenty five year veteran of the financial services industry, and involvement with the banking industry has demonstrated time and again that bankers only see customers as a revenue stream and nothing else, whereas the life companies, prior to bank ownership, because of their historical and length of involvement have always understood the vagaries of the life industry and operated with their focus on the customer knowing it would return them a profit at the end of the day. [some have grown to become mammoth enterprises internationally, following this philosophy]. Bankers have used the ‘churning’ debate simply with the aim to achieve higher profitability for themselves at the expense of advisers and clients. You only have to look at what the bankers did to mortgage brokers [in combating banking deregulation] to understand their view on financial advisers.
How on earth does J Brogdan & his CEO’s believe that harsher clawbacks will solve the problem of people ‘dropping’ their policies after three years, as he calls it. They need to address the root of the problem. I have clients that ‘drop’ their policies too, but it’s not because they lapse, it’s because the product they have, has been surpassed by another product offered by a competitor that is either more economic or has better features. As an adviser isn’t my responsibility to my client to always ensure he or she has the most competitive and effective product available?
It’s no different with car insurance. A few years ago I, typically, would have had the same car insurer for many years. Now it changes every couple of years because there are more competitive products available, more frequently. The insurance companies have taught us to continually check the economies of our cover, by the cost only focus marketing of their products.
My own code of ethics demands that I act in the best interests of my client, as does the government regulator.
If you want to call that ‘churning’ Mr Brogdan, then that’s your call – however there are still some of us around who understand what you really mean and what your real objective is.
Underinsurance in Australia will not change without advisors who have the integrity, the dedication, enthusiasm and understanding of what it means for clients to take out life insurance, an industry that understands the philosophy and social responsibility of what they stand and aim for, products that fulfill this philosophy and a true understanding of how to sell those products, and above all insurers that understand and adhere to what Dr Solomon S Huebner achieved when he established modern insurance, in which the concept of ‘human life value’ is the economic and philosophical framework of life insurance.
The job only gets harder and less people become socially responsible without these advisors selling life insurance.
Of course ‘social responsibility’ is something todays bankers can’t even spell.
That is why we can’t have a meaningful debate here today.
Craig Yates, I see where you’re coming from but I would rarely take 3 meetings for a $2,000 premium – more like one. Form filling in has become a thing of the past with E apps and teleunderwriting. For the average case of $5,000 premium I would take 2 meetings maximum. If after SOA presentation clients agrees then I have no more to do with it unless sensitive issues such as revised terms ensue. I say “Carolyn (my pa) will call you regarding underwriting” and explain the process. If client comes to me I introduce him/her to Carolyn. Notwithstanding this I think that Garry is living in dreamland. Could be a salaried adviser!
Maybe he doesnt have a carolyn
The FSC appears to be trying to find itself a function. John Brogden keeps coming back to this issue he has generated called “Churning”. If he did some research he would find out that the ASIC lookalike in the UK nearly killed the life insurance industry as it encouraged churning and the life business became unprofitable especially that written on the internet.
This is what Australian underwriters are now finding. 40–50% lapse rates in year one for this type of business and for a top adviser lapse rates are in the order of 1%.
I have an idea for the managers.
Introduce lower up front commissions and higher service commissions. Then start calling them Trail Commissions and question their viability and the justification for paying them.
Then support a process whereby the Government of the day and the institutions joint forces to turn them off because greedy advisers should not be allowed to own yachts or drive nice cars. Forget about their capacity to build long term relationships that generate millions of investment and insurance contributions/premiums which build the industry that employs the managers!
33 years in the business of selling insurance makes me an experienced dinosaur. I’d love to hear what other advisers, both ancient and newer, think of the following random thoughts.
1) Clients do NOT pay us a cent, the product providers do. If this statement was false, why do the providers quote the same premiums for direct sales that don’t involve adviser placement and renewal fees? Why are orphan policyholders charged the same premiums as those under advisers, even though the provider isn’t paying any renewal fees?
