New Hybrid or Old Level?

7
Which of these options, currently proposed under the new Life Insurance Framework, would best suit your advice business?
  • Combination of hybrid and level options - depends on individual case (29%)
  • New hybrid commission model - 60%/20%, plus client advice fee (28%)
  • New hybrid commission model - 60%/20% (12%)
  • Other combination (12%)
  • Existing level commission model - 30%, plus client advice fee (7%)
  • Not sure yet (6%)
  • Existing level commission model - 30% (4%)
  • Client advice fee only (3%)

Our latest poll draws on the the AFA’s recent statements that it will seek to ensure existing level commission arrangements remain a part of the new Life Insurance Framework.

As the industry awaits the Government’s response to David Murray’s Financial System Inquiry recommendations, which we understand will include further clarity on the implementation of the Life Insurance Framework proposals, we’re interested to receive your insights into what may well become a future choice for you, between existing level commission arrangements and the proposed 60/20 hybrid model.

We appreciate there exists a significant number of risk-focused advisers, in particular, who reject both of these remuneration structures, and therefore the premise of this poll. In an earlier riskinfo poll on the Life Insurance Framework, 49 per cent of advisers said their business could successfully operate under the new remuneration proposals, regardless of whether they supported them. 36 percent said they could not survive, while the rest remained undecided.

… life companies, licensees and individual advice practices have commenced gearing themselves for the transition period to the new Life Insurance Framework

While there may yet be further developments in this critical remuneration debate, we note that life companies, licensees and individual advice practices have commenced gearing themselves for the transition period to the new Life Insurance Framework, slated to commence from 1 January 2016. As the situation currently rests, this means advisers will be required to choose between an eventual 60/20 hybrid structure, a level commission model of approximately 30 per cent, an advice fee, or a combination.

If this situation does not change, we’re keen to know how you are considering the future life insurance remuneration options that will best suit you in your business.

The major benefit delivered by the 60/20 hybrid model (irrespective of whether you support this option!) relates to cash flow.  Accessing a higher level of income at the commencement of the contract, which corresponds with the time when most of the costs associated with placing the policy ‘on the books’ must be paid, can and will, make all the difference to the future viability of many risk-focused advice businesses, as they are presently structured.

As most advisers will have already ‘done the math’ you will appreciate that a 30 per cent level commission option will break even after year four, when compared with the hybrid option (ie 60/20/20/20 v 30/30/30/30). But we also note this is a simplified equation that doesn’t take into account issues such as average policy duration, GST and the proposed clawback provisions.

After year four, a 30 per cent level commission arrangement will deliver higher income and, all other things being equal, increase the value of the business, due to the higher annual renewal income stream.

Some advisers may determine they heavily favour one of these commission options because it will best serve their particular business model. Influencing factors may include how long the practice has been operating (and therefore the current level of annual renewal income), and its existing remuneration preferences.

There is no ‘one size fits all’ answer, because every advice practice has its own unique ‘DNA’ structure. And as we’ve already mentioned, there may be many advisers who reject the poll question itself, because you strongly oppose what you see as a move to a new structure that effectively rejects the current model, under which you have successfully delivered objective, meaningful and ethical advice solutions in serving the best interests of your clients, over many years.

As always, we welcome your votes and your measured comments in this game-changing debate.



7 COMMENTS

  1. To Riskinfo.

    As we all know, the one area that is of most concern is this 3 year clawback. What about a survey that specifically focuses on this issue? The question could be quite direct, along the lines of how many advisers will continue if the 3 year clawback was introduced? Or how many would stop writing new business, despite the adjustments they make to cater for any changes to remuneration?

  2. How many of the 49% of advisers who responded saying their Business could successfully operate under the new remuneration proposals, have taken the time to properly analyse the impact of a three year clawback or the fact that there is no
    mandated rules to force retail Life Companies to reduce by 50% the time it takes
    for Advisers to work with the Life Companies inefficient systems.

    Any reduction in our revenues has to be offset by Life Company efficiency gains, so we can write and maintain more Business.

    The comment saying that we note that Life Companies, Licensees and individual
    advice practices have commenced gearing themselves for the transition period, needs to be backed up by actual numbers.

    Cobb and Co, (One of the most innovative and successful companies in the world at the time) dismissed the automobile industry as an expensive fad, though they continually made improvements in their equipment to make them more efficient.
    It did not help. They went belly up as they did not see that the world had changed and
    they failed to change with it.

