The life insurance advice sector needs to do away with high upfront commissions if it wants to address the issues raised by recent inquiries into the quality of life risk advice.
This is the viewpoint of John Trowbridge, independent chairman of the joint FSC-AFA Life Insurance and Advice Working Group (LIAWG), who today released an interim report into retail life insurance advice.
Mr Trowbridge said while he was not yet in a position to recommend a specific adviser remuneration model for life insurance advice, he believes the industry should rule out a high, upfront commission model in future.
He highlighted that the AFA and the FSC have accepted at face value the primary concerns of the Australian Securities and Investments Commission, which relate to quality of advice and correlation of up-front commissions with poor advice.
“There is sufficient dissatisfaction with these arrangements to dictate that the ‘no change’ option is not acceptable,” Mr Trowbridge said.
Similarly, Mr Trowbridge has argued that a nil-commission model should also be taken off the table, as remuneration for insurance advice needs to be different from investment advice and that it is important to retain some form of commissions rather than ban them, as has occurred with investment products.
In place of an upfront commission model, the LIAWG Interim Report lists five alternative remuneration approaches, each of which contain an element of ongoing commission:
- Level commissions only – rate would be set between 20-30%
- Hybrid commissions – maximum commission rate for first year of 80%, level commission thereafter
- Modified hybrid – comprising initial remuneration of a combination of commission at a level less than the current hybrid plus a fixed dollar payment, renewal commissions could be as per current hybrid arrangements
- Level plus fees – level commissions, at a rate to be considered, supplemented with an initial payment (fee) from the insurer to adviser
- Level funded – variation on level where commissions are level but to offset initial costs, on each policy inception the insurer lends the adviser funds that are repayable over 3-5 years from renewal commissions
The LIAWG is seeking industry submissions on these approaches, along with three other key discussion areas:
- Quality of advice
- Insurer practices and product offerings
- Industry productivity
“This review has been put together a little bit like a government review,” Mr Trowbride explained, saying the working group would not make any recommendations until submissions had been sought from the wider industry.
“The interim report that has been released today is an issues and options paper. It puts many questions on the table; it doesn’t make recommendations – it simply airs all the issues. Submissions will be open until the end of January. We will then look at all those submissions, the working group will reconvene, and then ultimately I will produce a final report which will contain recommendations for the way forward.”
Asked why this approach would succeed when other industry attempts at self-regulation have not, Mr Trowbridge said the process that had been undertaken to date by the AFA and FSC was very different from previous approaches.
“I think this is a very impressive initiative from the two associations concerned. It has brought advisers together with insurers, which is clearly something that is needed.
This is a very well structured and committed approach that I haven’t seen before in the private sector
“This is a very well structured and committed approach that I haven’t seen before in the private sector.
“Everybody is committed to the process, and we will see how that unfolds. Part of the challenge is to try and get an industry-wide commitment to some kind of self-regulatory model, so nothing’s guaranteed. But because this was initiated by the organisations themselves, rather than the government, there has already been some cooperation between the sectors.
“I believe this is the best approach to a very complex range of issues.”
Mr Trowbridge will be accepting submissions on the areas identified in his interim report until 30 January 2015. The final report, which will include recommendations, will be handed down at the end of March 2015.
Click here to view a copy of the Interim Report on Retail Life Insurance Advice.
Misleading title here – Now I am subject to more online ads while reading this opinion
Question… With the insurers also having concerns around adviser remuneration, if the level option was to go forward am I correct in assuming that Insurance premiums should drastically reduce to factor in the further profits being made by the insurance companies…..
would this be correct……? highly doubt it.
When you say profits, are you talking about the $300 million loss made by RGA last year?
When was the last time your business made an annual loss?
I think it is important to highlight the difference between Advice ” commission, and the “servicing / admin ” trail . which (IMHO) isn’t a commission in the same way the current upfront model is.
regardless of whether anyone thinks Up fronts are bad, the fact is the legislation has caught up with what is the best model to deliver the advice.
