Pricing Insurance Advice – Where are we at?

We like to gather updated information at regular intervals to ensure we are in touch with what’s current within the industry. So much has changed in the advice landscape since 2012, and it’s been interesting to review and update how advisers are now pricing their advice.

Our Third Edition of the Adviser Pricing Models Research Report contains data from 275 advice practices around Australia, and is due to be released prior to Christmas.

For those giving advice in respect to insurance, whether you’re a risk specialist or a financial planner, the fact that both Labor and Coalition Governments largely passed over risk commissions in the Future of Financial Advice reforms means that you have time to consider whether removing insurance commissions from your advice business is viable. It’s a hot topic of conversation and contemplation, and while some insist that people won’t pay for insurance advice if there is an explicit fee involved, others have already evolved to removing commissions from their business altogether. Some have done so from pure choice, while others are getting in ahead of what they believe to be inevitable further pressure to remove risk commissions from the Australian market.

the number of businesses who receive no commissions whatsoever has doubled in the past two years

This is a brief update on how pricing insurance advice has changed since 2012, and contains a short synopsis of the data from our latest pricing research.We have written other pieces on the complexity and variables in providing risk advice; this article is purely a look at some of the key points revealed in the research.

What’s changed with insurance commissions?

Whilst receiving commissions remains far and away the preferred method of payment for risk advice, only 13% of the participants in our research said they take only commissions without supplementing that income with a fee. There are some clear developments in terms of the commission payment options being selected by advisers. Figure 1 demonstrates the split between the charging methodology of the participants in the research.

It appears that the proportion of advisers selecting the upfront commission option for insurance is reducing in favour of the hybrid model, with approximately 10% more preferring hybrid in 2014 compared to 2012. Overall, the proportion preferring level commissions has remained the same since the last research.

Of those who receive commissions, 51% will not decrease or offset these against the fees they charge. 49% said they would, depending on the amount of commission and the level of work involved.

A tactic of note is to receive commission only, with a statement in the SoA that they will charge a stipulated fee if the client does not proceed or cancels within the first 12 months.

We often hear advisers declare that: “Insurance must be sold not bought” and “Our underinsurance problem will only get worse if commissions are removed because clients won’t pay for risk advice”.
Which makes it very interesting that we’ve discovered that the number of businesses who receive no commissions whatsoever – either writing the policies with nil commission or refunding commissions entirely to clients – has doubled in the past two years.

A typical argument against this strategy is that the premium is not reduced by the exact amount the insurer saves in commission, and yet, those who use this option find that their clients are happy to pay an explicit fee for the insurance advice, and are appreciative that their adviser has secured them (roughly) a 30% discount on their premium for life.

It is particularly interesting to note that, of the advisers who receive no commission on risk, 86% stated they were happy with their pricing arrangements.

Fees for risk-only advice

So, for those advisers who are charging fees for risk-only advice, what do the numbers look like?

The research report contains a host of specific data on both the fee models used, and also the level of fees being charged to clients. When it came to insurance advice, we differentiated between risk-only advice, and advice where risk is included as part of a comprehensive financial plan. This article focuses only on those instances where risk advice was provided standalone, ie: not part of a comprehensive financial plan.

You can see from the following charts that there is a significant variance in the level of fees charged across every option. Note that these figures only reflect the value of the actual fee component – the commission would be added to these fees – and once again, the amount received in commission will vary significantly depending on the premium and the commission option selected.

The variation in fees charged is very wide, the lowest engagement fee was $200 whilst at the other end of the spectrum the top fee was $8,000.

Where an upfront commission option was taken in conjunction with an engagement fee, the average fee was $1,295; this is almost $400 more than the figure from 2012. The lowest quoted fee was $300, and the highest fee compared to last time has more than doubled, increasing from $3,300 to $8,000.

For those who take hybrid commissions the average fee has also increased, by $370.

Average engagement fees for level commissions have fallen since the last research, however the lowest fee charged has more than doubled. The lowest fee quoted in the 2012 edition of the research was $200 – in 2014 it is $500.

Whilst there has been change to some degree with engagement fees and every version of commission, the biggest change has come where commissions are rebated or refunded. Average fees in this scenario have increased by 68% since the last research in 2012.

In 2012 the average engagement fee for those who rebate or refund commission was $1,211; in the third edition of the research it is $2,039.

This is heartening news, especially given that, in our experience of helping advisers to determine the cost of their advice and therefore their pricing models, the minimum amount that any business discovered they should receive sits between $2,000 and $2,500 per case.

No doubt there are many challenges in finding the ‘right’ pricing model when it comes to providing advice on insurance. Commissions are not a perfect solution, and yet there is a lot of resistance to change. Arguably, until such time as legislation changes, we doubt that advisers en masse will replace commissions with pure fees.

However, the research proves that where a business has conviction about shifting from commissions, they have no problem getting their clients to pay them a fee for that advice. It all comes down to the conviction and vision of the business owner. If it aint broke, don’t fix it…and yet ???

In Practice Management, Elixir Consulting shares strategies for building better advice businesses

Lana Clark is a business coach with Elixir Consulting, a specialist consulting and coaching firm that is dedicated to helping financial advisers and risk specialists to get their businesses performing better.

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