ROUNDTABLE: The real risk in FoFA

KLIPIN: And what if you write a key-man policy with a hundred grand of premium, should it be fair ‑ is it a reasonable expectation – that someone might make a hundred grand or 110 grand or 120 grand revenue out of it?

So those are a couple of issues that when you look around, you go hey, people are justifiably concerned. If it hit the floor of parliament, people would be outraged by that kind of stuff. The way to do it is just set up a standard within the industry around risk insurance, and that’s this issue around commission levels, around churning, around larger cases.

Pricing stuff consistently I think denies manufacturers the opportunity to compete. They can compete on price, they can compete on services, they can compete on features and benefits. Let’s not deny manufacturers the opportunity to compete, you know. Let’s not legislate this game out of existence.

BROGDEN: Whenever we talk to our members, who are the life insurance industry, bar a couple of very small players, about remuneration, you get everything from “no commissions” to “don’t touch it” and all in between. There is no conformity of opinion in the industry, which makes it very hard. And it’s not even as if there’s 49 per cent for one view and the rest are split up. I mean there’s sort of 10 per cent for [every] view right along the line. And maybe it’s the nature of the industry as well; it’s a closed shop in terms of putting ideas on the table in those areas. It’s quite interesting.

“Yet with that threat hanging over our heads we still don’t have an option B that we can move to in a uniform position. It just doesn’t exist.”

It is interesting that there is no uniformity of opinion in terms of what the future might look like in remuneration, particularly if the government were ‑ and I don’t think they will ‑ just to walk out and ban commissions overnight. Yet with that threat hanging over our heads we still don’t have an option B that we can move to in a uniform position. It just doesn’t exist.

SATILL: You’re right, and that’s a big problem. I think it’s partially because life companies each have their own agenda. And I think, with respect to Tim, and he knows my opinion on this quite clearly, is that you’ve got the four big banks, who are the four largest insurance companies and quite honestly, if risk insurance commissions were banned, I don’t think that they’d be too upset because they have the resources to employ this horde of small, low-salaried advisers.

I’m not saying that they are necessarily for it, except for one, I think, is. But the independents…are now going very strongly into the direct marketing side, and I think it’s because they see, because they are scared of commissions being banned, and they don’t have sales forces. So I think that there’s too many agendas out there.

BROGDEN: But if your position is correct, what that’s saying is that there is no alternative to commissions in directly advised, so let’s get out of that and go to group and direct, which is frightening, which is basically saying we’re entirely redundant on one revenue stream and we have no idea how to replace it if it changes tomorrow.

SATILL: Well, we can’t allow it to change, is the point.

HOYLE: But the second part of the question I wanted to ask about the remuneration issue is how it changes the economics of a business. If commission goes, how do you react? How do you respond? What happens?

SATILL: It’s a killer. You know, we are one of the larger risk specialist practices in the country, to my knowledge. I think we would probably survive. But the average adviser out there I reckon would do ‑‑‑ you guys might know ‑‑‑ what, two new cases a month there? The average Joe, you know, if he were charging a fee, he couldn’t survive. Just couldn’t survive.

HOYLE: Is that right?

COOK: Yeah. It wouldn’t kill my business but I don’t argue the fact that it would have a big impact on practices generally. I think my business is fairly typical. We’ve got a sort of hybrid between holistic financial planning and risk advice, I think about 35, 40 per cent of our revenue last year was from risk advice and we do charge some fees in that area. But the vast majority is commission. It’s the renewal commission from a hybrid contract, some of which I wrote 18 years ago, back in my youth.

Presumably existing income would be grandfathered, I would imagine. But even if it wasn’t, I would survive.

DI CRISTOFORO: Ian, can I pick up something that you said earlier on, because you were talking about the negatives of commission, and Richard was talking about the rate at which commission is paid. I think there’s two possible conversations, and maybe something that’s been fully explored at the FSC end, is that the difficulty that is going to come into play when you talk about institutions is: How much do we pay?

I think the concern around churning is what commission structure or remuneration structure in any framework encourages people to churn? And if there’s a preponderance of upfront, then clearly those people who are predisposed to do so will do so. If there’s a preponderance of hybrid or level, which is what you’re doing, Ian, there’s less of a likelihood because they’re basically building a business in a way that says, “Well, my core function is actually ongoing service to my clients.”

So I mean maybe there is a conversation to have to integrate the two.

We’re either going to have a discussion that gets a rational plan B or it may well be taken out of our hands. If we agree that plan B is a better option then we need to address both things: The mechanism by which it’s sold, as well as the level.