Licensee firm, Life Insurance Direct, has disclosed findings it says provide a realistic perspective on the actual amount of commissions advisers receive.
This information, released at a critical moment in the debate surrounding the future of life insurance commissions, reveals advisers receive significantly less income per policy than the commission amounts perceived.
The findings are based on a very large sample of life insurance contracts written by Life Insurance Direct (formerly known as xLife), where it monitored applications, policy transactions and commission payments received from around 3,000 contracts across ten life insurers. They reveal that while the average gross initial upfront commission across the ten insurers was around 114 per cent, the actual commission ultimately received was less than 90 per cent.
In providing an example, Life Insurance Direct Founder and CEO, Russell Cain, looked at the average annualised premium across the 3,000 policies, which was $1494. He noted a number of elements contained within the premium that are usually removed from commission calculations, such as:
- 10 per cent GST
- Frequency loadings
- Policy fees
- Stamp duties
Mr Cain said “Excluding these elements means the average commission received for the policy implementation is closer to 89.83%.” Using the example of the average premium of $1,494, Mr Cain said the adviser would receive $1,342, representing an amount significantly below perceived levels.
This view of adviser remuneration is popularly accepted but, in our experience, it is fundamentally untrue
He believes life insurers have allowed what he refers to as a ‘misperception’ that advisers are being paid upfront commissions of up to 120% to continue: “Their intent might be unclear but the effect is not…This view of adviser remuneration is popularly accepted but, in our experience, it is fundamentally untrue.”
Turning to the current debate and the proposed future levels of hybrid commissions contained within the New Life Insurance Framework, the Life Insurance Direct data suggests that when using the $1,494 average premium example and applying an upfront hybrid commission amount of 60 per cent plus GST (ie 66 per cent), the adviser would receive 51.95 per cent of the premium, being $776.20.
In addition to these ‘actual’ calculations, Mr Cain also modelled how that amount of remuneration would reduce over time, given the impact of the clawback provisions contained within the New Life Insurance Framework. He maintains the data collected by his firm delivers an indication of what the proposed changes to adviser commissions are likely to mean in reality.
Advisers can click here to access a table of findings produced by Lifer Insurance Direct, on which this release is based.
Good on Russell Cain for providing this data. Its interesting that the so called actuary Trowbridge didn’t seen to be able to look at the same reality.
Then of course we have to also factor in the costs of acquiring the customer in the first place and the ongoing costs of retaining them when the insurance companies increase rates to increase profits, deal with claims, etc etc.
So under the new world of a 3 year clawback we should almost be expected to work for minimum wage or less?
When the insurance companies drive out half of the adviser market and have to find their own customers they will quickly find that they will have to increase premiums yet again or finally have to look at their own expenses of overpaid and useless executives, state managers and bdms.
Great article. it clearly shows that the industry will lean to the big banks and industry super funds at the expense of the small advisers as they will be able to absorb expenses. The big banks have no ethics In Westpac / BT I observed inappropriate advice, bank not acting in clients best interest even though there is a legal requirement. a management only focused on revenue at all costs, numerous Inappropriate and miscalculated / flawed advice. A compliance regime that covers up issues. Through all the various bank scandals planner reputations have been trashed to the general public. Planners have had their businesses effected so what happens the insurance providers conspire to destroy the small planners and risk writers to boost their profits at the expense of customers and financial planners. The 3 year claw back provision will also have a huge impact especially on insurance focused business destroying the viability on many business. I strongly urge you fellow planners and risk writers to raise with your political representation and stick together and try to have the proposed clawback provisions reduced or eliminated. Stand together. By standing together you were able to get AMP to reverse its stand on insurance commissions until January. There is strength in standing together. Our professional bodies such as FPA and AFA are not representing their members interests and have not done so for a long time. If you feel like this you should cancel your membership to send a message instead of treating you as if you are nothing. To survive in the future you will need to expose the many issues with industry super funds insurance offerings and if clawback provision for 3 years take place ensure client covers the cost of claw back in your documentation. I strongly believe with the insurance changes it will drive clients to direct insurance offerings instead of the more comprehensive insurance covers thus reducing potential to claim. Lobby and stand up and be counted . It is your business, families and customers whom will suffer
Well done Russell very correct……maybe the companies should now pay full com to us for mode, loadings,,stamp duty and dealer fee because their world has not changed the premium to them is still the same because their pricing is still at old commission rates.also maybe companies should compensate us in years two and three if policies lapse due to circumstances out of our control. We would still do the work to try and save the policy so maybe a service payment ,,,,,,,,and maybe a payment if we have to do a claim or any changes to policy or any service work after sale.
