Rice Warner MD, Michael Rice, has added his views to the proposed Trowbridge Reform Model, calling it a necessary improvement for the industry.
In a commentary released just before Easter, Mr Rice, who has operated his research firm since 1987, considered the history of life insurance commissions before delivering his qualified support for John Trowbridge’s reform package.
The research firm MD drew some parallels between increasing commission rates in recent decades and worsening lapse rates: “There has been a price war for advisers over the last 20 years and upfront commission has doubled in that time. Further, the persistency [clawback] period has relaxed from two years to one year… The relaxation has led to a doubling of lapse rates over this time, indicating that some advisers shop around policies every few years to earn further initial commission.”
Most consumers would … query why they pay [fees] on life insurance, but not on general or health insurance
While supporting the notion of a flat commission structure, Mr Rice nonetheless feels it would be going too far to suggest advisers should develop a fee for service model for providing life insurance advice to consumers: “The facility is already available, but few advisers use it,” he said. “The initial cost of providing the advice is likely to exceed $1,000 and could conceivably be much more in many cases. Most consumers would baulk at paying these fees and most would query why they pay them on life insurance, but not on general or health insurance.”
Mr Rice continued, “The Trowbridge report recognises the practicality of retaining a commission system, but recommends tilting it towards a renewal structure, with a maximum of 20% of each year’s premium. The main advantage of this is that advisers would have less incentive to shop around and recycle products every few years…”
“The difficulty for advisers if they earn renewal commissions,” continued Mr Rice, “…is that they will not get fully paid at the time they do the work. They will need to borrow against future cash flow to pay their bills. Trowbridge recognises this and suggests a fee of $1,200 per client be paid by the insurer in addition to the commission.
…the proposed structure is a necessary improvement
“It remains to be seen whether the structure will be endorsed by ASIC and then whether it can be implemented seamlessly. We may still see a number of advisers choosing to exit the market. However, the proposed structure is a necessary improvement. We can expect lapse rates to fall, making retail life insurance more profitable and possibly cheaper for consumers in the long term,” he said.
“Advisers who can manage their cash flow will have an increased value on their portfolio of clients since renewal commissions will be higher,” added Mr Rice.
This gentleman may be what he is, but it’s certain that he’s never sold a life-risk insurance policy in his life and has absolutely no idea what it costs to put one in place! Mr Rice should stick to research and refrain from commenting on pathways he’s never been down.
Well said Paul.
By using the words, “….indicating that some advisers shop around….” shows he has no proof and is guessing as to what he thinks is happening.
Mr Rice, no one enjoys paying money for insurance. Those who have and keep it do so because they recognise the financial protection it provides. Yet clients still look to their advisers to save on those premiums. Secondly, insurance companies update and improve the quality of their products and to remain competitive often look to reduce premiums. As advisers, we have an obligation to offer the best by way of quality and premium to our clients. This is part of our ongoing service to clients.
That is not churning! That is client service! Yes there are churners, but all advisers should not have to pay because of a few rotten apples.
If implemented, the Trowbridge responses will destroy our industry – just go back and read the responses. by advisers who actually work in this industry and deal directly with clients every day.
Just to change the subject. It has just occurred to me with all this debate about commissions and the insurance industry, that stockbrokers work on a commission basis. And yes the commission paid to a broker is not 110% or so, but it is nevertheless a commission. Why don’t stockbrokers then charge fees. I have had some of my clients comment that their brokers seem to be always making buy recommendations. BUY BUY BUY equals commission commission commission. What is the difference.
Dear Mr Rice,
Increased commission and lowered commission repayment responsibility have very little to do with increased/worsening lapse rates.
If in your capacity as a Researcher and you did your job properly you would find
1. Some companies have increased their premiums up to 53.0% over the past two years to get rid of legacy products they don’t want on their books any more. This is in spite of the fact that many of those clients with them have never made a claim in over 15 years. By the way, the ongoing renewal commission was 5.0% …, 50.0% less than what is available today,…so why wait 15 years to move the client ?
Advisers “in the client interest” have a responsibility to give clients the option of whether they want to be ravaged by current insurer or do they want to keep the client and make sure they can continue to pay for their protection.
2. Retail contracts once bought by clients are now offered offered at a lower cost albeit with lesser contract benefits in superannuation.Strange as it may seem, clients now prefer to these to be paid by their employer than themselves personally.
3. Some clients, circumstances have changed, divorce, marriage, loss of job, moving interstate or overseas. There are a host of reasons why clients no longer see the need for insurance but none of these have anything to do with advisers product churning. It’s a fallacy for you, Mr Trowbridge and industry funds to think otherwise.
4. In case your wondering if you had done your research properly, there are some industry funds who offer inferior contracts to the retail option and in some cases charge higher premiums. It’s delusional for you or anyone else who thinks that way to believe that clients should accept those conditions.
5. If there is a case for dealing with churning, lets deal with that problem properly. Make it mandatory for those members of the FSC (Life companies) to report who their agents are that engage in that practice and have them show “just cause” why they shouldn’t be dealt with by the regulator.
The only mitigation for action would be if the client instructed the adviser in writing and they were made fully aware of the consequences.
This is a far more practical option than trying to crack a walnut with the proverbial sledge hammer.
Michael Rice is quoted as saying ” The main advantage of this is that advisers would have less incentive to shop around and recycle products every few years”…
Isn’t this just an amazing statement coming from the Managing Director of a research firm who has a comprehensive Life Insurance Comparator covering all the open retail risk insurance products available, including analysis of different products benefits and premium costs at any age bracket. The text on the website states “Premium quotes are also coloured to represent their respective COMPETITIVE position for ease of use.”!!
Is Michael Rice stating that advisers should not be acting in their client’s best interest by sourcing a product that may provide enhanced benefits and definitions which may benefit the client at a reduced premium price whilst at the same time on the Rice Warner website promoting the use of the Life Insurance Comparator.?
I think someone has to explain to Michael Rice that the relentless and constant pursuit from insurers to have their product rated as highly as possible on Life Insurance Comparator software and research house programs has been an insidious contributor to the constant need to assess product suitability and COMPETITIVENESS.
No doubt the income generated to Rice Warner from those insurers who have subscribed to their process has been significant.
Double standards with one foot in every possible camp ?
The arguments being made to reduce commissions, ignore all the other factors which are responsible for probably 95% of lapses.
Mr Rice has used lapse data from many years, without then looking, or should I say researching the real reasons behind the lapses.
It appears everyone is making bold statements about our industry and our ability to earn sufficient revenues to pay our staff, our bills and hopefully ourselves, yet these very people would be horrified if they were told that they are to be paid under the same arrangement they want us to be paid, with little thought as to the real cost.
I and I am sure most risk advisers want a solution that enables all participants to be able to provide a great service to all Australians, with sufficient income to make it all worthwhile.
Unfortunately, the pro reduce commission parties, are yet to come up with a feasible solution, or more to the point, a valid argument that commission is the nasty thing that causes the majority of lapses.
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