Be careful what you wish for
Low commissions may mean no life advice for consumers.
Significant change to life adviser remuneration will do more harm than good - to advisers, to non-institutional licensees and most importantly to consumers.
The Trowbridge Interim Report (the Interim Report) suggested doing away with high upfront commissions and offered five alternative remuneration options, including one which advocated reducing upfront level commissions on new business from current levels of between 100 and 138 per cent, to between 20 and 30 per cent.
From a consumer point of view, this sounds like a sterling idea. Current commission rates probably seem exorbitant – but this is because there is not only scant understanding of the value of advice but, more tellingly, the cost of providing advice.
The costs to advisers
The first scalps reducing commission levels will claim are those belonging to new advisers. It’s a case of simple mathematics: the cost of acquisition will exceed revenue – i.e. the cost to new advisers of acquiring new clients, when they don’t have many (if any) on their books, coupled with the cost of servicing clients that do come on board, will exceed the revenue they receive. This means new advisers will have to borrow money to live on until such time as revenue catches up. Who could afford to do that? Bye-bye new entrants to the industry and hello to more restricted consumer choice.
But even experienced advice businesses are at risk. Consider this example:
A relatively small adviser, employing one person, incurs expenses of at least $120,000 per annum for wages, rent, software, and professional indemnity and other insurances, education, motor and general office expenses
Assuming the adviser drew a modest wage of $100,000 per annum, the minimum income required to break even is $220,000. This would require 50 sales each generating $4,400 of commission or other income.
In a level commission model of say 30 per cent, this would necessitate premiums of $14,500 – considerably more than the current average premium for advice business. This indicates the cost of acquisition would be far greater than the revenue generated.
Even an experienced adviser, with 50 per cent of income covered by renewal commissions, would have insufficient time to review all existing clients and prospect for enough new business to break even.
The costs to non-institutional licensees
A significant change to the existing remuneration structure would also put non-institutional licensees like Synchron at risk of extinction.
A 30 per cent level commission would either put us out of business or force us to offer significantly reduced services.
Again, it’s a case of simple mathematics: revenue from new business would be slashed to around 25 per cent of current levels, forcing us to cut costs and limit the services we provide. Forty two per cent of our staff work in the compliance area and wages and professional indemnity insurance account for more than 75 per cent of our expenses – if we are forced to cut these kinds of costs, how does this benefit consumers?
And that’s just the tip of the iceberg – our actual financial position would likely be much worse because we believe introducing a 30 per cent level commission model would result in at least 50 per cent of our advisers exiting the industry.
Advisers who are authorised representatives of non-institutional licensees like Synchron can offer consumers the most extensive level of choice, because there is generally no restriction of approved insurers.
This is important as some insurers offer better terms at specific age levels and have different underwriting requirements. If we disappear, consumers will not have access to this level of advice and choice.
Consumers at risk
Currently there are three ways consumers can buy life insurance – via an adviser, direct from an insurer or via a group policy. The benefits to consumers of each of these methods are outlined below:
If drastic changes to adviser remuneration force advisers out of the industry, consumers obviously won’t have any choice but to buy either direct or group life insurance. Life insurance advice, which takes into account a client’s unique situation and personal history, will therefore disappear.
This in turn will make Australia’s current underinsurance problem even worse.
A KPMG report, commissioned by the FSC in 2013, indicated that the average sum insured for an advised client is three times that of an unadvised client.
More recently, findings from research undertaken on behalf of TAL, published in January 2015, found that while most of those surveyed (79 per cent) rate financial protection as important or very important, only around half (52 per cent) say they actually have some form of protection in place. We know from other studies that the amount of cover is minimal.
Where to from here?
Is change needed? Certainly.
But there are ways and means. One opportunity we see is for product providers to be more innovative in the design of their products, perhaps creating products that start with lower premiums at younger ages, offering an automatic conversion to a level premium later.
They could also offer a claims preparation payment, similar to the general insurance industry.
If we saw a change in legislation, we believe requiring product providers to accept replacement business without ‘restart’ conditions, such as non-disclosure and early suicide exclusions, should be considered. This would discourage book buying.
We also think all companies should be required to report lapses on the same basis.
Some companies regard non-acceptance of CPI increases as a lapse while others have different definitions.
The bottom line is, consumers benefit from life insurance advice – the research proves it.
We need to be innovating to provide more pathways for consumers to access advice from life insurance advisers, without destroying the business models of those who are already doing a great job at keeping Australia’s most insured, adequately insured.
This article outlines some of the arguments presented in Synchron’s submission in response to the Trowbridge Interim Report.
Don Trapnell is a director of Synchron
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