Should adviser remuneration on replacement life insurance business be restricted to level commission only?
- No (72%)
- Yes (26%)
- Not Sure (2%)
A meeting of senior industry advisers and life company managers has raised the prospect of restricting adviser remuneration on renewal life insurance business to level commission only.
This topic was one of a number of key issues discussed at the recent Million Dollar Round Table (MDRT) insurance industry meeting in Sydney, and forms the basis of our latest riskinfo poll, which asks:
Should adviser remuneration on replacement life insurance business be restricted to level commission only?
The argument in support of restricting adviser remuneration on replacement policies to level commission only relates to discouraging the unnecessary movement of life insurance policies for motives other than what may be considered in the best interests of the client (ie to restrict the practice of ‘churning’).
There exists a small percentage of advisers who ‘churn’ life policies after the original responsibility period has ended in order to access another round of upfront commission on effectively the same business.
this practice … can potentially lead to rejected future claims
In addition to not being in the best interests of the client, this practice also reduces the average term of life insurance policies and can potentially lead to rejected future claims due to non-disclosure occurring during the replacement policy application process.
On the other hand, it was noted that within the general insurance industry, the practice of churning policies continues, even though all general insurance remuneration is paid on a level commission basis.
Naturally, there are many instances where it is in the best interests of the client to change their insurance policies, due to changed employment circumstances or product innovations or changed personal circumstances.
Should advisers who are providing this service for their clients then be restricted in their remuneration options simply because the new policy replaces an existing contract?
What is your view? Should only level commission be paid on replacement insurance policies in order to dampen the incidence of churning?
Or does this penalise the majority of advisers who prefer upfront commission remuneration models, who are simply acting in their clients best interests by changing their policies?
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26 Comments
Level V Upfront V Hibrid
Insurance companies want level commission so they don’t need to update their products & they believe that the adviser wouldn’t change it as the commission remains the same.Why don’t they suggest Hybrid as an alternative? or a penalty period, like increase the responcibility period, but make it prorater reduction.How about the industry not accepting business from those known Churners.
I saw this the other day, the client had been persuaded to change providers and it resulted in the client getting a worse off occupation class and effectively the same cover but more premium. Maybe restict them to hybrid or level?
I believe the adviser should still be able to choose which commission they wish to take. In the long term the life company would be worse off by applying the level commission. I believe if the client is in the same occupation & a new policy is written with the same company then the adviser would be restricted to 50% commission of the commission structure chosen. If the client has changed occupation then the adviser should receive full commission as some advisers would change company just so they would receive a commission. It needs to be a fair playing field when the circumstances has changed.
Being a rural based adviser where fuel costs $1.48 per litre and clients live upwards of 200 kms away how do we fund servicing of our clients business? Products change consitantly and if we dont service our clients just imagine the potential exposure to PI claims from clients.
There is an arguement for replacing recently underwritten business with level, but not necessarily for old business. I have no objection to hybrid for any type of business.
I have no problem with the outing of pure churners…the INDUSTRY DOES NOT NEED THEM AT ALL.
We all wear the taint and certainly it does our cause no good in the GREED image stakes which the pixies in the financial press love to promote. In the current environment we are on a hiding to nothing by supporting the “serial churners”.Get my drift!!
Re. level commission. The providers will need to speak with one voice for it to work as the leakage to highest reward would be significant.
Let’s do it!! I have often passed details of churners to insurance companies and they have shown no interest in dealing with the issue. It would hurt the bonus payments for the life office managers if the new business dropped because churning stopped. Maybe life office managers should only be paid on new business introduced to the industry, not on replacement policies. That would sharpen the focus! Level commission for advisers and no incentive for life office managers!
I can’t believe a 67% no vote at this point. Obviously it is the churners who have voted to try and protect their patch!
The vast majority of Advisers do the right thing and only replace business when it’s clearly in the clients best interest. In that case they do the SOA and all the research and work involved so should be paid however they wish. Why penalise Advisers who do the right thing by their clients, due to the actions of a few?
If the companies have a problem with churners they should deal with them directly (they know who they are) ~ but don’t penalise the innocent. A friend of mine who went down the level comm path now hesitates to go and see clients with older policies. He knows if they ask for something better (& he admits there are plenty of stronger and cheaper contracts available) he & his staff will have to work for 8 or 10 hours with the reward being a pay cut. If I were running an insto, I’d want level commissions because they’re in my best interests. That doesn’t mean it’s best for the clients or advisers.
Point 1: The primary issue is what is in the best interests of the client. A good adviser will always be able to justify why the change is in the best interest of the client.
Point 2: An adviser that cancels a policy before the new policy is in force should never be allowed to give advice.
Point 3: We do not take either upfront or Hybrid commission as business is written for the long term. We do however recognise that every adviser should be able to choose their method of remuneration. It is not appropriate for either insurance companies and governments to tell us what what we should charge our clients.
This must always remain subject to market forces and adviser relationships with clients. The only condition is that it is properly disclosed and agreed to by the client.
Further to my recent comments about this ” issue”, I would like to add, that those dealerships who have risk writers, their compliance managers should check the SOA’S to ensure that the switch is in the client’s interest.
The other aspect is when ASIC does an audit, they too should study the SAO’s for switched business.
If the reasons are right and definately in the clients interest to switch, then full commission should be paid.
There is a danger that many old outdated policies will stay, nice for the insurers, bad for the client.
Regulation means that insurers have to compete for the recommendation of independent advisers so products have improved.