2) I have never been paid a cent in either “servicing commissions” or “trail commissions”. The term “servicing commission” implies the payment is somehow linked to a service I provide the client. That is a lie. It is totally unrelated. “Trail commission” implies I’m receiving money without any responsibility. The fact is I that once the first year has passed, I am only paid when a client renews their policy, be it for another month, half year or year. It is not about the client or the level of service. It is a payment the provider makes to try to keep the policy in force longer and thus increase their overall profitability. It is a “renewal fee”. If we refer to it in that simple, honest manner, a lot of the emotional arguments about the validity of the fee disappear.
3) It costs me more than 12 times as much to place business (taking into account my time, staff time, compliance time & education time) than it costs me to have it renewed. Therefore if the “placement fee” is to be commensurate to the “renewal fee”, the so called, ‘upfront’ model is the fairest form of compensation.
4) How can the same companies that tell us they can’t afford “placement fees” of 120% afford to pay around 200% in New Zealand? Anything is affordable if the product is properly priced, which brings us to…
5) Where is the FSC stand on the forced reduction of salaries, bonuses and especially golden handshakes to the institutional bosses and policy makers who make short-sighted decisions (often financial time bombs) and then get out before it all blows up? Why isn’t the FSC considering a move to force those guys onto a ‘level’ salary model? Say a model that cuts their initial income by somewhere between 33% and 75% but gives greater overall remuneration after 6 or 7 years (as long as their decisions are proven to have been profitable over that period). If not profitable, they forfeit the delayed remuneration. I await the FSC press release.
6) Why do most providers charge full premiums for new business coming from indexation increases yet only pay the adviser the renewal fee? Shouldn’t those premiums get a discount?
7) If higher placement fees disappear, so will most new advisers. Right now, it is incredibly difficult for an individual with any financial obligations to make enough income over the first 5 years to survive / establish themselves in the business. The old rule of thumb was less than 10% would survive 3 years. Cut placement fees by 33% (ie 120% to 80%) and the industry is cutting its throat. Go to level fees and there would be carnage. (See point 3)
8) I know advisers who went down the level fee path a number of years ago. Yes, it is profitable being able to sit on those high renewal fees for minimal effort. So profitable they don’t want to service the products for fear that they will be asked about upgrading to a cheaper policy or one with better terms and conditions. All that work to place the new business and all they get is a pay cut! If the industry goes to level it won’t be long before the ‘new and improved’ version of the FSC will be telling us the high levels of renewal fees they are paying is unsustainable.
9) If it really takes 7 years for a policy to become “profitable” why is group cover still profitable even though it costs so much less (ie maybe a quarter or sometimes even better?) Let’s do some maths. Say a retail policy costs $1,000 a year and a group policy $250 for the same risk. After 4 years, the group policy has brought in $1,000 and the retail policy $4,000 (less approx $1,500 in placement and renewal fees). Net result: Income from the group cover over the 4 years is $1,000. For the retail policy, approx $2,500 (after adviser fees). Add indexation and the gap widens… Go figure!
10) Let me get this straight. Financial institutions get together and form an “industry body”, put a career politician in charge. Then the industry body makes recommendations for industry wide change to fee structures. Isn’t that commonly known as “collusion”? Isn’t collusion illegal?
11) Let’s just say we do end up being forced into reduced placement fees and higher renewals. Will the providers then increase the renewal fees on our in force portfolios to the higher levels? Or will the incentive still be there to move business (which means they haven’t fixed their stated problem)?
12) The fee modelling I’ve done confirms hybred fees give an adviser higher remuneration after 6 or 7 years than the ‘upfront’ model. If placement fees aren’t profitable now and the industry believes moving to higher renewals will lead to better product retention, doesn’t that mean that will actually put even greater pressure on the profitability of long term contracts, leading to increased losses?
13) With most companies currently increasing legacy product premiums because “they are unprofitable” (even though the vast majority of that business, if not orphaned, is only paying 5 or 10% in renewal fees) what would be happening now / will happen in the future, if and when the legacy products are routinely paying 2, 3, 4, 5 or even 6 times the current renewal fees?
Let me make it clear that I’m not saying there aren’t perfectly logical explanations to dispel all the above points. I’d love to hear them!
This is a great industry but it needs to be profitable for everyone. I may be old school but destroying a caring adviser force and replacing it with a new, faceless distribution arm (with 1 year product retention of around 70%) doesn’t seem to make much sense.
