Impact of Changes to Life Insurance Commissions

Unless you’ve been under a rock, you’ll be aware that there are significant changes coming very soon to the life insurance industry (January 1st 2016) – changes that will have a very real and immediate impact on advice businesses. In July I ran a series of workshops around Australia with Zurich, talking with advisers about what the new life insurance framework will mean to their business. There was a good mix of financial planning businesses that include risk in their proposition, as well as risk-only specialist advisers, and every one of them will be impacted in some way, with the degree of impact varying significantly between different business models, depending on the current structure of their business.

In August/September I spoke on a roadshow with the AFA, where its CEO, Brad Fox, pulled together a great line-up of speakers to help advisers to ‘face into transition.’ I must say that the thought process, the flow of the topics and the speakers who were experts in their specific niches were put together brilliantly – with many advisers saying this had been the best event they had attended in recent times (hard to not make that sound egotistical!).

Brad started the day with a recap on how we arrived at this position, and the perfect storm that has been brewing from as far back as 2012 that has resulted in the proposed new Life Insurance Framework. Advisers received the resounding message that, while there is still a lot of advocacy that adviser associations are initiating, there is no denying that disruption is afoot. We can do well to learn from other professions and industries and not become victims of market forces. Rather, it’s better to take action to ensure that the future looks bright for all Australians who receive great benefit when they seek advice about protecting themselves and their families.

David Peake, an organisational psychologist from Team Gene shared his insights into how we think about disruption and change, and how to get your team on board – to be willing participants in evolving your business, rather than whingers or sabotagers. Many advisers told me how these thoughts helped them to consider how they themselves, as the leader of their business, have been sabotaging their future.

I helped advisers to break down the costs of delivering advice, and shared insights into the first steps to analysing your business, then selecting the option that will work for you in future.

look at the impact of these changes sooner, rather than later

We then had some great video workshopping from the iconic Russell Collins, where he shared some of his client engagement techniques (I’d recommend anyone who provides risk advice to read Russell’s book: www.rics.com.au).

The speaker lineup was rounded out perfectly by PJ Byrne, a risk-only adviser from Brisbane. At the beginning of 2015, PJ changed his pricing model to charge fees to supplement a hybrid commission model, and he shared his journey. PJ charges different initial fees, depending on the complexity of advice – and now that he has refined his client engagement and has gained confidence in presenting a fee, he’ll likely be lifting his fees to ensure that he remains profitable.

If there is one piece of advice I can give to any business that provides risk insurance advice it is to look at the impact of these changes sooner, rather than later. The two main reform provisions that will have an immediate effect are the new commission structure and the extended clawback period. To refresh your memory, the current upfront version of insurance commission is set to disappear as of December 31st this year, replaced with a phase-in period for the ‘new hybrid’ commission option:

• Business written in 2016 calendar year – up to 88% upfront and 22% ongoing
• Business written in 2017 calendar year – up to 77% upfront and 22% ongoing
• Business written after 1 January 2018 – up to 66% upfront and 22% ongoing.

The level commission option is likely to still be available, although some recent commentary has suggested it may be changed.

The clawback provisions are being extended from their current structure so that any policy that lapses within the first year will see the insurer clawing back 100% of the upfront commission paid. A lapse in the second year will see 60% clawed back, and a lapse in the third year will see 30% of the upfront commission clawed back.

What will these changes do to your business? If you haven’t already modelled it, Zurich has a handy calculator that will enable you to input your current business (renewals as well as new business written) so that you can see the impact on your cashflow and likely business valuation over the next ten years. Chat to your Zurich BDM to gain access.

Depending on the ratio of initial vs renewal income in your business and the income method you currently use, it is likely that you will see a decline in income over a number of years, before the increased renewal income has a positive effect on your cashflow. In fact, most of your peers found that it would take 5 – 7 years before their income returned to current levels if they’re using the upfront commission option now. You might find it is similar in your own business. That is, if you choose to be remunerated by commission only. That’s right – you have a choice.

If you haven’t already, it’s important to take stock of the amount of work involved for you to deliver insurance advice to your clients. I have provided a guide to this in my post on ‘What’s the future of risk commissions?’, but it is important for you to assess this in your own business – determine your own charge-out rate and then apply it against the process you use. Don’t forget to account for the time for which you don’t directly charge clients, such as maintaining your CPD points status, updating your knowledge on products and regulations, marketing to find new clients, managing your business and staff, and of course, your most important service – managing claims for your clients. (You can access our online Pricing Advice software to help with this.)

When you do all of that, it is likely that you will discover that you currently don’t get paid enough in many instances with the upfront commission option, and most certainly will not generate enough from the new hybrid structure. So…what to do? Most advisers will figure out how to start charging a fee in addition to (or instead of) receiving commission for your insurance advice.

We have found through the businesses we coach, that this is indeed possible, and our Adviser Pricing Models Research Report has revealed a significant number of businesses who are already doing this successfully. Don’t fall for the urban myth that clients won’t pay a fee for insurance advice. They certainly will.

In our experience however, this is not simply about determining a number and starting to charge a fee. Pricing insurance advice is a lot more complex than that. Changing your pricing methodology (doing it well, that is) takes time, and a lot of effort. You’ll want to revisit your value proposition, your processes, likely even your whole sales and client engagement process, and you’ll want to articulate (and deliver) an ongoing service offer. You’ll want to have a model that is sustainable despite the new clawback provisions, and you’ll want to ensure it covers all scenarios – providing value even if clients don’t get covered, delivering your claims management service, and you’ll also want to start using terms of engagement letters that define the scope of your engagement and allow clients to engage you, in addition to ongoing service agreements.

This is a really important issue to address. We know that we need to get more Australians to protect their families from financial risks and, for many, the best way to do this is to access professional advice. At Elixir, we are dedicated to help advisers in any way we can, to build a sustainable business model and to keep delivering great advice to clients who will benefit immensely from the services and expertise you provide.

I’ve given a bunch of ideas on what clients will pay for in a previous article here in RiskInfo, and if you want to get a handle on how others have priced their services, we’ve just released an Insurance edition of our Adviser Pricing Models Research Report.

These changes are forcing every business owner to review how they deliver, and how they get paid for, their insurance advice. I’ve heard many protest that we will lose experienced advisers, which will only worsen the underinsurance problem in Australia because they can’t get paid enough for what they do. But I disagree. I hope that my crystal ball is better than theirs because what I hope will happen is that, as business owners reflect on how they deliver their services and build a sustainable business, they will review the way they position their advice to their clients, and also review the service proposition they provide. They’ll get better at educating clients and prospects about the need for quality advice and they will attract more clients to them, who will take greater responsibility for protecting their families.

If you’d like to get help from one of our consultants now, shoot us an email to evolve@elixirconsulting.com.au. But at the very least, play with the numbers to see the impact on your business, and start thinking seriously now, about how you will handle the changes that will be upon us very soon.