Some existing customer benefit from these improvements from guaranteed upgradable contracts, but many benefits are to do with additional product features, pricing of Level contracts, changes in ownership structure prompted by regulatory or tax changes.
For clients to be aware of these benefits they need good advice, possibly better than that provided by their current advisor.
If competition is good for the quality of insurance contracts, it should be good for the quality of advice.
If advisers look after their clients and propose appropriate changes that require policy replacement they deserve a choice in the nature of compensation. If an advisor invests the time in a client necessary to establish his advice is superior to the existing advisor he is even more deserving of a choice in compensation for the replacement solution.
Poor advice on replacement policies “churning” should be the focus of our regulators not insurance vendors with an existing client base to defend.
The insurers have always known who the bad apples were/are but many turned a blind eye because they were paid based on business throught the door.
The AFA have been trying to address this situation since the 40’s with no luck.
Now legislators are taking a hammer to crack an egg!
1. The insurers would know who the churners are, who move business every 1 or 2 years in order to receive an upfront 100% or 115%. NO WONDER WE HAVE AN UNDER-INSURANCE PROBLEM IN AUSTRALIA.
2. It is easier to convince an existing client to move providers, why don’t these advisers go and look for “new clients” and provide protection to more Australians ?
3. There is currently the option to either rebate some or all of the commission to a client, and then charge a fee for service. Or alternatively, pay the premium which has a built-in commission. There is no need to change the current arrangement.
4. Why doesn’t the name “commission” get changed to “fee” or “payment”.
5. Abolish “upfront” option, and have only hybrid or level as the options.
6. Extend the responsibility period from 1 year to say 3 years plus to prevent advisers moving policies regularly.
There are a few companies who are not able to make increase or alter existing policies because the company has changed re-insurers.
Why penalise the adviser if they then recommend to switch companies?
The only fair way to stop “churning” for profit is to substantially increase the respopnsibility period.
ADVISERS WHO CHURN RUN A HUGE RISK OF LITIGATION,SO IT IS THEIR CHOICE.THE ISSUE OF COMMISSION IS ONLY AN ISSUE BECAUSE THERE IS IN MOST CASES SUCH A BIG DIFFERENCE IN PREMIUMS BETWEEN THE PROVIDERS FOR ESSENTIALLY THE SAME PRODUCT.CHANGE THE DIRECTION OF THE DEBATE AND MAKE THE PROVIDERS STANDARDISE THEIR PREMIUMS AND AS A RESULT THE CHURNERS WOULD HAVE NO WHERE TO GO.
I can see a danger that the Federal Government may eventually intervene in relation to the payment of upfront commissions, especially in terms of replacement policies. In my view in situations where replacement business is clearly in the clients best interests, there is really no problem with being paid on a level commission basis.
After all it makes good business sense to have a mix of both upfront & level commissions within the advisers portfolio of risk insurance policies.
While the lure of upfront commissions to “churners” is clearly apparent, the flipside is the disincentive to advisers to move clients to another insurer when they should in their clients interests. Why go to all the work of rewriting a client with another insurer when you could earn the same income leaving them where they are. “Churners” whose motivation is their own interests rather than the clients will leave clients with old, out of date, inappropriate cover rather than put in the effort of rewriting them. Making level commissions compulsory once again perpetuates the many paying for the sins of the few.
Sincerely i believe it need not be changed. I do not see churning happening much at all in the riverina. Maybe in cities it is a problem? I have seen some good comments here and known churners should be watched quite closely and their RBA checked for valued reasons in their audits. Doing a SOA etc with a reasonable RBA should prevent this. also companies should bare partial blame here in part as too often most companies do grandfather the pricing. One case recently was an old policy from a company aquired to ING’s books and premium was aprox $2600. ING standard rate was just over $1800 (yearly) and this is a clear case to churn for the clients needs to save aprox $800! the costs of running an apmt are not like they once were! and we do need to be rewarded.
Wake up you lot or we won`t have an industry to work in.!! Between ASIC, the Labor Government and the Union Based Super Funds we won`t be able to make a cracker soon.!! Talk about Nazi Germany had nothing on this.!! Told what to do in every facet of our business,told now that we can`t earn commission on super,what`s going to happen next.? Pretty soon we won`t be able to do anything.Ask a Doctor how much he makes in a day, ask a chemist or a lawyer, see what sort of reply you get.!! Get real you blokes or it`s going to be over.
I think mandatory level commission on replacement business is a good way to deter churning.
This issue of churning shall never be resolved by waiting until one company braves the decision before others follow. There will always be companies that make the change last in order to potentially gain any market share. The answer lies in an industry cut-off date that all companies have to abide by. Increasing commission vesting terms to 2-5 years would only defer the churning!
I’d like to see some discussion/ modelling of true cost of insurance if generous upfronts were abolished; my understanding is that this could reduce the cost of insurance to the client by almost 50% (due to the impact of both the commission payment - generally about 30%, the reduced cost to the insurance industry of underwriting the same policy multiple times, and economies of scale due to the increased number of policies sold due to lower premium). Then we can start to discuss the alternate remuneration models - ie fee for advice v commissions and advisers and clients can make a better informed decision
The adviser has an obligation to provide the best product available to there client ,they should not be penalized with level commissions ,for doing their job properly
I do aggree with ‘25, peter murray” above. rather than make such changes to make it difficult for all to stop the few. This few, as like all advisors would need to have a strong RBA and great records that would be convincing to a auditor or the dealer group responsible. If there are many cases of churning, it would be quite obvious to the auditor and would need to show cause not tp recieve disciplinary action.