UK regulators back down on commission plan
We’re sure there are many local insurance brokers who wish South African regulators would follow their international peers when it comes to insurance commissions. The UK’s Financial Services Authority (FSA) announced last Thursday that it would adopt industry guidelines “to govern conflicts of interest, disclosure and transparency within the commercial insurance broking sector.” But it wouldn’t force mandatory commission disclosure on UK-based insurance brokers. Why was the decision taken?
Before we answer this question we need to determine why the FSA thought commission disclosure was a good idea. The regulator considered the move because it felt it could “improve transparency around intermediaries’ remuneration and services.” Sense prevailed when the FSA chose instead to issue industry guidance. Insurance brokers will be ‘kept in line’ by codes of practice generated by industry bodies. According to Eric Galbraith, British Insurance Brokers’ Association chief executive, “commercial customers should expect to receive disclosures that are clear and accurate and industry guidance should play an important part in helping [brokers] achieve this.”
SA life commission regulations kicked off in January 2009
Intermediaries selling long-term insurance products in South Africa probably wish local regulators had taken a similar soft stance. But it was not to be. In September 2008 regulation on Commission and Early Termination Values was introduced by way of amendments to the Long-term Insurance Act. These changes went live on 1 January 2009. The new sections apply only to long-term industry savings policies such as endowments and retirement annuities. Risk policies such as life and disability policies retain their existing commission structures.
At the time, Life Offices’ Association (LOA) chief executive Gerhard Joubert welcomed the regulations. He said they were essential to create a balance between upfront and as-and-when commission. “We believe that the new commission model is fair to the intermediary while at the same time ensuring the sustainability of the life industry, and above all, ensuring that policyholders receive a fair deal,” he said. The LOA has since merged with the Associations for Savings and Investments SA (ASISA).
It’s worth noting that the commission changes go hand-in-hand with changes to early termination values. These changes were inspired by emerging trends in the long-term savings industry, particularly where working habits were concerned. Joubert observed that “increased job mobility, uncertainty of income and shorter-term investment time horizons” necessitated a re-think of products with high upfront costs (mainly comprised of intermediary commissions).
Half upfront; half over the policy term
“In terms of the new regulations, only half of the commission due to the intermediary will be paid upfront, while the other half will be paid over the term of the policy to encourage ongoing service. Intermediaries will receive maximum commission of 5% on a [recurring premium] endowment and retirement annuities, split into a 2.5% upfront component and a 2.5% ongoing service commission, payable monthly. The upfront commission portion will be discounted at 6% per annum.” This differs from the ‘old’ arrangement wherein all commissions were paid at the beginning of the first and second years of the policy life.
The regulatory amendments also give the policyholder unprecedented power where commissions are concerned. In its letter on the new regulations, Sanlam says the policyholder may instruct the insurer to stop paying further commission to the introducing intermediary “provided that the policyholder also instructs the insurer to pay the commission, or a portion thereof to another intermediary who has a contract with the insurer, or who acts as a representative of the insurer.” It’s going to be interesting to see how this provision plays out in the months and years ahead.
Editor’s thoughts: The new Commission and Early Termination Value for endowments and retirement annuities have been in place for three months now. Although it’s too early to know how significant the impact will be on intermediary businesses going forward, we expect most intermediaries have a feel for the restriction these changes will place on their income streams. We’d love to hear from you about how these amendments have affected your business on a practical level. Add your comments below, or send them to gareth@fanews.co.za
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