Apart from the scribbling of journalists’ pens, the room descended into shocked silence. Speaking at the Protection Review Conference in July, Mike Ward from payingtoomuch.com had just made a controversial statement. He said he thought protection providers should pay much more commission on life assurance, critical illness and income protection products.
I do not think anyone was expecting his angle. As part of a panel of speakers talking about ways of growing the market, Ward’s comment stood out among the usual calls for product innovation, simplification and more marketing spend. Needless to say, before the morning session was over, his remarks were all over the online editions of the trade publications.
Just days later Money Marketing ran an article pointing to legislation in Australia calling for capping of protection product commission. It opened a debate as to whether this would be a route worth travelling in UK financial services. Replying to the article, most advisers, product providers and independent commentators were against the idea. Indeed, a few questioned the wisdom of reopening such a contentious subject.
Since then we have learned of the new Conservative Government’s plans for yet another review of financial advice. Like it or not, that discussion is bound to reopen the subject of commission on protection products once again.
Do I agree with Ward? Yes, because as an industry we have made the propositions so complex and the underwriting process so long and tedious that advisers spend excessive time on protection compared to what they receive in compensation.
Do I think we should follow Australia’s lead and put a cap on commission or, indeed, ban it altogether? No, because we know from the run up to RDR that consumers will not pay the same level of fees for protection advice as they would for investment and pensions planning. Nothing has changed since the last round of legislation. Banning or capping commission on protection is still likely to reduce take up rather than stimulate more.
The Australian experience is a red herring. The Trowbridge Initiative points to high commissions creating customer detriment and, therefore, calls for a cap on commissions to 60 per cent of the first year’s premiums (compared to the 150 to 200 per cent in the UK). Trowbridge cites high lapse rates on protection products and argues that advisers are encouraged to re-broke often because of high commission rates.
It is easy to see how that argument could apply in the UK but there is one fundamental difference. Australian protection products are mainly “annually costed”. Premiums go up every year just like car insurance premiums do in the UK. Faced with such increases healthy lives look to switch to a cheaper “new” product each year. High commissions do not cause the lapses the premium structure does. Arguably, a commission cap might increase re-broking rather than reduce it.
Tinkering with commission levels or banning it will not increase demand for protection in the UK. Nor will it overcome the consistent poor view that consumers have of the insurance industry. According to the Association of British Insurers, we pay out 97.7 per cent of all claims, yet consumers still think we decline more than 60 per cent. These are the perceptions we have to change. Commissions are not part of the problem.
Ward’s idea of paying more commission would indeed lead to more protection being recommended if advisers felt suitably compensated for the work they put in. Researching the market (particularly for critical illness products), the time they spend on managing the lengthy application process and having to handle their client’s expectations if they turn out to be rated all adds up.
Would paying higher commission create a revolution in the protection market? Probably not.
Those who shared the same panel as Ward at the Protection Review Conference, and advocated simplification and increased marketing (much less news-worthy approaches), still represent the best chance for long-term growth.
When we make products easy to understand, when we surround them with a mass of positive marketing messages, when we let customers apply almost instantly and design processes that do not force advisers to spend months on even the smallest cases – only then can we even begin to consider changes to commission structures.
Roger Edwards works through Roger Edwards Marketing as a marketing strategist and speaker, and through Make Sense Partners when developing new propositions