Professional Planner/CommInsure roundtable discusses the dangers posed to the industry if a workable alternative cannot be found to the FoFA proposal to ban risk commissons.
ROUND TABLE PARTICIPANTS:
JOHN BROGDEN, chief executive, Financial Services Council
TIM BROWNE, general manager – retail advice, CommInsure
GREG COOK, managing director, Eureka Financial Group
DANTE DE GORI, general manager -policy & government relations, Financial Planning Association of Australia
RICK DI CRISTOFORO, managing director, Matrix Planning Solutions
SIMON HOYLE, editor, Professional Planner
RICHARD KLIPIN, chief executive, Association of Financial Advisors
IAN SATILL, direction, Special Risk Manager
HOYLE: If we agree that under-insurance is an issue, and that the cost for the Government of under-insurance is an issue, it follows then that the ability of advisers to provide advice and to sell risk products efficiently and profitably is also critical. That’s how it’s got to be done. So you look at the proposals in FoFA, and the one in particular about abolishing commission and you say, “Right, first of all, what conflict in the insurance business are they looking to abolish by getting rid of commissions? Where does the conflict happen?” – because they’re talking about conflicting remunerations being the thing they have to get rid of. What conflict in the risk business are they supposedly addressing?
And secondly, how would it affect the economics of an advice business? How would you have to respond if commission were to be outlawed?
DE GORI: That’s a great point about, in terms of, what would they be achieving if they get rid of commissions. What are they actually trying to achieve and will they achieve it? Because it’s our experience that there is no real evidence of mis-selling in terms of insurance.
I mean there is the question of churning, the perceived nature of churning because of the commission structure. Again, there is very little evidence of that and I think a lot of the product manufacturers have done a great lot of work in terms of trying to stop that, in terms of dealing with those advisers that are known to be churning. And I think that there is that perception, however.
The FPA’s position, of course, is to continue to support commissions under insurance and the reason for that is because there is no obvious mis-selling, and also there are a lot of risks by removing commissions.
I mean, that the commissions that are provided to risk advisers support the whole function from end to end. And then if you start removing that and charging clients in order to have all those different services provided, you may run the risk of obviously not having people actually provide the claim support at the end – increasing the claims, increasing disputes.
And also the fact that people won’t get insurance cover in the first place.
If you don’t have a commission structure to support that process, the planners then have a commercial risk, which I think the guys here can speak to more than I, about the fact that if a proposal doesn’t get through, who pays you for that whole process? You still have to go through the application processing, seeing the client, dealing with the underwriters, getting medical applications done, et cetera.
So there’s a real risk there, I think, and so therefore we see a lot more negatives than positives in removing commissions and to be quite fair, we don’t know what the actual benefit is of removing commission, what they’re actually trying to achieve.
SATILL: I think the conflict that they’re trying to get rid of is the differing commissions. So there is conflict if you’re seen to be selecting the highest-growth commission going around. That’s easily fixed.
But just if I may digress slightly and address Dante’s comments, because I’m not on the manufacturing side, but I think that if you say that there’s not much evidence of churning, I don’t think we’re in the same industry – because that is a big problem in our industry. We see it from the outside looking in, as an adviser. Often we see horrific stories, where advisers are churning, and what’s happened is that there might have been some medical condition happen between two events, and clients don’t get paid. So it’s a horrific problem and it’s something that the manufacturers can fix very easily. That’s my opinion on that.
I’m originally from South Africa, which has always been a leader, if not the leader, in the world of life insurance. And about 22 years ago when I left the country it already had standardised commissions for many, many years and it worked perfectly and probably continues to work.
BROGDEN: Are they industry regulated or government regulated?
SATILL: Not sure, but it was regulated. From memory, I think it was about two-and-a-half or three per cent of the premium times the term. Simple as that. No matter where you placed the business – so the only difference in the dollars was the fact that if, obviously Company A’s premium was higher, you were going to earn more. But I mean, you know, I don’t think anybody’s going to sell the highest premium in order to earn the most. But the rate of commission was standardised, absolutely standardised. There was little, if any, churning. And that’s a simple solution.
HOYLE: Is it simple?
SATILL: Absolutely.
HOYLE: Who’s going to say what the level should be?
SATILL: Well, it doesn’t matter. As long as the level is reasonable and sufficient for us to continue to run our businesses. You know, today every insurance company offers, to my knowledge, generally three rates of commission. They offer an upfront, they offer a level and they offer a hybrid. Some of them offer more than one hybrid.
We write 98 per cent of our business in our practice on a hybrid basis, only because level is not high enough for us to sort of make a living. But the reason that we write it on hybrids is because of the fact that we don’t churn; we just do not churn. The ongoing commission on a hybrid is higher than that on an upfront, and we are building a business, I hope, that the Government doesn’t take away, and that’s a business based on an ongoing income stream. We need that income stream in order to provide our clients with an ongoing service and a high quality service.
I personally think that those businesses that are continuing to write the majority of their business on an upfront basis either have very high standards of living, and therefore need the money for some reason, or churn it. And I don’t believe that you’re right, by the way, that the insurance companies are doing anything about those churners. I don’t think that they’re not doing business with them. I think that they still are courting them.
BROWNE: I know for a fact that CommInsure have taken action against churners. However, I think the issue which has been raised here is the standardisation of commissions, which has been raised by a number of people. The challenge there is that if we were to look at standardising, we need to be very careful that it’s not perceived by consumer groups and by regulators as price collusion.
