The future of risk commission
Hot on the heels of the recent changes in savings commission, the possibility of a change in risk commission received sprinkles of media attention late last year.
Possible reasons mentioned for changing the commission structure on risk policies include: better value for money for the policyholder, to prevent the replacement (churning) of risk products, and perceived high actual levels of commission paid.
Momentum, however, believes that a move from upfront commission to as-and-when commission may not be the appropriate solution. On risk policies, much of the work is done upfront, and this change will mainly be to the detriment of the financial advisor, without providing meaningful benefit for the policyholders, and not effectively addressing the issue of churn in the industry. This article sets out to position Momentum’s view.
Improved value
The starting point fuelling most commission debates is that policyholders should receive better value on their insurance products if the commission regulations are changed. As mentioned before, these perceptions may be driven by the recent commission review on savings products. However, it is important to note that the new-generation risk products do not have any fund values that the client can access - pure risk benefits compete in the defined benefit space. This is very different to savings products where the commission payments have a direct impact on the fund value, as well as early termination values – neither of which is applicable to pure risk products.
The absolute level of commission payments influences the premium paid on a pure risk product, and if it reduces, clients will receive better value for money. However, the impact of paying upfront commission is far less significant than one would expect. Changing the commission payments on risk products from an upfront payment to an equivalent as-and-when payment will reduce the cost of risk benefits somewhat. The cost saving is, however, not as high as one might expect - paying a comparable level of as-and-when commission will only reduce the premium by about 2% to 3%.
Replacement of benefits
On the flip side, changing the commission payments on risk products to as-and-when payments should reduce the level of replacement of benefits in the market. There will be less of an incentive for a financial advisor to replace his own business. The change, however, will not prevent another financial advisor from replacing the business.
The challenge in the South African market is that new entrants in the financial planning industry are dependent on upfront commission to enable them to establish themselves in the industry. The FAIS Act was introduced to enhance the professional standards of financial planning in the industry, but it also contributed to an increased cost of entering the financial planning industry. Moving from upfront commission to as-and-when commission will create another barrier for entry, making the recruitment of new advisors, unless financed, almost impossible.
Momentum believes that this potential loss of new business due to the reduced incentive to write new business must be weighed up against the perceived gain that a change in commission may bring.
Alternative
Another alternative could be to introduce a longer commission clawback period. This could reduce the replacement of benefits in the market somewhat, especially when considering the replacement of a financial advisor’s existing policies by himself. As such, it could introduce more sustainability to the risk industry.
However, once again, a longer commission clawback period would not prevent the replacement of the existing policies by another financial advisor, resulting in the penalisation of the financial advisor whose policies are being replaced. The financial advisor replacing the policies is still better off.
The impact of introducing a longer clawback period should therefore also be debated carefully.
Finding the right balance
As with any debate, one needs to be sensitive to the needs of all stakeholders and it is important that we find the right balance between their respective interests. In this regard, any commission dispensation must deliver a positive value-proposition to financial advisors, policyholders and insurance companies, and needs to create a platform for business sustainability.
This topic is indeed a sensitive one, and Momentum recognises and supports the very integral role financial advisors play in making a success of the financial industry as we know it.
