You have to wonder where some of these consultants are coming from when they make recommendations for our law makers (read politicians). The Trowbridge Recommendations which deliver far-reaching change on Insurance advisers freely states that the cost of writing an insurance policy for an adviser is between $1500 and $3000.
What Trowbridge recommends is that the Initial Advice Payment (IAP) is a maximum of $1200 or no more than 60% of the premium is below $2000. From there the adviser gets an ongoing commission of 20% per annum for the life of the policy.
This is a guaranteed way of losing money if this is your business. Governments can go for decades running up deficits just look at Australia however businesses cannot. This will be a far-reaching change on Insurance Advisers.
Lets look at the numbers. According to Trowbridge it costs the adviser between $1500 and $3000 to get a clients insurance underwritten. Remember this is Cost recovery, no profit. Read my point above, Governments can work on the no profit model however banks do not allow businesses to do that.
Lets assume your insurance policy has an annual premium of $3000. The maximum an adviser can get is $1200 in the first year and then $600 pa after that. The $600 will increase as the premium increases so that is good for the adviser business however dont tell any legislators or they will ban it.
For an adviser to write this policy it will take them 24 months to recover the cost of writing the policy and therefore will not make a profit for 36 months. I have five staff in my office and they like to be paid each 14 days so taking two to three years to get a positive cashflow from a client is not going to be too helpful in paying the staff if new life insurance is all that we do.
Trowbridge clearly acknowledges that the adviser will be losing money in writing insurance policies in this way. What is his message here ? He says he is trying to have a balance between what the true cost is for an adviser in writing a policy and eliminating any behavioural doubt as to whether the adviser is working in the clients best interest. Whose interest is Trowbridge working in here ? The staff of an advisers practice will not be too happy and how does the consumer benefit if the advisers are not here to speak with them anymore. When I said that it will take 36 months to make a profit from writing an insurance policy that assumes the adviser does not speak with the client in that three year period otherwise it will take longer to make a profit per client.
If advisers in small business cannot write life insurance policies as they are losing money with every policy they write who will write them ? Look at the Iron Ore industry now as a parallel.
The small miners are losing money with every tonne they produce and are going to be closing down really quickly if this continues for another 3 months. That will leave the giants BHP and Rio.
Who are the giants in the life insurance industry ? They are likely to be the ones to survive as they have the stored up capital which will allow them to run loss making advice ventures so long as they are funneling products through to the main business. That sounds remarkably like the funds management advice business for a number of years that FoFA was designed to overcome and now Trowbridge is heading that way for the Life industry as well. Are the main players in the funds management industry also the main players in the life insurance industry? Interesting question. You will have to research the answer yourself.
My underlying question after this long preamble is how can a government consultant come up with a policy that freely acknowledges that anyone in a particular business is going to lose money for 2 or 3 years on each new client if their recommendations are implemented. What business school did this consultant go to and how does he expect a business to survive under this regime?
No doubt the answer will be that he doesn’t expect them to survive and that is the desired outcome of the proposals however how does a family benefit if no one will talk to them about what family protection should be in place. The BHP’s and Rio’s of financial services will still be there and no doubt if you go to one of the big guys they will have to have the other guys products on their recommended list as per the new proposals and those products from the other institution will get an equal representation in their advice documents. (I am really excited as the tooth fairy is expected at our house in the next day or so.)
ONeil Financial Planning will thrive in this environment. We charge an advice fee for the financial planning work that we are doing and have no strong interest in the products that form the outcomes of the advice. We love the idea of higher ongoing revenues and have been using hybrid or flat commissions for many years where we provide insurance solutions. I have no doubt the changes foreshadowed will come into being as the Financial Services council will be strong supporters as will the Industry Funds and the Banks. They will want to clean up the industry for the benefit of the consumers ! Are they already the giants in the life insurance industry and the funds management industry ? The answer to this question is becoming more important. According to the stats the major banks and one big life office already own and/or control 70%+ of the advisers in the industry and they want to clean up the industry. Surely they already have that option by looking internally at their current business practices.
Who are the BHP’s and Rio’s in the Financial services sector and who will benefit ? If you are not familiar with the current Iron Ore saga let us look at the retail options in Australia beyond Coles and Woolworths. Australia’s cost of living is going through the roof because concentration of ownership in key sectors of the economy are taking away price competition and the Trowbridge report is going to eliminate the only people that have been ringing the bell about price sensitivity in Insurance premiums in the past.
I know everyone is disgusted scoundrel advisers are twisting policies every two to three years for the huge up front commissions however ask yourself if you would change your existing policy to a new one if the premium was increased in the new policy compared to the old one. Under the new regime no one is going to be able to be paid for 5 years if they want to discuss with you a change in the policy to get a reduced premium so who is going to do it. Allowing that no one is doing it what will happen to the premiums in the future ?
No doubt we will review this blog in 5 years and see how stupid it looks. My next blog is going to be about life insurance as well and something that happened this week so read on. It will be designed to highlight some of the issues in life insurance and definitions in your daily life and why you need to deal with someone that knows what they are doing. Reading between the lines Mr Trowbridge believes you should be prepared to pay for the advice yourself rather than through paying insurance commissions. Look out for my next blog on life insurance.