The Challenge of Pricing Insurance Advice

There is little doubt there will be challenges for all advisers in pricing insurance advice – whether it is paid by commissions, fees or a combination of both, and that no single model is flawless.

In her recently published book titled Worth Paying For, Elixir Consulting’s Sue Viskovic has written about how to value your advice in future, and has dedicated a chapter summarising a range of possible solutions to eleven of the most common challenges.

In this article, Sue provides an excerpt of that chapter, sharing a range of solutions for three of the common challenges. We welcome your feedback and insights on this issue as well as what steps you have taken or will take to prepare for the change

To help you decide on what model you will choose to use for your insurance advice in future, I’ve outlined a range of possible solutions to three of the common challenges you might face. The best solution for you will depend on other choices you have made about your service offer and pricing model.

Clawback

The Challenge

Insurers will claw back commission if a client cancels the policy within two years. If you choose to receive commissions, or charge a fee and refund the commission to a client, you may find that you end up refunding all (or much) of the income you received for the work you completed.

This is now a bigger risk as the new framework has extended the period from one to two years. If a client cancels in the second year of holding the policy, the insurer can claw back up to 60% of the commission they paid you at the outset.

The Solution Options

  • Choose a model where the client pays an engagement fee in addition to (or instead of) commission to reduce the amount of income at risk of being clawed back. The less dependent you are on commissions only, the less of an impact clawbacks will have.
  • Educate your clients about not shopping around for the cheapest policy. In particular, be aware of policies that look cheap in year one but jump up thereafter, so the client doesn’t come in looking to move when the premiums go up.
  • Make it clear to your client that should they cancel their policy within the clawback period, you will invoice them for the amount of your fee that is clawed back by the insurer. In reality, the reason most people reduce or cancel their insurance is because they no longer see the need or they can’t afford it. These are both situations where they are unlikely to want to honour your agreement, so it may be argued that you would never recover this money. However, being transparent may make clients think twice before cancelling a policy in a short space of time.
  • Stay in touch with clients so you can counsel them with alternatives to cancelling their policies if times get tough, and also to keep your role as their trusted adviser and minimise any risk of being encouraged by another adviser to alter their policies unnecessarily. If you are providing ongoing advice and support, you can assist them to make a considered decision, weigh up their alternatives and potentially keep their policies in force, while solving their budget issues in other ways. Many advisers who charge fees for their insurance advice have found that their lapse rates have reduced, so clawbacks are no longer an issue for them.

Clients who have only ever seen you receive commissions in the past may require some re-educating

The Right Fee

The Challenge

Coming up with the right fee to charge before doing all the research and formulating your recommendations.

If you choose the fee-plus-commission pricing model, you don’t know what new policies you will recommend to a client at the early stages of your discussions. My advice is, don’t give away your intellectual property until the client agrees to engage you at the fee you quote. But how do you know how much to quote when you don’t know how much commission you’re likely to receive?

The Solution Options

  • When you’re clear on the type of client you wish to work with, you generally find some consistency in their requirements and you find there is a minimum amount of commission/premiums that your clients tend to obtain. This may allow you to set your advice fee at a level that will be sufficient to commit them to the process and cover some of your costs until you get to quote stage, and still achieve the profits you seek when your clients obtain their cover and you receive the commission.
  • Quote your entire Minimum Recoverable Amount to your client but tell them they will only pay a specified portion of that directly to you, and that you are taking an educated guess that your recommendations will result in sufficient commissions being available to provide the remainder of your fee. Then reserve the right to invoice a higher fee if it turns out to be otherwise. In this way, if their existing policies are largely sufficient and you only recommend a small amount of top-up cover, they will be paying a lesser additional amount in ongoing premiums and only have a higher sum payable to you as a once-off, in exchange for the peace of mind that their revised insurance portfolio is suitable for their needs (or the best they can get).
  • Once you’ve worked with a number of clients, you’ll get a feel for the likely amount of work required and have a minimum figure to quote. If you use our pricing software, you’ll be able to determine a fee schedule where you can price in additional work.

often the fear around clients being willing to pay fees is in the mind of the adviser

Reluctance to Pay

The Challenge

Clients won’t pay for insurance advice. Some advisers believe that clients will be driven to obtain direct insurance or will go to banks to obtain their cover, rather than pay a fee to an independent adviser.

The Solution Options

  • This challenge is all about the mindset of both the adviser and the client. Clients who have only ever seen you receive commissions in the past may require some re-educating, but given the fact that this change is happening across the entire industry, you might find it easier than you think to obtain their acceptance.
  • The great thing about your existing clients is that they probably already value the work you do, and don’t expect you to do it for free. If your commissions are being reduced and your clients need you to do some new work on their insurance portfolio, you will probably find they will be happier to pay a fee to keep your services than to have to find a new adviser and pay them anyway (or worse, be insured without the support of an adviser)
  • Just as we saw when the Future of Financial Advice reforms was introduced, often the fear around clients being willing to pay fees is in the mind of the adviser. Not only did clients expect to pay a fee for advice, this deepened the level of trust between advisers and clients and often resulted in clients referring new business to them. That is not to say that you will be able to use the same engagement techniques that you have in the past when you’ve received commissions as payment. You will have new conversations and will want to rethink your onboarding process and marketing materials. But remember, other advisers have gone before you and proved that clients will pay for risk advice.
  • Every adviser knows the pitfalls of obtaining direct advice, both in the increased costs and the likelihood of a claim being declined due to the practice of underwriting at time of claim rather than application. Clients will also recognise this if you educate them. Make sure that in your marketing materials, you articulate the reasons why clients should seek expert advice rather than be fooled by slick advertising.
  • This is all about education. You can play a huge part in helping clients to improve their knowledge about insurance and correct their understanding of default cover, insurance within super etc. You don’t need to do this individually – create blog posts, articles or explainer videos that you can host on your website, share on social media or send to your client. Just like you have had to ‘sell’ the features and benefits of insurance policies in the past, you now might have to educate your clients about the benefits of seeking (and paying for) your advice.

Pricing insurance advice is challenging, but it is certainly possible. And for those doubting whether clients will pay separately for their insurance advice? The answer from our pricing research is clear – yes, they absolutely will, provided that the value of that advice is articulated and it is delivered well.

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

Sue Viskovic is the Managing Director of Elixir Consulting and author of ‘Worth Paying For’.

This article is an excerpt from Sue’s new, soon to be launched, ‘Worth Paying For.’.

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