As a mate of mine says, “if we’re earning too much, why aren’t there queues around the block of people begging to be allowed to sell insurance?”
I await your thoughts.
Point 10 hits it on the head Guy…. how can this process be anything else?
I bet these trinkets of info released over time constitutes “industry consultation”….
Maybe as part of a new model, the insurers should consider higher 1st year commission for clients who do not have any insurance in place (other than in super or online as the no advice model doesn’t count for much) this would encourage NB to the underinsured or not insured population.
This is all a political tactic by the FSC & Brodgen so they cam make more money out of the life insurance pie, by reducing the advisers rewards. There are no morals at all involved in their argument but more money for them at the expense of advisers!!!!
An adviser cannot live on level comms nor hybrid comms on small yly premiums of under $4000pa due to the time involve in the paperwork & getting the client thru underwriting. Think many of these comments above have their heads in cloud cookoo land..
Until adviser realise why we are continuallly been attacked by the FSC about the slices of the pie, the FSC will have the upper hand of this debate. So lets address the real problem for what it is. It is not about the sustainability of the life companies!!!!! Its just shear old fashioned greed by big life companies!!!
KPI’s and volume based rewards??? I thought this was banned through FOFA!
All great points Gary- esp. point 8 re level commissions.
The Labor government and ASIC have been doing their best to put us out of business and now the FSC and Life companies are giving them a helping hand.
The UK banned commissions and the Life companies collapsed so they resumed upfront commissions.
Take away incentive and a reasonable income and Advisers will quit as the business is too challenging and important to be poorly paid.
If the Life companies are looking to be more sustainable then look at other avenues and efficiencies, not the commission structures or responsibility periods of Advisers as we provide the income streams.
Churning is just an excuse behind the main problems of lapse rates and claims that are endemic at the moment in the current poor economic and governmental climate.
Support us and we will be motivated to support you even more.
Again, level commission is the answer. Some people are suggesting to get rid of risk commissions completely and to charge a fee to the client. Absolutely no way will this wash with the client. It is different with lump sum investments where there is a pool of money in the investment itself. With risk insurance the market is completely different. How does an adviser suggest to a client that $500 – $1,000 (min range) upfront fee to the adviser is now payable when the premium is only between $1K – $3K p.a?? We then slug the client for $1K fee and $1K-$2K premium on the same day! After 27 years in the industry I have absolutely no doubt whatsoever that sales would plunge by at LEAST 50% in the first year of the lunacy of banning risk commissions. Life companies and consumers would be the worst affected. Most long term advisers would be OK with a renewal trail grandfathered. Not ideal though – for anyone.
Yes, we can strongly and sincerely and cleverly sell our value proposition to the client to justify a fee – all true stuff no doubt. It still won’t wash. The short-termism with which clients are affected today would have them running to get it online. Then we have associated claims nightmares without their adviser to help down the line. Not to mention regular reviews. No – commissions must stay if life company talk about their ‘concern’ about underinsurance is true and not just a party-line. We shall see. Keep the faith riskies!
More political maneuvering to attack our industry. Why have the life companies waiting so long to now state they have been running their metrics on outdated data, ie the 7 year timeline to recoup profit?
Anyone who makes the comment (in my opinion) to take away upfront commissions to solve the problem either, 1. was basing their comment on experiences of 20 years ago, or 2. is in a nice salary and not running their own business. This will not work due to the amount of increased admin burden required to now bring a client in force on our books. The premium of $4,000 p.a. is not far off the mark for level, for an adviser to run their business and be rewarded.
The statements of “just charge the client a fee”, well i am afraid you may not quite be at the sharp pointy end. To say this to a client who you have been servicing for years that we are now charging them a fee for what has been to them a free service, will not wash well and may well result in even more cancelled policies, or not taken up at all as they will choose the option to self-insure.
This argument will not resolve the issue of under-insurance and the “supposed” churning debacle in Australia, in fact it may well increase it.
Brogden & FSC etc have their heads in the sand, I am fairly positive they have NEVER ran a business themselves and had to put up with the utter BS that a professional adviser has to these days.
BRIAN HOWARD
Well said that man and very true sensible commentary, I only hope Brogden etc read it?
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