Clever commissions and incentives fall foul of the Act

In terms of the Long-Term Insurance Act 1998 an insurer may not pay more than 7.5% of the annual premium in commission on a single premium life policy. The Act provides for the commission amount to increase to 22.5% of annual premium if the financial services provider performs certain administrative duties for the insurer.

It is not clear what duties qualify as administrative, though the Act defines administrative work in a 'group scheme' context as work done "in connection with the handling of enquiries, maintaining administrative records and the receipt and processing of claims." This supports the notion that a financial services company would have to do more than simply complete and submit an application form on behalf of the insurer.

The Act also explicitly outlaws the use of non-monetary gifts or incentives as reward for selling insurance policies. In the section titled, Limitation on Remuneration to Intermediaries, the Act states: "No consideration shall, directly or indirectly, be provided to, or accepted by or on behalf of, an independent intermediary for rendering services as an intermediary, otherwise than by way of the payment of commission in monetary form."

The 'common practice' copout

This quick look at the Long-Term Insurance Act was prompted by this weekend's Personal Finance expos of Regent Life's past commission practices. Regent Life is a subsidiary of Imperial Holdings, and has, according to Personal Finance's, contravened a number of Acts and regulations in its attempts to boost the sale of life insurance policies. The cases in question include credit life policies sold through various Imperial Holdings subsidiaries to motor vehicle purchasers.

Practices included exceeding the maximum allowed commission payment of 22.5% of the first year's premiums and the use of gift vouchers as incentives for selling Regent Life policies. Commission payments in excess of 22.5% were simply invoiced back to Regent Life as service fees. Another serious practice, today banned by the National Credit Act, was to include the insurance premiums in the vehicle finance, allowing the finance company to charge interest on the insurance premiums for the life of the credit agreement.

Regent Life Managing Director, Nazeer Hoosen was adamant that the practices mentioned by were stamped out by the end of October 2005, that he had reported Regent Life's shortcomings in handling commissions to the LOA and FSB in 2003 and that he had implemented steps to deal with the problems as soon as he became aware of them. Perhaps more alarming is Hoosen's suggestion that boosting commission payments was common practice in the industry, and that not following said practice would result in losing business.

Has the 'secret profit' saga taught the industry nothing?

Another question raised by during his review of Regent Life's commission practices is: What use is regulation if captains of industry take it upon themselves to create workarounds for the intended outcome of the regulation? And why does industry continue to use the 'common practice' copout when found guilty of wrongdoing.

Creative accounting has long been used by corporations to paint a rosier picture of their financial affairs. Here we have a situation where an insurance company decides that they prefer not to comply with the legal stipulation of a 22.5% commission. To get around the requirements they simply request the company receiving the excess commission to invoice them for 'database usage' or some other token service. This is against the sprit of the law in anyone's books.

Readers will remember that Alexander Forbes and other pension fund administrators who made secret profits through bulking were exposed a while back. It will be interesting to see what happens after initial investigation into these commission practices. Perhaps this article will lead to the exposure of a number of similarly frightening practices in the short and long-term insurance industries.

Nowhere to hide

The Financial Service Board has a huge task at hand. Apart from the misrepresentations mentioned above, they also have to stop institutions who believe their licenses afford them the right to market and sell insurance products by whatever means possible. We note with alarm the number of multi-level marketing structures in place to sell insurance policies. Companies selling insurance in this fashion are in blatant contravention of the FAIS Act, with the final salesperson neither equipped to sell insurance nor an approved financial representative.

We are well into the twenty first century. Financial records are fully computerised and it is near impossible to hide financial wrongdoing from a thorough forensic audit. In this light it amazes us that people are still prepared to attempt to hide or disguise financial transactions. These attempts will catch up with them when the financial regulators finally get round to undertaking complete investigations.

Editor's thoughts:
Commissions and incentives are a vital part of any insurance sales channel. For years, insurance companies and product providers used an array of incentives and commissions to grow market share and retain the best sales staff. Regulators have recently clamped down on excessive commissions in an attempt to reduce insurance costs. Do you think that a sales incentive paid in addition to the maximum commission is acceptable in terms of the Act? Send your comments to [email protected]