The payment of commissions to life insurance salesmen in Australia will end in 2013. This is part of the reforms that are to take effect in the Australian insurance industry. The ban on commissions will also extend to bonuses for sales volumes.
So why are we mentioning these Australian financial reforms for Good Cents?
Because the Australia regulatory environment generally paves the way forward for New Zealand in the interests of trying to create a common market. History suggests a high priority with our regulators.
New Zealand Insurance companies typically pay life insurance advisers between 150 ~ 200% of the first year’s premiums for each policy sold. This means that all the premiums that you pay for the first years of a life insurance policy go to the insurance adviser.
The commissions the financial advisor receive can also include an on-going percentage of premiums for the life of the policy (a trail), and volume related sales bonuses. These commission costs are built into the premiums policy holders pay.
If insurance companies were no longer permitted to pay advisers a commission, what would happen?
The model changes, advisers would have to charge their own service fees and insurers could not build commission costs into the policy premium. The effect of this legislation leads to a very different outcome for financial advisers and insurers alike.
The price of life insurance should go down and the consumer would be charged a consulting fee on a time and material basis for the financial advice provided.
Which then begs the question, what’s the value of the ‘advice’?
Those clients with specialist needs will require more of the financial advisor time, and hence they will get charged more. Consumers with simple needs, will in all likelihood expect to pay very little for the financial advisors time.
Add into the mix, we live in a changing economic environment where consumers can go online, research products, review insurance companies, compare quotes and complete almost most insurance purchases online. In an emerging online world where information is essentially free the less need for advice. Death to the Insurance Salesmen; welcome the birth of the Insurance Consultant.
This article was written by Steven de Jong, who is a partner at Pinnacle Life and writes frequently on the topic of life insurance. Pinnacle Life offers consumers the opportunity to buy life insurance ‘instantly’ online without the need for a medical examination. Visit Pinnacle Life for more related information, and you can read Steven’s articles here at blog.pinnaclelife.co.nz.