Lower commissions would slash insurance cost, report says
Life insurance is $100 million a year more expensive than it needs to be, because of commissions paid to independent insurance advisers, a divisive new report claims.
The report, by actuarial firm Melville Jessup Weaver (MJW), was commissioned by the Financial Services Council.
It says analysis shows high upfront commissions paid to advisers when they sell a new policy are driving them to replace policies more frequently than they should.
In some cases, advisers earn a one-off fee of up to 200 per cent of the annual premiums their clients pay when they place new business.
The report says about 10 per cent of banks' policies are replacement policies but up to half of advisers' sales are.
The report claims inappropriate policy replacement activity adds up to 15 per cent a year in industry costs every year.
"This equates to over $100 million every year in excess cost to customers and to the economy of New Zealand."
The issue of commission is already in the spotlight because the Financial Advisers Act, which governs the sector, is up for review.
One of the authors of the MJW report, David Chamberlain, said New Zealand was an outlier in international terms when it came to adviser commissions.
"Advisers are looking for every reason to move customer from one insurer to another. We don't know what's good or bad in many cases, it can be very hard to determine.
"We are trying to deal with the underlying cause, which we think is the high initial commissions. If we take out the underlying incentive it should slow the rate of replacement business, that should reduce costs to the industry and should benefit consumers and ultimately advisers because it would be a stronger industry."
The report recommends that advisers' commission be restricted to 50 per cent of annual premiums upfront, and then 20 per cent a year on an ongoing basis.
That is up from about 7.5 per cent a year at present.
No commission would be allowed on policies replaced within seven years, unless there was an increase in premiums.
It wants advisers to disclose their actual commission to clients and tell them what their premiums would be without it.
"A high upfront commission paid on a successful sale incentivises a consultant to firstly make a sale, and to sell as much as they can.
"So we can end up with inappropriate sales and inappropriate levels of cover (too high). A manifestation of this conflict of interest is that personal risk insurance cover is more expensive than it needs to be and can be compromised by inappropriate policy replacement," the report says.
The report has proved divisive among the insurance sector. AIA, Asteron Life and Partners Life have tendered their resignations from the FSC over the report.
Partners Life managing director Naomi Ballantyne said there was no supporting evidence for the data it used. "They've guessed."
She said if advisers were replacing policies with something better, that should be encouraged. "
[Advisers] should be actively reviewing clients' policies and making sure they stay relevant. Even if it is 50 per cent [of business that is replacement] if it's in the clients' interests, what is the problem with that?"
Ballantyne said advisers could not operate independently on the commission structure suggested.
"I would have to step in and pick up some of the marketing costs. And if I've got that fixed cost I am going to want to know where the business is being placed, so what it does is it influences their ability to be independent."
Rod Severn, chief executive of the Professional Advisers Association, said he agreed disclosure should be simplified and there was a need for an industry-wide policy around replacement business.
But he said advisers were being unfairly targeted.
"The industry functions as a whole - therefore singling out one channel does not accurately represent the role and obligations of all parties in evolving the industry in the interest of consumers.
"The whole industry must work together – providers and advisers - to clearly define issues and promote change in the interests of consumers. How consumers access advice and who pays for that advice is not a new subject, and one that is high on the agenda for the advice industry," he said.
"The formula for the current remuneration model needs to provide more clarity for consumers. But reducing remuneration by up to 75 per cent would decimate the industry and is not a sustainable model and would underpin the chronic underinsurance already present in New Zealand."
FSC chief executive Peter Neilson said the report would inform some of the debate around the Financial Advisers Act review, without being a formal submission from his organisation.
Written by Susan Edmunds. First appeared on Stuff.co.nz.
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