What’s the true cost of providing quality life insurance advice?
Whilst each client scenario is different, the life risk advice process encompasses a number of steps, each of which can vary in length and complexity depending on the client situation.
The time investment from the advice business therefore varies on a case by case basis.
Consequently one cannot determine what the appropriate quantum of remuneration (either by fee or commission) unless there is an understanding of:
• The advice process itself; exactly what are the best practice steps in the provision of risk advice that are performed even for the most basic of cases?
• How does the time taken to complete the risk insurance advice piece differ based on complexity?
• What is the true “cost to serve”: that is the cost to provide advice as well as the cost to implement the recommended solutions?
The answers to these questions allows us to judge the extent to which different remuneration models are appropriate in different circumstances
What becomes apparent when looking at even the most basic insurance advice is that the time spent advising and implementing a solution for a simple scenario is around 7.5 hours.
Add some more complexity and soon the advice business may have spent 21 hours of chargeable time.
Applying a reasonable margin (based on AFA Adviser of the Year data on what best practice businesses achieve which is aligned with customer satisfaction and retention) then the cost of advice in a base scenario of 7.5 hours, is $1705.
With the average premium of the order of $2500 to $3000, then remuneration levels equivalent to 60% to 70% of premium would seem warranted in this most basic scenario.
This scenario assumes however that lower paid administration staff are performing some of the tasks in the advice business, helping the cost of advice.
This also assumes that all scenarios take no longer than 7.5 hours.
Adding complicated underwriting, and more detailed conversations with clients as part of an education and strategy analysis raises the cost of advice to closer to between $2500 and $3000, and consequently remuneration levels equivalent to 100% of the premium are warranted.
If $2500 - $3000 is indeed the average premium, then initial remuneration levels below 100% (either as commission or fee) would see an adviser making an immediate loss on the provision of that service, which, may have the following consequences:
• A reduction in businesses and advice professionals advising in this space
• A flight to larger advice businesses who are better able to subsidise the initial loss making period
• Middle Australia not having an advice solution
• Small business advice professionals leaving the industry
• Consumers self-serving via the direct market, resulting in an off-the-shelf rather than tailored solution (and likely paying more for the equivalent amount of cover)
• An exacerbation of the underinsurance problem, in turn leading to a significant cost to government in health, disability and associated support services
With more lives insured and higher sums insured in business succession scenarios, premiums for this type of advice (buy-sells) can be well above average.
While these cases can result in premiums ranging from $10,000 to beyond $50,000, the work involved varies.
Time to ensure the proper structuring and facilitation of the solution can mean that the initial time spent in the provision of advice is of the order of 40 plus hours.
Using the same costing model, this means that the cost to provide advice can easily exceed $10,000.
Clearly with very high premium cases there is a point where appropriate remuneration levels fall well below that 100% of premium equivalent – whether that be charged as a fee or taken as a commission.
It must be pointed out however that with only 8% of businesses having facilitated business insurance solutions, this is a small and specialised area of advice and is not the norm for risk insurance advisers.
What is appropriate would be therefore dependent on:
• What are the overall services and service commitment for ongoing work?
• What is the perceived and actual value of the advice and is it commensurate with the compensation being received?
• What is the business model of the advice business?
Up to this point our analysis has focussed on the actual cost of advice, rather than the actual remuneration mechanism.
The above numbers hold true regardless of whether that mechanism be commission or fee for service. Where the challenge obviously lies is in the lack of willingness amongst the majority of consumers to pay any out of pocket fee for life insurance advice, let alone the amounts that fairly reflect the cost of providing that advice.
Zurich’s own research showed that 57% of consumers would leave the market altogether if required to pay any out of pocket cost for life insurance advice.
The remainder were not prepared to pay more than $600 – still well short of the true cost of providing that advice.
Regardless of your own position on the question of adviser remuneration, there is little doubt that the affordability and accessibility of advice relies on many factors including a vibrant, growing, sustainable advice profession.
In this regard, any policies which act to limit the viability of advice practices will ultimately work against the interests of consumers.
In this respect it is clear that a framework comprising a choice – for both consumers and advisers – of remuneration mechanisms can help ensure equality and accessibility across premium ranges, business types and client types.
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