    What customers want has not changed in hundreds of years. They want quality product
    at a reasonable price and ease of use.

    Currently, the retail Life Companies are like Cobb and Co, though at least Cobb and Co did not shoot itself in the foot by inventing the automobile, then let competitors
    take advantage and eventually push Cobb and Co into oblivion.

    The life Industry has brought this whole debacle upon itself by inventing Life
    Insurance, then jumping into bed with direct policy peddlers, who with their unregulated chaos, are destroying the quality and sustainability of the Retail Life Industry which has always been the back bone and foundation of the industry.

    If the Retail Life Companies invest in workable, non-legalistic, plain English
    efficiency gains that advisers can easily take to their clients, the volumes of New Business and retention levels will rise exponentially.

    Cash flow is King and Business efficiency is also King, though many companies seem
    to not understand this. However, more importantly, knowledge is the crucial linchpin that holds it all together, as high revenues with efficient systems is still a Cobb and Co Business model unless the business is an expert on every facet of its industry and understands internal and external threats.

    The life industry turns over many Billions of dollars to produce a promissory note. That is all we do, yet we seem to flounder and spin around trying to get a foot hold on solid ground, which in today’s rapidly changing world is actually quicksand.

    The solution and the way to build a sustainable Business model that sits on solid
    ground is actually very simple in our industry, as we do not have to build dams, roads, factories etc.

    We just have to build an easy to manage promissory note that protects the foundations
    it is built upon.

    The danger in a poll that is easy to answer without proper analysis, is that focus groups with little practical experience can promote their theories and as we all know, the more they yell, the more they believe their own voice, though that noise can drown out measured advise from experienced practitioners who can actually add to the discussion based on real world advice and experience.

  3. I totally agree with WB the three year clawback is probably the most concerning. How about putting a survey up on what advisers think on this issue.

  4. Is the adviser fee which appears in these options subject to responsibility & clawback. Is it on an individual policy basis or insured basis ( 1, 2, 3 or 4 policies). If the client only wants the IP this year, but comes back to do the term life next year, is that 2 adviser fees. If spreading policies over 2 or more insurers, does each insurer pay the fee
    This is still a joke-no detail, no certainty. SNAFU !! Designed by a committee of vested interests-read FSC and 4 banks. All in the benefit of consumers !!!
    The non-bank members of the FSC should think very carefully about these proposals – they are the real targets. And with the full support of a Minister who is ex-bank.!!

  5. I also agree with WB, its the clawback provisions that are the most concern. However the commission levels should be left to the free market to decide upon, all of the so called reasons that have been given to reduce the commissions are based on myths and mistruths. “Churning” was created by companies that were upset that they were losing business because they had pushed their premiums to high after they had introduced “Take-Over Terms” to induce advisers to move business from another insurer. All of the Insurance Companies have done this at one time or another over the past 30 years, then their CEO’s have the gore to place all the blame onto the “greedy” advisers.

    If it is not profitable for insurance companies to operate as they have been in the past why is it that they are all announcing increases to there PROFITS this year. The CEO’s of the Insurance Companies are happy to keep their remuneration packages, when it their fault that the industry has a so called problem.

  6. This whole conversation is just a set up. I keep reading news articles keep pushing the same mantra that only talk to holistic financial planners or say hey if your not insolvent in 4 years maybe your cash flow will be higher.

    Anyone in journalism knows that how you frame the argument is more important than the facts behind the half truths.

    When advisers replace an Insurance product it’s called churning (negative connotation). When a product provider is also the advice provider we call it vertical integration (not so bad).

    I think we need to change the terminology from churn to something better like best interest policy replacement and Vertical integration should be called conflicted profiteering.

    Seriously someone needs to call four corners and highlight the conspicuous correlation between declining profitability of insurers, rise of Top 5 market share and how the the price fixing cartel got what they wanted while pretending to benefit consumers. ITS A BIG STORY!! The ABC loves to bank bash.

    Frydenberg is completely in their pocket. He quietly pushed through the general advice exemption that only helps the majors. Not matter what we do he will do what they say.

    We need the media focus on him before anything goes ahead so he can still wash his hands of it. He still could pretend he only approved it because he thought there was a consensus. Only the media will make him change his position now.

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