The Life Offices' Association (LOA) recently released a discussion document outlining its proposals to reform the industry's standards with respect to paying brokers up-front commissions on long-term investment insurance policies, including endowments and retirement annuities.
The proposed changes were made in light of recent queries the industry has faced regarding the performance of its investments and penalties applied during early withdrawals and premium reductions.
"These changes, if implemented, are to be welcomed as a good first step in ensuring transparency in the industry, allowing customers to select the best instrument from the appropriate company to suit their long-term needs," says Freda du Toit, director of SDT, a financial services solution provider.
"Improving commission payments will ensure brokers get paid for their services, but on a more equitable basis for customers that will encourage them to take better care of policy-holders for the long-term."
The LOA's proposal suggests that the current up-front commission structure be replaced with new, ongoing commission payments consisting of a sales commission and a service commission. This effectively limits the penalty charged to the client for the initial commission term to a maximum of five years instead of the previous full policy term. Policy-holders will be able to negotiate the commissions paid on the policies they take out and have full control over the service commission.
Gerhard Joubert, executive director of the LOA, has stated that the proposal would mean a "significant improvement in early termination values for those customers who choose to end their contractual savings before full term, while at the same time still provide a reasonable amount of up-front remuneration for the intermediaries".
Unfortunately, all is not as rosy as it appears. The proposal takes care of the problems brokers' commissions cause with future policy values, but it does not deal with the insurers' administration costs. Du Toit says that by ignoring the costs of running and maintaining their outdated administration processes, customers will still not be able to enjoy the full fruits of their investments.
"The proposals are a response designed to prevent government interference in the industry," Du Toit adds. "And while this is certainly a worthwhile goal, as far as the life companies are concerned, it's a case of ignoring the log in your own eye."
Due to the age-old processes applied in large insurance companies, the costs of activating a policy are enormous - and these costs are deducted from the customers' premiums before any money is invested. If life companies were to reorganise their internal processes and make use of the latest technologies and business practices, they would be able to substantially cut the costs of doing business every year.
"Reducing the commission on life instruments is a worthwhile start, but the changes should not end there," Du Toit says. "It's not right for life companies to target brokers, who play an important role in providing specialised services, and ignore the costs of their own administration processes. Finding a better way to handle both these issues will not only better serve customers, but will also streamline policy processing to the benefit of the insurers and their brokers."
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