Ok - here we go..........
Over the past few weeks, life insurance commission has been directly and indirectly alluded to in various media. The latest is the announcement that the FSC has formed a committee to assess the 'viability' of the adviser distribution channel. On the premise that the penetration level of life products is below the desired level, the FSC seeks to identify more effective distribution strategies.
Any initiative that addresses the desperate level of underinsurance in NZ is laudable, but there is an 'elephant in the room' so to speak in this latest round of discussions on life insurance commissions and the viability of adviser distribution - the level of upfront commission in New Zealand is excessive.
The following remarks are bound to upset somebody - so apologies in advance, but here goes........
- Advisers don't set, drive, or maintain commission levels - insurance companies do that. And if some companies choose to gain market share by paying more commission, it's this action that has a bearing on the viability of the channel.
- In any event, why would an adviser choose a lower commission payment when faced with 2 products which both adequately serve the client's needs?
- New business commission levels in NZ are ludicrously high - Australia, U.K., and just about any other territory I can think of does not market products with such a high expense loading for distribution. As an IFA in the old country, 110% - 120% was maximum, and Australia was/is about the same.
- Previous arguments that investment product commissions impacted on client benefit, but commission on risk products makes no difference, no longer hold water since variable risk product commissions were introduced. Like it or not, commission has an impact on price - or on the level of benefits the client can afford.
- It's not that long ago when some product providers were complaining about the high level of commissions being paid in NZ; some of those who complained are now leading companies paying the higher commission levels.
- High upfront commissions encourage churning and I don't think the Australian solution - 100% year 1 clawback, 75% year 2 clawback, and 50% years 3 clawback - will be effective. Habitual churners will merely wait for the 4th year to get on the roundabout again.
- High upfront commissions are usually accompanied by lower renewal commission and work against building meaningful practice value.
Now 3 additional points to make here -
- I'm not advocating the removal of life insurance commissions for risk products. The payment of commission has proved to be an efficient and effective compensation mechanism for intermediated distribution. The acquisition costs incurred by a life company - of which commission is only one component - are driven by other factors also, such as expense allocation and systems management.
- I am critical of the high level of upfront commission and believe that this should be curtailed by some means or other. The self-regulatory myth was identified early by regulators and there's little chance of any self-imposed maximum being agreed to in the current market.
- There are occasions when replacing a life risk policy is legitimate, but is should not attract full new business commission if the face value of benefits remains the same. South Africa has installed effective mechanisms to reflect this and churning is no longer an issue in the Republic - nor is adviser channel viability.
In summary, it matters not which compensation structure prevails, there will always be someone, somewhere, who will somehow feel aggrieved - no matter what.
But it seems to me that it's high time that a more sustainable, sensible, and equitable commission structure was presented to the intermediary market.
Slàinte mhòr agad
The Laird of Albany