AIOFP cites rising UK commissions in LIF argument
The Association of Independently Owned Financial Professionals (AIOFP) says it has passed on to Treasury and the Assistant Treasurer and Minister for Financial Services, Stephen Jones, details of risk commissions being paid in the United Kingdom (UK) as part of a discussion around the Life Insurance Framework (LIF).
AIOFP executive director, Peter Johnston has told members that information received during a recent visit to the UK indicated that risk commissions had increased to a maximum of 280% after a four-year obligation period.
He described it as “valuable information that will assist us push for a return of pre-LIF commission conditions over the next 12 months”.
The e-mail suggested that the average commission in the UK was around 260% with the 280% number being rumoured as the highest.
Under the current Life Insurance Framework (LIF) operating in Australia commissions are capped at 66% and the recent Quality of Advice Review recommendations (QAR) suggested that there should be no change to the existing arrangements.
The information provided by the AIOFP to Treasury references the commission arrangements available via UK firm Paradigm Protect.
Assistant Treasurer Jones has previously signalled his concerns about commission-based remuneration.
In what world is paying out more than you receive in premiums a good business model. There is a reason why there are fewer players in the insurance market now cutting each others throats for the last 2 decades and now can’t afford to stay in business. If anyone thinks going back to 110% upfronts is going to happen they are clearly deluded and need to get with modern practices.
Yeh modern practices where almost no advisers write Life insurance due to BS over compliance and Communist style capped commissions.
LIF has seen:
LIF what a success story : – /
Probably the world where they recognise their underinsurance problem, their increase in welfare and hardship, the need to incentivise private business to write more policies, the need to increase the insurance pool, and sustain a decent pool of insurable people for sustainable claims management and also company stability. A good experiment would have been to let the markets decide commission caps rather than government intervention and the state of things we have now.
Going back to 110% should not happen. Part of LIF was making it easier to provide advice, that is the part that was forgotten. If you fix that then you fix the issue about 66% upfront. Realistically there was reduction in upfront payments of 40% and an increase of at least 50% in the compliance requirements. This is why hardly any adviser writes risk anymore.
I don’t care how much the % is, who in their right mind would accept a 4 year responsibility period. The business risk is completely unacceptable.
@Matt,
If you think the present model works for risk insurance based on your hourly rate (be t $100, $200 or $300 an hour) for advice works where even if you write an Olympic athlete, you are flatout putting the documentation together from start to finish under 9 hours to submit for acceptance.
With Nil commission and a 30.0% rebate based on fee for service with an average premium of $2000 p.a and you charge out @ $100,per hour fee, I’m not sure which client can you can convince to pay 50.0% more.
When you start to work out where the break even point is on Fee for service that equals the 30.0% commission rebate, the premium is $10,000.
I’m not sure how many of those you will come across in your lifetime, never alone in one year.
Advisers today need to write twice as many clients to match when initial commmissions were 100.0% of the first years premiums with a 12 months lapse responsibility.
In case you hadn’t noticed, current contracts are inferior where the client pays much more and gets much less with virtually no product differentiation. Competition between life companies no longer exists because of fewer numbers with a “me too attitude”.
If you think otherwise, Disneyland is alive and well in Australia.
First year premium of $2,000 with full rebate plus 9 hours at $300 per hour = $4,700. First year premium without 30% discount = $2,857. Assume premium indexation of 5% (wouldn’t that be great?). Break even is 3 years. If this client holds their policy for 5 years, they are in front by $886
I haven’t had a client in years who hasn’t reviewed their insurance within 5 years with 90% doing so within 3 years. Particularly with the premium increases that insurers have tried to implement. That review costs another $4,700 (using your figures) which moves your breakeven back a fair distance.
Fine in theory Dacian. But very few clients have the time and attention span and dispassionate logic to accept they are better off paying $4,700 rather than $2,857 upfront for a grudge purchase, when they receive exactly the same product.
It’s only when premiums are over about $10K that upfront costs of the fee for service model become less than the commission model, and clients become more receptive.
As mentioned by others, roughly $10K premium is the magic number when fee for service insurance advice becomes viable for advisers and palatable for clients. But there aren’t enough $10K premium clients around to sustain a viable industry based on fee for service insurance advice.
9 hours to write a risk SOA – what the hell are you doing man, a word template would be 5 x faster than that?
