Robert MC Brown says that if planners were trusted more, underinsurance would be much less of a problem.
In 1978 I attended my first life insurance sales conference. It was held in the ballroom of a sparkling new Sydney international hotel and its purpose was to fill the audience with the necessary evangelical zeal to go out there into the marketplace and sell more life insurance policies.
We were told that the Australian public is “chronically under-insured” and that we had a moral obligation to sell them more policies, for which we would be handsomely rewarded both in heaven, and by the payment of (undisclosed) commissions at levels that, these days, would make even the most aggressive financial planner blush with embarrassment.
Times have changed – or have they? In 2010, we’re still being told about the “chronic under-insurance problem”, although this time that “problem” is being trotted out as a justification for allowing insurance sales to continue to attract commissions in the context of the proposed Future of Financial Advice legislation.
“Life insurance is different,” we’re told. “It’s sold, not bought, so the only way to fix the under-insurance problem is to allow advisers to continue to receive commissions.” Of course, the fatal flaw with this analysis is that life insurance has been sold exclusively through the commission model since Adam was a boy; and the Australian public is still under-insured! Surely, therefore, commission is not the answer.
‘Life insurance has been sold exclusively through the commission model’
Perhaps, a strong clue to solving the “problem” (if it is a problem at all), lies in an understanding of the industry’s own questionable practices over the past thirty years. Could it be that the public doesn’t trust life insurance companies and their intermediaries?
Let’s take an uncomfortable journey and examine some lowlights of the industry in modern times. The 1980s were boom years for life insurance selling in Australia (which is strange, given the abolition of state and federal death duties in the late 1970s). Nevertheless, throughout that decade, an army of high pressure sales agents aggressively sold “whole of life” insurance policies to an unlimited supply of prospects who were attracted by promises of big income tax deductions for their businesses and capital guaranteed returns. This was the “heyday” of “split dollar agreements” and the good times were rolling. The widespread successes of sales agents were rewarded with huge undisclosed commissions and volume bonuses (up to 250 per cent in some cases).
In addition to lucrative commission structures, these were the days of low/no interest/no FBT Agency Development Loans (ADLs), during which time tens of millions of dollars were literally thrown at “big producers” by otherwise conservative life insurance companies who were at war over market share. In most cases, their mutual status and their lack of accountability to shareholders made it possible to engage in practices that would now be viewed as an irresponsible, if not illegal, use of shareholders’ funds.
The “big producers” were courted on the basis of “whatever it takes” to sign them up to an agency agreement. Many accountants were offered ADLs because it was correctly assumed that the profession was well placed to convince clients to buy. A minority of accountants couldn’t resist the temptation, selling out their independence in return for a pot of easy money that could be employed to buy a building or to pay off the working capital overdraft. And some of the more colourful (and less astute) sales agents were understood to have ploughed their loans into fast cars and luxury yachts.
Such was the strong sense of ego-driven competition surrounding who could win the biggest ADLs, that there were weekly stories in the financial media about who had extracted how much out of whom. The main qualification criterion for an ADL was simple. Sell lots of “whole of life” insurance (or even promise to do so), and you too could be the recipient of millions of dollars in loans – most of which were written with such in adequate security as to make the US sub-prime market look positively responsible.
The best way to describe the life insurance industry in the 1980s is to say it was in a state of frenzy. Market share was king, financial disciplines appeared to matter little, and if consumers’ interests were served, that was a happy coincidence.
And then the sales frenzy subsided. The 1987 stockmarket crash, followed closely by the “recession we had to have” in the early 1990s, acted to ensure that the sales of “whole of life” insurance policies ceased. The recession meant that cash-starved businesses and individuals who should never have been sold these policies in the first place could no longer afford to pay the hefty premiums ($100,000 per annum was common).
To make matters worse, many of the policies were funded through bank overdrafts on which agents were receiving trailing commissions. As a result, the clients suffered termination penalties (but still owed the bank), the agents suffered substantial commission write-backs (which curtailed their impressive lifestyles) and the insurance companies wondered how to recover the ADLs and their tarnished reputations.
At much the same time, compulsory superannuation was introduced, providing for most people a minimum amount of life insurance cover and an excuse for not buying any more.
The fall of the life insurance agent coincided with the rise of the financial planner. Not wishing to be tainted by the poor image of life insurance selling, many former insurance agents found new opportunities in the world of managed investment funds, and life insurance was pretty much ignored as the province of the old “white shoe brigade”.
That is, until the global financial crisis, when financial planners suffered a crisis of their own. No one wanted to buy managed funds. So the next best thing was to switch the selling focus to “risk” – that is, to the selling of life insurance policies. And creating the impression that Australia has a “chronic under-insurance problem” wouldn’t do that campaign any harm at all.
I’m not suggesting the Australian community doesn’t need more life insurance. I’ve heard those claims throughout my career and I’m not in a position to dispute them, irrespective of the somewhat conflicted sources from which much of the “research data” comes. My point is that continuing with commission-based remuneration is clearly not the answer.
In the recent words of a well-established financial planner who understands the point: “Insurance is the next frontier in the battle to give Australian consumers access to commission-free, independent advice and is also the key to unlocking the chronic under-insurance problem in Australia.
“Wiping out commissions on insurance is a sure fire way to reduce the cost of personal insurance as well as to encourage people to seek advice on how best to protect their income and their family, without paying excessive premiums.
“Every person will have a different insurance need….for instance, as an individual moves through life and their debts are repaid, their adviser should consider reducing their insurance cover, but often this creates a conflict of interest for the adviser as it reduces the commissions on the insured amount.
“When there isn’t the conflict of commission, clients can feel confident knowing that we will find the best and most affordable outcome for them….the fee for service model should be extended to insurance.”
Therefore, to suggest that insurance should get a “special carve-out” from the FoFA legislation is unjustified and won’t solve the “problem”. The solution lies in trust. Not the kind of (mis)trust that comes with commissions, but the kind of unqualified trust that comes with a true “fee for service”.