If they make the initial commission too low, then we may see additional fees creep in, BUT a sensible approach with a better trail to allow for increased costs of day to day compliance may suit everyone, Even the regulator!
we are under huge pressure from the regulator to get it right, the burden of compliance is high and implementation costs are in some cases not adequately covered by the commission.
I do however feel that there are swings and roundabouts, which means if a sensible model is implemented, we as advisers will still be able to deliver a quality advice service to those that would otherwise miss out. the Ban on commissions on investment products has pushed up the cost of advice, and many are now unable to get that advice at an affordable price and in a timely manner.
I suspect this needs very careful consideration before implementation
“Which relate to quality of advice and correlation of up-front commissions with poor advice.”
pasted from the above article, if it is considered bad advice or simply churning, compensate the client, don’t pay any commission and get some future training and ethics to the adviser.
we aren’t all doing this, so please don’t take my livelihood away.
Again why is the level of commission being questioned? We are told churning. So why affect the majority of us who do the right thing. These enquiries cost millions, yet by regulating the insurers who accept business from the small percentage of churners, you would save millions in enquiry costs, needless debate and rancour in a dysfunctional senate, and avoid more stress about our industry. For pete sake, you would think we are the only industry that are remunerated via commission. Lets then look at real estate agents, and all commission paid salespersons. We all know the obscene commissions paid to the real estate people. Some get paid massive amounts for very little work on quick sales. Why are there not more howls of complaint. Reason unions and bank don’t yet own real estate franchises.
I completely disagree with whole underlying premise of this article – what a lot of nonsense!
The ONLY way to ensure that there is no possibility of perceived bias or “conflicted remuneration” is to legislate the amount of commission payable – the same rate must apply to ALL insurers!
As far as the whole “churning” debate goes it is also not a hard one – is a policy is to be replaced within 3 years of commencement then an adviser need to provide documentary evidence of why it needs to be replaced. Why this way? Simple really. Although it is rare, there actually are times when it is appropriate to replace a policy within 3 years (peoples circumstances do change without notice at times). Just because a clients circumstances have changed does not make it any less work for an adviser to reassess and recommend a policy – why should they get paid less for the same work?
Can we put an end to this stupid debate and address the REAL issues not the political agendas of some self-interested parties.
So will any of this lead to More Austrlains taking out life insurance?
Based on the enquiries bad advice has led to clients getting the wrong product, not them getting no policy. So no more people will be insured in future and probably less,
Unless the price of insurance comes down ,,, and that then compunds the advsiers income decrease – lower premium x lower commission year 1. So will the cost of providing advice fall?
but if adviser income is reduced, will they want to stay in the business or only target the most profitbale segments.
Bottom line direct – call centre, no adivce sales is the aim of the Insurance industry, ASIC and govt will play along.
I agree – the issue here is premiums need to come down across the board and reducing commissions isn’t the whole answer.
People need to retain policies for longer, that way premiums don’t increase due to poor retention and increased distribution costs.
Complex and high volume of features in a policy increase base price and the amount of time spent giving advice and so cost of advice. Policies need to be simpler and remain valuable.
IP policies need to encourage return to work, not allow someone whose 80% able to work to sit on claim, inflate claim costs and so lead to premium increase due to poor claim experience. People who can work in a reasonable capacity should not have the ability to just keep claiming benefit.
When claims are declined or closed, advisers shouldn’t blackmail insurers with the threat of taking business away and force payment of a claim that shouldn’t be paid. Let FOS do their bit. Claims that should not be paid should not be forced through by advisers trying to justify their earlier advice to someone now claiming on the policy they purchased.
If we can build high value, lower cost insurance, more people will buy.
Is the issue around poor advice or commissions too high? Commissions are linked to premiums. Due to the size of a client premium it is essentially double charging for a premium and fee for service to be charged. As it is clients / consumers / people shy away from insurance due to the premiums. Yes, advisers churn to gain revenue. Other review and rewrite due to premium, feature / benefit changes or other issues such as poor claims or admin that affect both adviser’s ability to provide a service and clients experience.
