Inside Money: Insurance commission debate crosses the Tasman

AMP introduced measures for its advisory force more-or-less in line with recommendations in the Trowbridge report and a number of smaller players are following suit. Photo / Dean Purcell

As reported here last month, the once industry-focused debate on life insurance commissions across the Tasman has struck out for the mainstream.

Thanks to a report from noted actuary, John Trowbridge, the issue has already forced the hand of Australasian life insurance mega-brand, AMP, which introduced measures for its advisory force more-or-less in line with the recommendations: that is, upfront life product commissions capped at 80 per cent (of first-year premium) that max out at $1,200 with a 20 per cent annual renewal payment for the duration of the policy.

Since then a number of smaller players, including independent advisory firm, Fortnum Financial Group, have followed suit in a bid to "self-regulate and ward off further legislative attack."

The Australian legal assault on insurance commissions will probably come regardless, and the likelihood of New Zealand introducing similar reforms is increasing by the day.

Trowbridge, who was in New Zealand recently presenting to life industry execs and insurance advisers, reckons the situation here is worse than Australia and overdue for a shake-up.

"In New Zealand life insurance commissions are twice as high," he told me. "And in Australia all advisers have to satisfy a 'best interests' duty, which is moving the insurance market away from product sales to advice."

Under the two-tiered, product-centric NZ financial adviser legislation, life insurance falls into a lightly-regulated category.

There's a clear conflict of interest [in high upfront commissions]... when remuneration is so high, there's an incentive to find ways to switch clients.

John Trowbridge

"That's a big difference, it's really important," Trowbridge said. "I've heard stories of Australian insurance advisers coming to work in New Zealand because of these rewards."

But whether 'churn' - or the unnecessary shifting of clients to different providers to collect a new upfront commission - is worse in Australia or New Zealand remains a moot point.

And Trowbridge said the actual scale of churn is irrelevant.

"I don't have to put a figure on it," he said. "There's a clear conflict of interest [in high upfront commissions]... when remuneration is so high, there's an incentive to find ways to switch clients."

Likewise, Trowbridge said the fact clients may, or may not, be receiving good advice is not the point.

Consumers, he said, are paying too much for insurance because the commission structures have locked life companies in a system of mutually-assured destruction.

"In life insurance - and this is true all over the world - it's impossible to build a business without advisers," Trowbridge said. "For insurers, the customer is the adviser - not the policy-holder. They're totally dependent on advisers who can then bid the commissions up."

He said there's no "first-mover advantage" for insurers wanting to scale back commissions as they would lose out to those continuing to offer top-dollar to advisers. (Although, AMP, with its mostly-aligned advisory force was in a better position than most to take this step.)

"That's why the industry needs some form of regulatory intervention," Trowbridge said, where commission restrictions would be implemented across the board. "In New Zealand, there's clearly a need for change."

However, Trowbridge is not advocating for commissions to disappear. He said when insurance commissions were banned in the Netherlands, sales of life products among the 40 per cent of the market without mortgages (debt-holders apparently still valued insurance) quickly dwindled.

Not everyone agrees with his diagnosis. NZ insurance industry consultant, Russell Hutchinson, for example, has noted the 'churn' factor is linked to a growing "consumerist society", rather than adviser commissions.

But even Hutchinson says in his latest client update, the pressure on NZ life insurance commissions is growing. While noting a healthy round of product review and drop in consumer complaints against insurers, he says:

"On the other hand there is a review of the Financial Advisers Act [FAA] underway, a concern from the Regulator about replacement insurance business," Hutchinson says in the client update.

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Trowbridge said the NZ life industry is certainly up for more discussion on the subject.