UK regulators back down on commission plan

07 April 2009 Gareth Stokes

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


Added by Arthur, 08 Apr 2009
Little thought has been given to the fact that we pay upfront for the costs which we incur in putting a policy on the books, such as petrol, telephone calls, secretaries, etc, all of which are directly paid by the broker. We then receive commission in arrears and are funding the upfront costs from our own overdraft. One day the broker must leave the industry, and what happens to the ongoing commission that he has earnt? It will be "serviced" by some other broker who has not incurred the upfront costs. So in short it will pay to be unscrupulous and just switch the servicing of clients.
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Added by Craig A, 08 Apr 2009
Maybe it's time to start charging a fee for the work we do. If the client is prepared to pay for a retirement analysis, we can go ahead and write the policy. We don't take any commission, but every time the client requires info or advice we bill them, just like a lawyer. Do you think the client will pay for this? Probably not because we have been doing this for nothing (from the client's pocket) and the insurers have paid the commission. The client doesn't realize that our commission is actually a long term loan. Commission is usually paid for selling a product and not taken back two years later.
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Added by Basie Pretorius, 07 Apr 2009
More than this what can be said "You cannot legislate the poor into freedom by legislating the wealthy out of freedom. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is about the end of any nation. You cannot multiply wealth by dividing it." ~~~ The late Dr. Adrian Rogers , 1931 to 2005 ~~~
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Added by Phil , 07 Apr 2009
This impact is significant and I forsee many brokerages (particularly those servicing the middle market where com yield is lower and lapses higher) closing. It is great to have regulation that protects the customer but the reality is that the bread and butter for most brokers is now gone. Take away 50% of any businesses cashflow and you are left with a business crisis and no amount of rhetoric can mitigate. Put lipstick on a pig and its still a pig.
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Added by Andre Erlank, 07 Apr 2009
Unfortunately I have come to the conclusion that a lot of my colleagues do not fully appreciate the depth of the cash flow problem that has presented itself trough the new commission legislation. The first year commission is only marginally down by +/- 16%. The full impact will unfortunately only fully manifest itself in 13 months time, once you realize and feel it in your budget and escalating operating cost that your second year commission is reduced by 100% to nothing. Even with the service commission, if the current time value of money or inflation is taken into account the advisor is on the losing side. I it also send shivers down my neck if I think of the unscrupulous amongst us and the way they are going to handle this signing over of the service commissions…
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Added by Dries, 07 Apr 2009
The LOA said: "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. I say this is total nonsense, South Africa people must stop copying other countries like America etc. They will pay a painfull lesson, whe must do our own thinking. The LOA make a big mistake by reducing commission, people in SA need to save on shortterm and for retirement, but.. . people need the Advisors to guide them, I wont cell a product which I am not paid for...?? Look at the Advisors cost to do marketing, ph. cost, petrol cost, etc. Most of the clients expect you the Advisor to come and visit him, he dont think he/she have a need, I the Advisor have to show him the need , for him/her to save or be protected,to do a sale and to live.. but its up to the Insurance Company to perform with the investment, not the Advisor, so why penel the Advisor.. . tell the LOA to go and sell a policy or 2 to survive, I bet you they cant...??They will die of hunger.... They must think furter..??
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Added by Tim Jones, 07 Apr 2009
There is no doubt that the new regulations are having an effect on our cashflow and therefore our sustainability. One result will be that formerlly independent advisors will be forced to consider becoming tied agents in order either earn an overrider or have their admin costs subsidised. This will lead to a loss of objectivity and increased churning which is surely not to the industry's and consumer's benefit!
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