- Agree (90%)
- Disagree (6%)
- Not sure (4%)
Advisers have sent a clear message on what they think is needed to successfully operate a risk specialist advice business.
As we go to press, nine in ten of those taking our latest poll (89%) agree that an 80/20 hybrid commission model for life insurance advice can form the basis for a sustainable risk-focussed advice business, whereas the current 60/20 model cannot.
This is a strong outcome, which seems to make commercial sense. It reflects the fact that prior to the introduction of the Life Insurance Framework reforms, the 80/20 hybrid commission model was a standard commercial offer made by all insurers and was a model which was increasing in its popularity. However, insurers never offered a 60/20 model because the numbers didn’t add up for advisers from a commercial perspective (nor do the numbers add up for some advisers at 80/20).
While …the high upfront commission era will not return, debate remains about the future of risk commissions
While it seems to be universally accepted that the high upfront commission era will not return, debate remains about the future of risk commissions.
One factor we didn’t address last week was the issue of the two-year clawback period currently mandated under the Life Insurance Framework reforms, which sits alongside the current 60/20 cap. One possible alternative future remuneration scenario involves the proposition that under an 80/20 hybrid model, any replacement business would attract level commission only, but this restriction would be accompanied by a reduction in the current two-year clawback period to one year.
This is just one example of a number of potential future commission-based remuneration models for life insurance advice. However, we appreciate many advisers would not support this alternative scenario outlined above and we’re also mindful that any such debate is entirely theoretical, given the current LIF commission cap and clawback restrictions that now apply.
In any case, we will welcome your thoughts about the future for specialist risk advice businesses as our poll remains open for another week…
The LIF changes were partly real – 60/20 is worse than 80/20 and many insurers dropped their level commissions by 15% – but also psychological. Plus the roughly doubled compliance burden, which adds a lot of costs up front made life insurance a marginal proposition.
However, for many advisers the psychological impact is even more devastating. There is no sugar hit from getting 110% or even 140% (if you only chose one insurer) as 60% only covers the costs and there is the huge uncertainty from the two year clawback. That is especially debilitating for large or very large policies as you in effect don’t get paid anything for twelve months and then only a partial payment for another 12 months. You receive the money, yes, but it is really just a loan for those 12 months.
In the past, if you had yearly premiums for a client and only very few such clients opted out in the first year but you had no idea how they would respond to the price increases in year 2 and for those who are more sale oriented, that create a huge level of uncertainty.
The LIF changes were deliberately structured to make them unattractive for those who have a high discount rate, i.e. those who rather have $100 now than $120 in a year’s time and those who like to spend everything they get. By structuring much of the first two years’ payments as in effect a loan for 12-24 months, the insurers created a lot of tension and uncertainty for those insurance advisers who responded by walking.
The main reason for replacing Insurance policies is client driven, as in when they get a substantial premium increase and object, by cancelling or asking their adviser to find a cheaper alternative.
Once again, this model of only paying a level commission would lead to further lapses as 20% to cover all the Compliance and New Business processes is impossible.
60% is not viable, so how can 20% work and if it is client driven, why should the adviser get punished for the Life Company being unable to price their premiums correctly, so large increases can be avoided.
It has been stated in another of this weeks articles “Lapse Rates Surge – Churn not the Villain”, that in other countries where commission rates are much higher, the lapse rates are low. Commissions were never a problem, even under the upfront model. And after this ridiculous witch hunt, life insurance specialists are subject to LIF, and the FASEA impositions – both of which should never have been established. I said it last week, as I have said it repeatedly in the past, and I will state it again – the CEO’s of the life companies, the heads of the AFA, and FPA, and other major parties MUST go the govt collectively and put forward a water tight case, and show why commissions must be reinstated, this 2 year claw back must be altered, and the FASEA impositions must be abolished. The longer this is left, the longer the recovery.
I have just one question – where else in the world, in any other industry does the person doing all the work to help another achieve their goal have a 2-year responsibility period hanging over their head? (My guess….not one.)
It’s an absolute and utter disgrace for EVERY party concerned who contributed to this decision that this was EVER considered fair and reasonable!
If there was ever an occupation that should have accountability hanging over their heads for that long, its politicians with the enormous impact their decisions do have on the population…i.e. Dan Andrews.
Advisers should NOT be held accountable for relationship separations and people losing their jobs – especially now that we have to invest around 15-20 hours to help the client actually get the insurance they almost certainly approached the adviser for. The more I think about this, the more disgusted I am with how advisers are treated by people with NO clue what really goes on.
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