SATILL: But it’s not. The price is different; it’s just the commission.
BROWNE: I understand that. I’ve made it very clear that it’s perception. I see that there is an opportunity to work with industry groups in collaboration with regulators or the ACCC to have this conversation at some point in time. However, for us to look at doing it autonomously, without a collaborative effort with government and consumer groups, we just need to be cautious.
KLIPIN: What’s quite clear is that there are two or three issues when people look around the insurance market. One is that some of the big writers will move some of their book, they might move all the book, they might move some big cases, and that’s the churning issue. And there’s a very strong regulatory reason why you may want to do that; and you know with all the innovation we’ve had in the market place in the last five years, there are better products and services out now than there were five years ago. So why wouldn’t you want to help people benefit from that?
The other issue is how do you get the manufacturers cooperating so that you can have your “hit list”; because if we turn off the tapes and just ask the question, “Who are the culprits?”, with a few other people in the room it wouldn’t be too hard to figure who they are, and you can then take action if you want.
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.
SATILL: On the large-case scenario, the way that the South African system works is that doesn’t happen, or almost doesn’t happen, and the reason is because as I said, the commission there, at that stage, was three per cent times the term. Invariably, you’ll find that the hundred grand case is an older life, so it could be 55 years old. So it’ll be a 10-year term, times three per cent. You’re only going to earn 30 per cent, not 100 per cent. So it doesn’t happen as much.
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.
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 advised [provision of risk products], so let’s get out of that and go to group and direct, which is frightening, which is basically saying we’re entirely dependant 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.
CHRISTOFORO: 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.
HOYLE: Well, we’ve got Richard, John and Dante here representing three key bodies. What work are you guys doing, what work could you guys put your heads together and do on this “Plan B”?
BROGDEN: Well, internally we’re doing some work on a mirror image of the member’s super chart. We’re looking at a member life charter with respect to remuneration. So we’ve been working on that. I’ve been there 12, 14 months; we’ve been working on it from day one.
BROWNE: I’m involved in that committee, and by creating that forum I’m actually seeing a convergence of views. So maybe the initial starting point was a large number of significantly different views. Creating that forum has allowed the different stakeholders within the industry to sit down and work through the details, and I can see that that is leading to what will be a consensus point of view from a representative group from right across the industry: bank-owned, non-bank-owned insurers. I think it’s a really very positive step.
BROGDEN: The interesting thing is we’re framing this whole debate in the rest of FoFA, which is the abolition of commissions on superannuation – so, black to white. I guess what the industry is saying is you can’t go from black to white, or white to black. There’s just no ability to do that. There has to be a middle ground, if there is to be change. And I think the question is, do we promote a mid-ground or do we respond to a call for change?
BROWNE: But as far as the industry framing the argument, you can’t do it. Well, clearly the Government has the authority to be able to do it. Where I think we need to frame our argument is the consequence of doing that, not only for us as an industry, and I grant that for some sections of the industry banning commissions would be catastrophic. It wouldn’t be bad, it would be catastrophic.
My concern is [that] the consequence of that for the Australian consumer would be absolutely devastating. A very significant number of Australians would be left in precarious positions that would ultimately lead to them encountering a terrible financial position at the same time that they had a horrific disablement or death in the family.
And that’s why the industry is focused on this issue. We understand that there are implications for us as an industry, but we need to elevate the argument to make sure that our concerns are concerns that go hand in glove with Australian society.
I think about the work that we’ve done over the last 20 years. The work that we’ve done that we can take the greatest pride [in] is the work that we’ve done on behalf of the clients. I believe that the true heritage of our industry is that heritage that hasn’t come from mergers and acquisitions, that hasn’t come from takeovers, it hasn’t come from product development.
The true heritage of our industry is [that] in the event that a tragic event occurs in the lives of our clients, we as an industry have been able to step in and provide some sort of solace. And our key challenge, but also opportunity, is to collate and communicate those stories in a rational, powerful and convincing way.
KLIPIN: I think there’s greater strength in let’s get our act together collectively, rather than let’s try and play each other off and see who’s going to come out on the top of the pile.
SATILL: Just one other point, and I know in the scheme of things it’s small, but it’s close to my heart. Because we have a unique practice in Australia, which I mentioned places cover on impaired life. So that’s the three or four per cent of Australians who actually can’t get cover, get declined by the insurance companies. You know, those with mental history, diabetics, heart disease, cancers and et cetera.
That’s our area of expertise. Now, the amount of work that we’ve put into that, there is no way that 80 per cent of them could afford to pay us for what we do if there were no commission.
BROGDEN: And the fascinating thing is, I don’t think there’s a public uprising about commissions.
And it’s hard to pinpoint systematic failures in the industry, although I’d agree with the possible exception of churning.
What concerns me about churning is it drives up cost.
SATILL: And that adviser’s not a professional. Doing it for the wrong reasons.
BROGDEN: Yeah. But it just makes it more expensive. Like any product, the more affordable, the bigger the take-up, the better the outcome. Everybody wins, the more insurance we sell. Everybody wins.
KLIPIN: The way we manage the message becomes important because yes, there is some churning and yes, there are some large cases that I’ve heard get the average person’s income twice in one hit, but they are few and far between, and I’d rather – if we’re going to allocate resources, spend time and energy – focus on how do we lift penetration of insurance…rather than going after the so-called bad guys.