@Dec,
I’m not sure if your first meeting is free but you can’t find out much from a client unless you should spend at least 1-2 hours discussing needs analysis and complete the documentation. Someone has to put together a series of risk recommendations (that is quotes) put it into an SOA, then present to a client.
If you don’t assist the client in completing their insurance application (and I think you should) then there’s time spent there, plus follow time with underwriters, life company administration and medical reports.
If you can do that under 9 hours in every case, I’d be surprised.
I once heard an insurance “adviser” boast they once wrote a $50k insurance premium policy off the back of a 30 minute phone call and never met the client
@WTF,
As a director of an AFSL with several of our advisers earning between $500,000 -$1M p.a, I serious doubt if any would be game enough under any compliance regime to say they wrote a client either new or existing after a 30 minute telephone call and expect to pass an audit by their Licensee or ASIC under those terms.
Sounds like an urban myth or someone doesn’t understand the rules of the game since about the year 2000.
If this was even remotely true, can you imagine when the business invariable “hit the fan” when ASIC takes a look ?
I heard it with my own ears, just about fell of my chair
Back in the 80’and 90’s it happened.
@ Dacian Moses,
I hate to tell you but your figures are wrong !
If the initial premium is $2000, and Nil Commission rebate reduces that initial premium by 30.0% (viz $600) then the client pays to $1,400 to the life company and according to your fee for service rate of $300 per hour =$2700 +$1400 = $4,100 not $2,857 !
If you follow the trend no premium in the last 3-5 years has trended up by 5.0% indexation.
Try putting your hypothesis to work where premiums have increased by 30.0%- 50.0% over that same period.
And it will continue to do so for one very good reason.
The premium pool for new business is shrinking and is being falsely claimed to be increasing of these 30.0%-50% increases on existing business with claims outstripping new business inflows.
My figures are only wrong if you decide to change the meaning of your initial post. Your initial post said that the $2,000 “average premium” was already 30% discounted ($2,000 premium plus advice cost of $2,700 is definitely $4,700). The amount of $2,857 is the first year cost of a premium that is not discounted. Keeping the original scenario and changing premium increases to 30% means break even reduces to less than 3 years. There is no question that the ‘fixed cost’ of advice on small premiums is a big factor to consider, but I’m not sure that 9 hours would need to be spent on advice for a $2,000 total annual premium in the real world.
You also get double the trail so once the policy is on the books it is very profitable
@ Alan,
That’s a myth because if the insurer decides to increase their risk premiums by 30.0% + after 12 months or so, there are not too many clients happy to see that happen, especially when you put a 10 year by year projection into the original SOA quote, even though it says stepped/level premiums illustrated are not guaranteed.
Many start to question the merit of retaining the existing cover.
That leaves the client 2 options, reduce the amount of cover to match their projected original quoted premium or “can” the policy altogether within the 24 months lapse/cancellation period.
Therein lies the current panacea for what’s wrong with the life insurance industry.
Many also start to question the merit of retaining the adviser who recommended such a policy.
It’s another reason so many holistic advisers are getting out of insurance. The behaviour of insurers is souring advisers’ relationships with clients.
@Alan,
Statistically, it used to take 8 years for a policy to remain on the books to be profitable.
Why do you think life companies that are paying out less in commissions but increasing premiums way sooner and much greater than they once did ?
For an adviser, how much are you going to charge a client to settle a claim, no matter what it is and do you think they will be able to afford to pay you ?
I can tell you from experience, if you care about your client at claim time, there is no change out of at least 20 hours of your time to assist.
@ Matt,
One final thing.
Life companies were intent on taking on risk clients at any cost.
It wasn’t low premium dollars that effect their bottom line in profitability, it was poor underwriting practices from the very beginning that blew out their claims book.
You are probably not experienced to know but many large life companies in the past were prepared to take on any client from a large producer without any underwriting at all for the premium income chase.
You’d have to be naive in the extreme to think that those large producers didn’t take advantage of the situation.
The most extreme example of this poor underwriting occured with union super group policies. In order to get the business, some insurers were providing huge auto acceptance limits with no PEC exclusion, even for personal members. Many of the chronic disease support associations were actively encouraging people with significant health issues to sign up with those super funds, and take out the maximum auto accepted insurance amount. TAL’s contract with Australian Super was a particularly ludicrous example, that all current TAL policyholders are probably still paying for.