A fresh take on long-term insurance commissions
In their April 2010 Treating Customers Fairly (TCF) discussion document the Financial Services Board (FSB) observes that the upfront commission structure in long-term insurance may result in over-eagerness [by intermediaries] to sell inappropriate policies, such as where a client clearly cannot sustain the premium contributions… We’d argue that since the introduction of the FAIS Act, which clearly sets out the roles, obligations and relationships between product provider, broker and client, such incidents are rare. Nevertheless, broker commission remains an emotive issue.
You need only mention “financial intermediary” and “up front commissions” in the same sentence to trigger a heated debate. And although the touchy topic of intermediary remuneration has gone quiet of late, there’s little doubt the regulator will eventually “convince” the life industry to make concessions or changes to the way it remunerates those selling life, dread disease and disability products. The challenge to the life industry is to get the jump on the regulator and introduce sensible alternatives to up front commission without being compelled to do so. Altrisk could be on the right path with its recently announced ongoing commission offer. The company believes this alternative to traditional commission will assist brokers in tackling the multiple headwinds they face, including slow economic growth, tight cash flow, premium affordability and continued regulatory pressure.
A smarter way of paying life commissions
As things stand, life companies remunerate their brokers by one of two methods. The most common is up front commission, whereby the intermediary receives an agreed percentage of the annual premium multiplied by the policy term. The first amount is paid at the point that the policy is issued, with another third of the initial amount paid at the first policy renewal. “Each increase in the policy that arises from a future voluntary escalation or premium escalation works on the same basis – some up front and then (a year later) some renewal,” says Ryan Chegwidden, an actuary at Altrisk. An alternative payment solution, known in the industry as spread commission, allows for the broker to receive the up front commission by way of instalments over 12 or 24 months. In either case the commissions paid are subject to “claw back” – as specified in the Long-term Insurance Act – should the policyholder lapse or surrender the policy.
Altrisk’s ongoing commission introduces greater flexibility for the broker and a small saving for the client. “With this solution we specify a percentage of the premium that will get paid to the broker for the life of the contract – up to 50 years,” says Chegwidden. The fixed percentage is applied to the monthly premium and in the event there is an escalation on anniversary, or an improvement in the benefits, the percentage is simply applied to the client’s new instalment. Any savings generated by the broker’s ongoing commission choice will be passed to the consumer. The extent of the saving depends on the age of the client at inception of the policy, premium pattern applied (increasing or level), nature of benefits and the “mix” of commission chosen by the advisor. It is important to note that regardless of the solution, the client will never pay more in commission than in the traditional 100% up front model.
“Ongoing commission allows advisors to build an annuity-based risk product business that has a saleable value and to better manage claw back risks,” explains Craig Harding, managing director of Altrisk. The option is available for new business across the Altrisk product range. How does it work? “In our quotation programme the broker can choose a mix of up front and ongoing commissions,” says Chegwidden. So, for example, the broker could select 50% up front and 7.5% as an ongoing commission… On a large policy the broker might choose to take smaller up front and more ongoing commission, and the opposite on a small policy. “The real benefit is that this choice is offered at policy level – the broker chooses the commission mix on each policy and not at contract level,” he says.
Sounds great – but will the regulator like it?
We asked Chegwidden whether their solution “gelled” with the FSB’s latest thinking on life commissions. He believes any regulatory intervention in the life space will focus on spreading the intermediaries’ earnings over time and thereby encourage an ongoing relationship between intermediary and client. “I can’t see future regulatory intervention being anything other than that – because such changes will better suit the relationship between the broker and the client as envisaged by the FAIS Act,” he adds.
In any event, Altrisk developed its ongoing commission concept with due consideration for legal and compliance issues. Chegwidden concludes: “We are very comfortable that ongoing commission meets all legal requirements and are quite happy to have both the legal and moral debate… We are providing an improved deal for both broker and client, so it’s unlikely we will attract any regulatory attention.”
Editor’s thoughts: Altrisk’s ongoing commission model is essentially about broker choice… The quantum of commission is unchanged, but the broker has greater control over the timing of the remuneration. How would you prefer to be paid – up front or ongoing? Please add your comment below, or send it to gareth@fanews.co.za
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