There are two factors that stand out for me on why protection is sold less than other financial services products. These are the underwriting process and the remuneration structure, both of which are inextricably linked.
Underwriting is uncertain, both in elapse time and end result, yet is central to any client recommendation of cover and insurer. A whole of market adviser must give their advice after an analysis of the underwritten terms of a sufficiently large number of insurers. Whilst it is known that the quick quote will increase for 25 per cent or more clients, it is often unclear who will be affected, especially for older clients with normal health disclosures.
In a shrinking market insurers have tried to retain new business by sharpening premiums, in part paid for by tightening their ordinary rates criteria. If all other things were the same, which they are not, the cheapest quick quote insurer would rate more applicants. To overcome this uncertainty, advisers need to make pre-underwriting calls before they can recommend an insurer.
Whilst I am a strong advocate of commission, it is a blunt remuneration model. For some clients commission may be disproportionately high, such as a large case with no health issues, while for others it may be insufficient or nil: those with a protracted application process, rates terms not taken up, or declined.
Protection can be “hit and miss”, both in remuneration and client experience.
With indemnity commission in particular it is hard to build adviser business value. Clawback, which is not in the adviser’s control, is value destroying, and the low level of renewal commission does not generate a meaningful future revenue stream.
From conversations with many advisers, I conclude that protection is a marginally profitable business line, where the sales time and uncertainty can outweigh the rewards. If protection is to be more than a social good, it must allow the adviser to make money, reinforce their client relationships and build longer-term enterprise value.
There are two things that can be done:
- Increase commission and reshape the remuneration model
- Reduce application costs and uncertainty
Commission terms have been creeping up year-on-year. Whilst higher commission should increase sales, the impact depends on the relative risks and profitability versus alternative adviser activities. In some cases, higher commission may drive up lead costs and negate the overall increase in profits.
The indemnity/renewal structure is anachronistic. I have long been an advocate of lower indemnity commission, say 100 per cent, sufficient to cover the adviser’s acquisition expenses and earned more rapidly, plus significantly higher renewal commission paid earlier, say 15 per cent from month 13. In my view this would align insurer and adviser interest and builds long-term adviser enterprise value.
However, increasing commission is not my preferred option. We first need to remove sales inefficiencies; otherwise the adviser business model is vulnerable to more efficient competitors.
The second option is a more effective sales process. Whilst insurers have taken unilateral action to improve their online processes, alone these do not address the responsibility advisers have to compare underwritten terms. Effective digital technology can replace these manual adviser processes, with a single online application that connects with multiple insurers to provide fully underwritten “buy now” terms, or “indicative” terms and next steps. This step change technology would provide an easy and transparent buying process that significantly reduces sales complexity, costs and client surprises.
There is an alternative, which is single-tie, so that the sales complexities and costs of using multiple insurers are removed. However, this restricts client choice and runs against the grain of most advisers.
In summary, insurers need to recognise that compared with other financial services products protection is significantly less attractive. Underwriting surprises and delays impact on between a quarter and a half of adviser clients, which makes profitability uncertain, and can strain relationships. Invariably unilateral insurer action accentuates the problems. We need to increase adviser confidence that protection can enhance their client relations, secure attractive profits and build long-term enterprise value. Insurers need to review the commission model, and use technology to make the buying experience more rewarding for advisers and their clients.
Martin Werth is chief executive at UnderwriteMe