The changing face of life industry commissions
Toward the end of last week, the National Treasury released their “Draft regulations dealing with commission structures and minimum protection for contractual savings products in the life insurance industry.” The document is the culmination of a series of discussions with industry players following the 2006 National Treasury discussion paper: “Contractual Savings in the Life Insurance Industry.”
According to treasury, this draft “forms the next phase of the SOI, designed to further improve the cost effectiveness and consumer protection provided by contractual savings products written in the future. These reforms deal specifically with changes to the structure of commission payable on these products, as well as enhanced minimum early termination values.” Let’s take a quick look at what Treasury proposes and what these changes mean for the intermediary and insurer.
The upfront – ongoing mix has been announced
Industry players are now closer to knowing how the mix of up-front and ongoing commissions will be implemented. The Life Offices’ Association (LOA) issued this statement, which summarises the proposed changes: “In terms of the new draft regulations, intermediaries will receive maximum commission of 5% on endowment and retirement annuity (RA) fund policy premiums, split into a 2.5% upfront component and a 2.5% ongoing service commission, payable monthly.”
Treasury’s proposal includes changes to the maximum commission payable on a number of savings products. For multiple premium policies the maximum is 5% of each premium. For single premium policies this maximum is 3% with some exceptions. For example, “The maximum commission that may be paid in respect of a single premium policy, of which the policy benefit is an immediate annuity, is an amount equal to 1.5% of the premium…” The same 1.5% maximum applies to a fund member policy that funds a retirement annuity or a fund member policy that is a transfer that does not fund a retirement annuity. A fund member policy which funds a retirement annuity upon a transfer will receive no commission. In other words, there will be no commission payable on the investment value of a switch from one RA to another! An example of advice without a fee!
Apart from changes to the commission structures, intermediaries are faced with another serious challenge. The period during which commission payments will be reversed (due to a policy being terminated) will increase from two to five years. The regulations are aimed at preventing intermediary miss-selling; but may be a step too far. It would be interesting to see comprehensive statistics on the number of early termination in the two to five year time frame...
Consumers to decide intermediary’s fate
There are two other amendments which will interest financial intermediaries. The first is Treasury’s intention to prohibit “the payment of up-front commission if an existing contractual savings product is replaced by another such product…” This move should discourage ‘churning’ – and as such will probably be welcomed by all industry stakeholders. Perhaps the only concern is that no time limit is mentioned… In other words, if a contractual savings product has been in place for a number of years it may be in the consumer’s interest to replace it with a more appropriate product – yet the adviser will receive no incentive for offering the advice.
The second amendment relates to the consumer’s right to determine whether commission is paid on an ongoing basis to the intermediary who sold the policy. If the draft regulations are implemented without modification then a policyholder can “at any time during the life of an investment policy instruct the insurer in writing to stop paying further discounted and undiscounted commission to an independent intermediary or a representative…” Additional requirements are that the insurer will have to pay ongoing commissions to another independent intermediary stipulated by the policyholder (though such intermediary must have a contract to render services as an intermediary with the insurer of the policy in question).
Is this an appropriate decision to put in the hands of a policyholder? Allowing the policyholder to contract through one party – and then move the remuneration for that contract to another will surely be open to abuse. It will be impossible to ensure that such instructions occur only when consumers are genuinely unhappy with the performance of their financial advisers! LUASA issued this statement: “The draft regulations are in line with what was expected and reported to members over the past few months. The right of a policyholder to redirect payment of commissions was not entirely unexpected as it was raised by National Treasury; but inclusion in the regulations is now a potential reality and will require careful consideration of the pros and cons.”
Further enhancements to early termination values
In line with decisions reached in the Statement of Intent (a joint statement of the LOA and National Treasury) more changes have been made to the penalties for early terminations. The maximum charge has been lowered from the 30% to 35% of investment value applied to existing policies to a flat 15%. This will apply to policies started from 1 August 2008. Treasury reveal that “The insurer may, in addition to casual event charges, deduct in respect of any causal event, either during or after the charge term, an administration charge of not more than R300.”
The insurer will have to communicate (in writing) the early termination charges to the policyholder within 30 days of the application date. A reminder of the conditions must be communicated annually.
Editor’s thoughts:
Treasury’s draft amendments contain a number of items which will have a significant impact on the financial intermediary going forward. While there has been enough time to get used to the idea of upfront and ongoing commissions, the extended commission ‘claw back’ period and policyholder commission redirection clauses could cause additional hardship. What are your views on the impact of the draft regulations on your practice? Send your comments to [email protected] or add them below.
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