I agree upfront commissions are too high, I also wish to stress ongoing commissions are too low. I also put forward that insurance premiums are too high as well.
The insurance providers, as do investment providers, rely on the adviser to source and sell the product, then to complete forms, do compliance work and follow up until the business completes. Then to keep the business on the books and provide ongoing review and service. In most situations without a adviser assisting at initial stage of a claim and possibly until completion the client becomes lost and stressed at the time their policy was designed to be effective. I don’t know an adviser who charges for assisting in the claims process or a provider who pays adviser to assist. There are some older policies that provide a fixed fee to cover advice to place funds after a claim only. Correct me if I am wrong.
There needs to be a complete review or insurance premiums / provider cost base to include a fair profit for provider as well as a fair upfront / processing commission or fee, as well an ongoing review and servicing fee for the adviser.
A fair model, well, someone more intelligent than me will need to sort this out. It is more than the profits of a provider and the whether their is enough revenue for adviser to sustain an office / a tightening compliance regime as well as earning an income, which is why advisers all have a minimum fee / commission they need per client to make it cost effective to have that client.
We will all need insurance sometime in our lives. To make insurance cheaper and more accessible to Australian can only be good. The risk that we face is incorrect costing of the insurance model will place a large group of Australians in a situation where they can’t afford to seek and take cover, as I am seeing now with investment / superannuation clients, those with large balances and or good incomes can and do seek advice, other either don’t seek or don’t accept advice due to the cost.
I have had to downsize my business – office / staff etc – to stay viable financially as well as remove personal stress. I don’t see any other professionals in this country doing the same, possibly due to the legislative / compliance regimen we have had put in place.
Yes, I care about people which is why I work as an adviser. I am also a person, a family man, and need to earn an income, and income that comes from providing a service to Australian people which doesn’t seem to be taken into account by politicians or those who are completing these industry review.
Thankyou for listening.
Well said Michael.
In my 30 odd years in the business the absence of satisfactory training and education of planners and as a consequence higher incidences of inadequate advice has never been more top of mind. Sales training is one thing but there is nowhere near enough awareness and understanding around the claims and risk of a claims process. In a lawyer versus lawyer the attention to detail is more critical than many advisers have given enough thought to.
Beware the increase in litigation is here to stay.
And all of this adds up to more time and more cost in the delivery of sound risk advice. It’s a dangerous time for advisers and who wouldn’t want to be compensated for the time and risk. It invariably means the swings and roundabouts on the question of the cost of advice has again swung away from the affordability of many clients. I am not saying I am an advocate for or against high upfront commissions but I am concerned about balance in the argument.
To those advisers offering risk advice take care.
I am aged 80 and my lapse rate on life insurance is virtually nil. I still have policies on my books that I wrote many years ago because my practise was nearly always to show both a step rate and level rate premium and the benefits in the long term to the latter. Level premiums make it difficult for dishonest advisers to “churn” because whether we like it or not people buy on price.
If policies are sold on premiums that people cannot afford to pay then ultimately they will lapse whatever the commission basis. If the advisers job is done properly with premiums that can be afforded lapses will be minimal. It is easy for people who have not been in the industry over the long term or even worse public servants who have little knowledge of the industry to gather statistics and reach the conclusion they want to based on their predetermined position.
At my age why would I want anything but an up front commission. I will be dead before level commissions ultimately cease. I cant help wondering whether this is just another ploy by the big life companies to ultimately reduce commissions.
Contrary to the conclusions reached in the “report” by ASIC commissions have very little to do with lapse rates. Lapses are in the main being caused by advisers recommending policies with premiums that cannot be sustained in the long term.
You nailed it Brian! Agree 100%. I have written level premiums on what i could since the early 90’s. Ip was all that offerred this then. I was once told the average policy lasted 8 years. Now dont ask me to define what average means…..its quite a colourful explanation, suffice to say, i dont do average. Maybe I’m guilty of not churning enough? im sure there are a few i should update?
