A story appeared on Good Returns last Friday that mentioned a traditional NZ life insurer increasing its up-front commissions to over 200%. This means that if you buy one of their policies, the first two years of your insurance premiums goes to the person who sold you the policy, plus a small amount more each year, every year for as long as you hold the policy. I’ve been in this industry a long time and I’ve never encountered commissions this high.
So why would a life insurer do this? And more importantly, why is this bad for the life insurance industry?
Insurers offer higher commissions for one reason only - to fuel their sales. It’s a strategy. They are working on the assumption that insurance brokers will put their own financial interests ahead of the consumer’s. These insurers are betting that their high commissions will sway the broker’s recommendation at the point of sale towards their products. And with commission levels now above 200%, you’d have to say that’s a lot of temptation.
And if the strategy works, what then?
Then consumers will be sold products that carry high commissions ahead of products that best meet their needs. And if that happens, it will be bad for consumers and surely not a good look for the life insurance industry – an industry that struggles with credibility as it is.
The best way to stop commissions from spiralling out of control, in my view, is disclosure – a point I made in a previous blog post. Whilst I don’t think disclosure will necessarily drive commission levels way down, I think it will have the effect of making insurer’s intentions transparent. Over time, with disclosure in place, I think insurers will be forced to rethink their commission strategies leading to a convergence of commissions – with all insurers paying similar levels. Insurance brokers will end up with a reasonable commission for the good value they add and commission levels will cease to be a factor in the selling process.
This would be a great outcome for the industry – and even more so for the consumer.