I find this possibly a little disingenious – I don’t think that GST and Stamp Duties should be part of any commission calculations. The policy fee should be part of commission calculations and I am agnostic about the Frequency loadings.
I have a feeling the 89% will be above 100% when you fully exclude GST and Stamp Duties from these calculations.
But Russell has a point – the headline percentage is misleading.
Good data and thought provoking. What annoys me though is that one life office has already announced that they will pay commission on policy fees, frequency loadings and stamp duty. A pure market grab. This just exacerbates the competition spiral and I question how you can pay commission off the back of stamp duty. Someone should take them to task, or perhaps some advisers will just gravitate to them in their clients best interests. Oh and their name starts with T.
Interesting point about commissions paid on policy fees, stamp duties and frequency loading, yes potentially a sales ploy, but it overlooks a few basics including possibly the insurer seeing the issue with adviser remuneration and doing its best within the rules to ease the pressure.
Clearly nothing has changed with the insurers and their pricing for commission purposes.
The regulator rules state commission % rates as a factor of premium spend. Past commission rates while higher, were based on a lower commissionable premium to start with.
Change the % rules and you’ll get unintended consequences, this is one of them. The insurer is playing in the rules, they’ve just increased the base commissionable premium they pay on. Likely making the adviser commission more in line with past incomes based on client total premium spend.
If the other insurers are smart they will do the same, to protect their market, support their advisers and protect their income streams for new business.
Reality is, when regulators play with the market there are unintended consequences, and they usually impact the people the regulator was trying to protect or help.
With the approach from this insurer and the others following, I can’t see client premiums coming down in a hurry, if anything I’d expect to see an increase in insurance company profits, possibly a good idea to by shares 😉
What amazes me, is that we have had representation from the FPA, AFA etc, and yet this reality has not, (to my knowledge), been brought up.
This then brings into direct question about the experience and ability of these so called “professional” organisation being able to act in the best interest of ourselves, we are of course the people who subscribe to them for this service.
Or, is there institutional support being paid to them, soft dollar or whatever? as contributions in order to stifle this kind of information.
I must add that I feel, if this is the case, then it all should be disclosed openly to see if there is any bias in this, (it may be disclosed already, I just have not researched it yet).
Advisers are not stupid, the majority of us are sound business people, and to think that we can be led blindly and hoodwinked is really disingenuous on their part.
Kudos to Russell Cain for pointing out the incredibly obvious and a very good questions is raised – how did the “expert” actuary Trowbridge miss such an important point!?
However, you are all still missing the point. The whole argument about commissions is that it somehow has an impact on the quality of advice provided to clients. I have yet to see ANY data that even suggests this, let alone proves it.
What does impact on the quality of advice in our industry is the fact that product providers can also be advice providers. If you cant work out that is an obvious conflict of interest and it necessarily has an impact on the quality of advice, then you are either not serious about the issue or you have no idea about how this industry operates.
When will the powers that be start talking about the real elephant in the room!
Tony Caferella; Good point and agreed.
I agree Tony, the conflict of interest is even more important as it breeds justified mistrust.
The ASIC report on life insurance showed a compellingly strong connection between upfront commissions and lower quality of advice. Commission structures and levels have a very big influence on the quality of advice given. It is not the only influence but it is a big one.
The real elephant in the room (conflict of interest) isn’t being talked about as due to FoFA etc running a good licensee is now uneconomic and it has to be subsidised through other means. The most common example is a product provider having ‘synergies’, my licensee runs the licensee itself as a service offering, others may subsidise it through higher adviser fees or through lower quality (hence the string of failed fixed feel licensees).
Oh, and the other reason is probably because 80% plus of all advisers are conflicted. What do you do if you are a politician in such a case?
Christopher, The ASIC report was set-up. They asked the insurers who wrote large amounts of business and who had high lapse rates and then targeted only them. Furthermore, the % of advisers looked at was a tiny % of advisers out there.
Do not accept the lie that the report is indicative of overall advisers who get paid alleged high commissions. Please see Jeremys cost break-down for the TRUE cost of business.
I was told that ASIC asked for client level detail for the past 5 years of business that lapsed from each company. From their they must have data match based on address, date of birth etc. Pretty sure that’s not a set-up if they see the same client moved regularly from company to company with similar sums insured & benefits.
Not according to ASICs own report they didn’t Darrell (see pg 28 of the report). The insurers were asked to calculate and provide stats on each type of insurance to ASIC, who then made assumptions. No where in the report does it say that names, addresses, & DoBs were supplied. Read ASICs methodology (pg 15) and it is easy to sustain an argument that ASIC Report 413 seeks to support desired conclusions by shaping the methodology to suit.