My whole proposition centres around the three cornerstones of advice andnaturally risk is top priority as it lacks a date of need. I do not accept a client for other needs if they have realistice risk needs they do not want to address. Therefore I explain they do not fit our profile of a client taking the journey with us. Mostly they see the light and attend to this need rather than go elsewhere because they get that we care and are not transaction partners. Additional to three cornerstones, I place this as my guiding test. What are our conversations going to be in ten years? 20 years? will they still be a client? will they be happy? Will i be the one most likely to provide that trauma claim for the 68 year old?
Said a little more than I planned and trust others understand my direction here.
I don’t have a problem with the abolishing of high upfront commissions and it will address sustainability issues in the insurance area. However, we need to be careful that advice costs are met and that the clients still get access to advice. We have calculated many times the real cost of giving clients advice and know that the cost of resources required to provide advice and implementation are greater then the new business income. To be clear, we only write business on hybrid rates.
Whilst we are a larger practice of multiple offices and could likely carry ourselves through a changed financial model to level, I believe to take remuneration models lower then the hybrid will see smaller practices struggle and this will remove the availablity of advice from the consumers. A total backflip on what government and indusrty has been trying to achieve.
These smaller practices will then take haven under the big dealer groups (mainly bank owned), which are primarlily only interested in selling their own products, and then advice becomes more conflicted then ever.
Mr Trowbridge needs to make sure the changes achieve the outcomes needed. We have a right to be paid a fair price for the work we do. Yes, there are times when a big premium causes a big commission, but those cases take longer and require more work. They also balance out with the smaller clients that we take a loss on in providing advice and implementation.
Advice quality in most has been poor for ages and totally frustrates me that the professional risk advisers get tarnished with the poor advice given by the part timers who think they can cover risk, super and investment. There are thousands of them and thier knowledge needs to lift as does thier work ethic. Risk is a much more complicated beast then most understand and the industry standards need a big consideration as part of this whole review. Perhaps their should be advice and no advice on different pay models.
The greatest thing we do for our clients is manage their claims and this consumes a massive resource. We know we make a huge difference to our clients and this is funded through AFRM’s current remuneration models from the insurers. Of major concern for me is that remuneration model continues to make the costs of servicing claims sustainable. We always have over 60 or 70 claims running , many long term and most quite complicated and god help the claimants if they were left on their own to deal with the insurers because they couldn’t afford to pay for claims management.
We as an group need to insure that all these considerations are worked through before a remuneration model is settled upon. If you do nothing, then you’lll get what your given. Hats off to AFA and FSC for taking this up themselves to effect change rather then wait on the government to get it totally wrong.
High (and what is high?) is not the problem. It is the intent from an adviser generating the commission that is the problem. If it is being generated from moving business with no benefit to the client then it is wrong. If it is generated because the premium is low, or a considerable amount of work and advice has gone into the sale then it is not wrong. Advisers need to be able to both cover costs associated with the advice and make a profit.
I have been in this industry for 25 years and throughout this time manufacturers have openly promoted new business sales irrespective of how they came about. Just look at takeover terms. Just look at how advisers were rewarded for high sales irrespective of how the business was generated. Just look at how their own sales management were rewarded.
The manufacturers have, maybe until late, done nothing to stop the sales of new business in dubious circumstances. We still have one manufacturer who is prostituting themselves in the market in the pursuit of market share.
I fully endorse that change needs to occur, but getting rid of upfront commissions in all circumstances is not the answer. The manufacturers need to have a good look in their own backyard as well. Charging a fee to a risk client is also not the answer.
The risk advice industry needs to continue to prosper. Take us away and watch the under insurance problem in Australia bloom. Provide us with a strong framework where we run profitable business that continue to provide a valuable service to consumers who, whilst many don’t know it, desperately need our advice.
The issue i see is what is going to happen in 4 or 5 years time when the insurers start to “winge” that they cannot afford to pay ongoing trail commissions of 30%. They move the “goal posts” year after year in the name of “bad claims experience” that may be so in the Income Protection area but with the ongoing acheivements and breakthroughs in the medical field they are making a “killing” in the life insurance area.
