Report recommends curbing insurance advisers’ cosy commissions

The Melville Jessup Weaver report, commissioned by the Financial Services Council (FSC), looks into insurance commissions and whether changes should be made to better align brokers’ interests with their clients.

The report comes as the Ministry of Business Innovation and Employment undertakes a review of the Financial Advisers Act 2008.

It found a “material conflict of interest” for financial advisers in the life insurance sector, which the authors say is a significant contributing factor to the high levels of replacement business being written – almost half their business.

The report makes seven recommendations with the key ones centred on remuneration.

When writing a policy under the current structure, whether for a new client or as a replacement policy, an adviser typically receives 200% of the first year’s premium with other incentives such as overseas trips based on volumes. This can take the commission to 230% and 7.5% or 10% of subsequent annual renewal premiums.

So, as an example, for a typical policy sold by an adviser, the annual premium is $1500 a year, which means the initial commission amounts to $3000.
“The situation is extreme,” the report’s authors note.

“While rewarding advisrrs by initial commissions exceeding one year’s premium is not uncommon in other countries, the New Zealand level, at two times and more, is not only out of line internationally but it also generates inappropriate incentives for advisers and has profound implications for the structure and operation of the life insurance industry in New Zealand.”

Big cuts to commissions
David Chamberlain of Melville Jessup Weaver says the report recommends a 20% servicing commission through the life of the contract with a 50% initial payment.

“So we are saying no upfront commission on replacement policy, when an adviser moves a customer from one insurer to anther.”

The report also recommends a ban on volume-based commissions, including “soft commissions” – trips to desirable overseas locations or volume-based bonuses.

“We are saying we accept commission on an individual translation but we see no benefit from the customer where a commission addition is paid when the adviser sells more of the same.

“That’s when the insurer is rewarding an adviser for quantity not quality and there’s no customer benefit.”

The report recommends a transition regime that would occur over three years.

“What we are saying is the ideal model would be a fee-for-service where the consumer would pay the adviser directly,” Mr Chamberlain says.

“That’s not practical in the life insurance area because people don’t wake up in the morning and decide they need life insurance and ring a broker. So we accept that commissions and the product provider remunerating the adviser is a necessary step in the process but that brings about a conflict of interest.”

RAW DATA: Read the report here.

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