Commissions have had a rough trot recently.
Firstly, the former Labor Government’s Future of Financial Advice (FOFA) reforms outlawed commissions for a large swathe of the financial services industry.
NIBA successfully lobbied for those dealing in insurance products to be exempted from much of FOFA reform but, late last year, the blowtorch was applied from a different angle.
A year-long ASIC investigation into the life insurance advice found 37% of the advice consumers received failed to comply with the laws relating to appropriate advice and prioritising the needs of the client.
The corporate regulator sheeted home much of the blame for this on the structure of upfront commissions in the industry. In fact, the investigation found that when advisers were paid upfront commissions, 45% of their advice failed to meet compliance requirements; when the adviser was paid under another commission model, the failure rate was just 7%.
Although ASIC told IRP it had no plans to target general insurance brokers in a similar way, increasing numbers of brokers are pushing the fee-for-service model as a way of modernising the profession and better proving value to clients.
Fee fi fo
Whitbread Insurance Brokers CEO Stephen Jones describes himself as a “massive advocate” for fee-based broking. “It means the broker has to demonstrate what service the client actually receives, and it also provides a transparent platform, allowing greater trust to be established,” he says.
Fees eliminate commissions that are often out-of-whack with the service provided. For example, a broker may spend a substantial amount of time providing advice, obtaining quotations and placing cover for one client, and end up receiving a commission that is insufficient remuneration for the service provided; the same broker may spend less time with another client on a less complex query and receive more commission when placing cover.
Competitive broker market interaction will keep the pricing relative once clients fully appreciate what they receive.
Eliminating commissions also reduces government charges and taxes due to the base premium not being loaded with commission.
Jones says that it is not unusual for brokers to ‘net premiums’ and add a fee for commercial accounts but retain commissions for domestic insurance. His brokerage uses both models. “We would be similar to many other brokers in that our SME book is geared more to commission and our commercial book for fee,” he says.
“This is predicated primarily on the basis that as the insurance needs of customers increase, so does our involvement and justification in order to charge a fee that
is reflective of the work required.”
How it works
A common practice is taking commissions and still adding an admin fee. Pricing the broker’s time and bundling it into one fee is rare. A fee-for-service increases the promotion of general insurance brokers as not only providing a service for insurance product placement, but also as professional risk advisers and managers of claims.
Fees versus commissions: pros and cons
Stephen Jones proposes that prices for fees should be set as simply as possible.
“You need to take into account what the client needs and what the broker will provide based on key metrics such as design, placement and servicing of the insurance program supported by a broker and claims management.”
However, some brokers argue it is difficult to justify building a component into the fee structure that covers the possibility of handling of a claim within the insurance period.
Bruce Bowen, former manager of NSW brokerage Bowen Insurance Brokers, explained how for eight years his company netted premiums and charged a fee-for-service on all classes of business in order to be upfront with clients before eventually reverting to a commission model.
“We weren’t sure we were doing ourselves a favour, or the client, as we questioned whether the income derived from charging fees was making enough money for us, and the client just looks at the bottom line anyway.” He said that netting premiums is more work, and every underwriter has a different way of netting. Bowen says being remunerated via commission guarantees income without headaches, whereas during the eight years of fee-for-service remuneration, clients were always seeking justification of fees and looking for discounts.
Australian insurance industry analyst Jan van der Schalk, of CLSA, says for many people, insurance remains a grudge purchase and calls for transparency, especially for retail clients, make little sense when most are just looking for the cheapest price.
Explaining to clients how fees are derived is often “mission impossible”, says van der Schalk. “Consumers have no way of judging or understanding the value proposition that the broker offers in the fee,” he says.
While van der Schalk argues that there will “always be a broker who will undervalue another broker’s fee”, Whitbread’s Stephen Jones disagrees.
“Competitive broker market interaction will keep the pricing relative once clients fully appreciate what they receive,” he says. “Any significant variance to this should raise questions in their own mind.”