Has anybody actually asked what type of business is being “churned” i have no doubt it would be Income Protection not because advisers can but in many cases have to move clients as premiums have escalated over the past few years.
Many companies have not kept pace with the changing employment landscape
Look at AC&L POLICIES that overall were very “slanted” in favour of the client { for a change} now managed by AMP. The premiums in most cases are almost double the industry average.
You may not be able to cancel a policy but you can certainly price someone out of it !
What people earning $300,000 a year think is a fair premium is not the case with someone earning $50,000 a year. They will simply forgo it and increase the underinsurance postion in Australia.
Look out FOS the complaints are due to escalate.
It is not high upfront commissions causing this issue ! but to satisfy the buerocrats it will change! we no longer have a say and have not for some time its just being “gift wrapped” differently.
Fees will be added to initial policy applications to cover the costs of providing the advice which the client will not want to pay and therefore go direct, get information only, not advice and hope they get something that will meet their needs.
What causes the degree of uncertainty and mistrust in the Financial services area is the repeated negative publicity that the media creates. { bad news sells papers} What about some good facts and positive deliberation with the industry as a whole and give the advisers a chance to have their say some time rather than another “knee jerk” response to an ex Bankers arrogant and misguided idea of our industry.
Long Term viability ???????
Do the sums – Pay level commissions and over 20 years the life company will be substantially out of pocket.
Life companies have been more than guilty of arranging mass book churning themselves in the name of market share!
Just another article by another misinformed person with little regard for the real world or real people!
If you apply the same flawed logic that is throughout the ASIC report 413 ‘Review of retail life insurance advice’ ( and yes I have read it ) where 82 to 84% of new business is written with the dreaded up front, doesn’t it also tell us that 100% of advisers breath air so let’s ban that, problem solved ! For a real laugh read page 63 , where the accusation is that by using ‘on line ‘ applications we somehow avoid underwriting by ‘flying under the radar’ obviously advisers can’t lie on ‘paper applications’. Seriously if these geniuses spent as much time , money and energy analysing the drop in adviser numbers, because many just get sick of all the C**P compared to and in direct correlation to the horrors faced by the average Australians because no one has spoken to them about protecting themselves and their families we would all be ‘better off’ .
As for the churning , what do I do when a client comes to see me with a ‘TV type policy’ 1 year benefit period, indemnity with as many flaws as the ASIC report ? I re write it with the appropriate benefits. There you go another CHURN … funny that the client is now better off though. Nearly 30 years of this and I’m getting very over it
With you on this Stephen. Intervention from incompetant policy makers will damage the public through unintended consequencies stemming solely from incompetance.
It’s a good thing that the general public, that is, the insurance-buying public, isn’t aware of these constant enquiries into our industry. If so, can anyone imagine how much more difficult it would be to sell life-risk insurance? The public would understandably be thinking that there must be some dodgy dealings going on here. They could easily put off buying a policy until the results of this or that seemingly endless enquiry has been tabled. How would that then help the underinsurance scenario in this country?
Much has changed since I came into this industry in the days of whole-of-life insurance. That had level premiums, deferred (trail) commissions, no policy fees and commissions based on $X per $1000 sum insured. Things have changed too much to make comparisons, but we rarely had enquiries, reports, massively high fee-paying reviews and most advisers (agents then) earned a decent income provided they did the work.
For now, I see it’s basically been decided upon that the present upfront commission arrangement will go in favour of hybrid commissions. Many advisers will exit the industry esp those who don’t have a big business/client base. Also new advisers will need all of those to come into the industry or they won’t survive unless they’re the new Ben Feldman.
Word has it many of the audited advisers in the ASIC report were preselected from insurers reports on lapse rates. So do we really call this a true representation of the wider market or is it just us taking more bullying from the corporate regulator wanting to be seen to have found a problem to get more dollars for it coffers, and for the bankers end of the market who stand to win again by this decision.
I fear we will destroy any chance new advisers will have to survive in this game, unless they become just focused on chasing the Big Dollars. Who wins there, not the consumer that is for sure.