Set up as in it wasn’t a random statistical sample group of advice.
They sought the conclusion of the report first instead of investigating it without bias it is what she is referring to.
I would be interested in hearing more about the profit breakdown. I’m trying to estimate an accurate break even point for the insurers that doesn’t embed profit.
Added to this most advisors have to complete an SOA unlike direct marketing businesses.
The biggest misconception is how does Gross Business revenue, magically turn 100% into Adviser Commission.
When I look at my Business revenues, I have never received anywhere near 90% after deductions, dealer fee and Business expenses.
To come up with a real Adviser commission percentage, which everybody is focused on, it would be nice if we took into account what we do not get paid on and include our expenses, which we cannot avoid, to enable us to stay in Business.
On a 110% upfront commission rate, we first lose 10% GST, then the deductions which vary between Insurers, though can be up to 9% modal loading / $8 per month policy fee / Stamp duty which varies between states / Dealer fee 10% and which can be much higher.
On the average $1494 premium, this is actually around 75% commission paid to my Business, not the adviser ( from 110% bandied around by the media and all and sundry )
I then need to pay my Business expenses, pay the ADVISER and hopefully get a return on all the risk and headaches of running my own Business.
My Business pays a retainer and a commission to incentivise our advisers to write new Business and look after existing clients.
On a dollars rather than % basis, from the $1494 premium, my Business receives approx $1120 of which $448 commission is paid to the adviser including me on clients I look after
= $672 net to pay all my Business expenses, which are substantially higher than the above 110% stated commission advisers supposedly get.
The real commission the adviser gets is approx 30% and that does not include all the unpaid work for uninsurable clients, claims and the enormous work we do fixing Life Company admin inefficiencies.
This is based on the current commission structure.
It would be nice if the Life Companies could explain what % commission we will be receiving after expenses, once the new system kicks in and when the promised admin efficiencies will be delivered, so we do nor have to spend 40% of our time fixing mistakes and being mired down in red tape and old systems that cannot cope in the current world we live in.
Just a quick question . With principals of large and small businesses how are you positioning yourselves where an adviser is paid a bonus based on writings. Adviser leaves and lapses occur within the 3 year responsibility time frame. Ouch this is going to sting big time. Or is there magic in the room where lapses follow the adviser ?
What about hiring one then being liable for all the previous policies written?
Everyone has the point unfortunately it appears the ones we need to get it across to are not being informed or do not want to know !
Good on Sam Perara for sending a letter to the prime Minister It may not get the hearing it deserves but at least he is trying. We all need to take a stance and lobby our local members with some actual figures for them to present on this or it will pass through and then what ? We all say we told you so.
Don’t look to the AFA or FPA they are already brainwashed and have no intention of going any further with this.
I remain cynical to the whole exercise………………
the companies want more profit,
they have to cover potential losses they might suffer under the sweetheart deals they do with industry super funds,
they never tell us what the churn rate is, even tho they claim to know who the “bad apples” are and still continue to do business with them… and can they separate churn from lapses that occur for a 1000 and one reasons
they expect customers to pay an advice fee and a premium … will companies reduce premiums ?
AND WE ARE EXPECTED TO HAND BACK ALL OUR COMMISION SHOULD SOMEONE CLOSE THE POLICY DOWN WITHIN IN A TIME PERIOD?
boys and girls we are being shafted.
John… whilst I don’t agree with the claw back terms you need to know that the proportions are
<1 yr – 100%
1-2 yr – 60%
2-3 yr – 30%
Does anyone else have an issue with the source of this info being a ‘comparison website’ that is offering retail policies in what appears to be no/limited advice? iSelect do something similar.
Yes, and they still get full commission for doing no work!!!
Ken’s comment is correct. Go and lobby your local Federal Member. Get together with the local chapter as a show of strength. I took a working example such as Jeremy outlined to the local Member and he has forwarded to the Assistant Treasurer on our behalf.
As agreed by everyone, the proposed changes are unworkable and the claw back arrangements are totally out of step. Yes, the Life Insurance Companies and Licensees do know who the churners are in our Industry, however to date, nothing is being done about it. I am personally aware that my Licensee has one Planning Firm on it’s books that it has banned from writing any of the Parent’ Company’s life insurance, because they are noted as a high risk churning Firm. Go figure!
You all seem to be missing the point, THE ASIC’s Peter Kell has designed this to get the focus of his inability to deliver.
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