What is the Best Commission Offer?

There have been a number of high profile changes to life insurance commission offers – Sovereign and Fidelity are two more recent examples, but within the last 24 months AXA, AMP, and AIA have all made at least tweaks to systems. 

Due to the extent of change working its way through the financial services industry it seems likely that there will be more changes from other insurers, and even further changes from some of those that have changed recently seem likely. The impact of tax changes could prompt more revisions. New adviser offers such as QFEs could also prompt revisions. It’s also an area of competitive pressure, so we can expect constant tension. 

With their recent changes Sovereign and Fidelity appear to have moved in different directions: one focuses on the upfront part of its offer and the other shifting more emphasis to the service commission component.

In my other life as a consultant we track commission systems and any changes and have been doing so for more than seven years. I am constantly asked – what is the best commission offer? Well, we don’t give that away, and the complexities of comparison are such that we would be taking our life in our hands to make a black and white pronouncement on the subject, but we’ll share with you some interesting figures. 

Well, that depends on what, exactly, you mean by ‘best’. It also depends on the kind of business you run as volume, persistency, and product selection will all have a big bearing on the commissions you receive. Also, contrary to an almost universally held myth, at least a good proportion of advisers choose an acceptable set of companies and products first, before they start worrying too much about the levels of commission. This is for the very sensible reason that you have to actually get the business on the books before you get paid – which is hard to do if the product is something you don’t believe in, or is priced badly, or the attendant service is very poor.

Having said all of that, we’re in this business to make money. Our clients expect it, and we do consider the terms. 

So let us look at one situation, an adviser who produces $80,000 of new annual premium a year. We’ve also had to assume that this adviser has no inforce book, a 92% persistency, and roughly 50% of premium is non-life benefits (Disability, Trauma, etc…) The leading company for ‘upfront’ commission offers a total of 188% of premium to an individual (we’ll call them ‘company G’) , the lowest offers just 119% (‘company B’), the others all range in between. 
However, this picture is very limited – only focusing on upfront commission – I am sure you can already spot that the value of persistency rewards, renewal commission, and so forth may change the picture. If we add an existing book of $500,000 then our friend company B ranks as the highest commission payer. Company G remains strong however, slipping only to second place. The lowest placeholder is now company A. 

Contemplating commission values should really be done thinking about the lifetime of the contract. That’s how the insurers do it, and it is sensible. Although you do most of the work upfront (reflected in the weighting towards upfront commission) you will receive a level of payment for some time. 
To properly compare these we do a net present value of the commission arising from the business. We used a lowish discount rate (10%) and a retention rate on business of 89%. Applying this we get a difference between the ‘best’ offer and the ‘worst’ offer of more than $100,000 in present value – so it does pay to check. In this case we find that some of the middle placings in the survey have moved around, but companies B and G remain triumphant. Spread commission terms affect the mix similarly. 

So is that the answer? And why won’t I tell you who those companies are? Well, it wouldn’t be fair. Because with at least five out of eight major carriers I can make each one rank either first or second by changing the assumptions around business mix, production, membership of an aggregator, persistency levels, and so on. Each remuneration system has its best point of sailing, and each business will have unique characteristics that will make certain companies more attractive to them than others. However, we can leave you with a definitive set of pointers about evaluating commission offers.
1. Leave it until after product selection. Your heart will be at ease when you sell this way, and the inevitable challenges to your reasons for product selection will be easier to deal with.

2. Get good data about your business. Consider actual levels of retention as well as the persistency rate you qualify for under various company schemes, look at net new business levels, look at policy lifespan, consider the discount rate you should use.

3. Model net present values. Most advisers I’ve met have been in this business a long time, and plan to be in it a long time. Thinking long term is a great idea, especially at industry turning points.

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