I find it alarming that no-one yet has called into question the fact that most of these recommendations are based on a report that “involved a review of 202 advice files” according to the ASIC Report.
It would be interesting for the manufacturers to release the number of policies issued in the same time frame that were the result of an adviser’s recommendations. My bet is that the sample size would be less than the margin of error in most government statistics.
Yet, our industry sits back and does nothing. We have not even questioned where ASIC was during the Storm/Westpoint debacles. There have been enquiries, compensation paid and changes to our businesses but no-one has yet said what responsibility lays at the feet of ASIC.
Maybe it’s time we got ourselves a union!
Level the playing fields. legislate max commission rates by all means however insurers to provide transparency regarding how commissions are accounted for before or after change.
This is a political exercise 101. Hold an enquiry, control the terms of reference and thus the outcome. I am saddened to see my AFA was convinced they needed to be in the tent of the enquiry. Now they can’t agitate against the findings because they were a ( minority ) member of the enquiry. Or did they take a position without consulting risk writing members. This could cost the AFA big time Mr Fox
Risk advisers are faced with a nice little joining of interests. Its not about commissions ( or their scale per se ) its about the vested interests of the ISN ( get rid of advisers so funds stop going to SMSFs ) and insurers and their bank owners increasing profits by reducing distribution costs thus subsidizing the blundering losses made on group in super. Everything else is “fries ” !
And then we have a regulator which clearly has an ideological position on commissions of any sort, and is naturally aligned with the perceived interests of the ISN.
Commissions have worked for 150 years, and the system works, but like everything in life it gets abused by 1 percenters.
I have not seen the Trowbridge report, but I will bet a 15 year old single malt they did not address the matter of buyers of books who systematically immediately churn the book. Insurers should insist on a 2 year moratorium on churning before authorising the transfer of the book and its revenue stream to a new adviser. Might reduce multiples on offer and slow up some adviser retirements but it would slow up the real churners
I will also bet that those insurers who benefit from churn won’t think that’s a good idea
Spot on BillB
Buyers of books systematically churn, we have seen it happen time and time again and know who these advisers are – and the insurers KNOW it, but chose to only act when they lose business not when they’re in the winning seat! Insurers need to take more responsibility when it comes to replacement business, its disclosed on the application so WTF don’t they use the info already provided to identify the churners, and deal with them…
Then we have retention teams at each insurer, so why don’t ALL the insurers arrange to have say a 4 boxes scenario for reasons behind the lapse, they are already speaking with the clients!! Make the contact useful to the industry not just your own coffers.
Really, the Insurers need to step up to the plate here – unless they don’t actually wish to ??
As a Young adviser looking into setting up my own Risk Practice in the next few months, this
talk about reducing upfronts makes me want to close my doors before I even open. Maybe this is what they want..
Also, with Level Comm, firstly you cannot feed yourself, and then how do you incentify a referral partner?
Level Comm = destruction of the IFA adviser
THEY DON’T KNOW WHAT THEY ARE DOING!
FOFA is bad enough but this Working Group and ASIC with their flawed objectives are doing their best to put us out of business and ultimately destroy the Life Insurance business.
The retention of up front commission is vital for a sustainable business and prosperous future for new and existing advisers. Even though we do already have the choice of alternative commission arrangements to suit recommendations.
I entirely agree with Brian Davis in his message that Lapses are being caused by advisers recommending policies and premiums that cannot be sustained by clients in the long term . Up front commissions or subsequent churning of policies are a very small contributing factor to the 10% or thereabouts lapse rate that exists and has always existed.
If they were to remove up front commission they would also remove incentive and individual enterprise then we would experience business production of Life products and adviser numbers plummet. It would be sad day for us, small business and the economy
To stop the Working group and ASIC’S opposition to up front commissions I suggest that all Advisers and Licensed Dealers write to their local Federal MP or join a political party in the next 2 months and put our case forward for the retention of up front commissions before it is too late.
We have been treated very badly for a long time, now and it has to stop.
Comments are closed.