A quote along the lines of:
“Don’t worry about the insurance commission on your quote; it’s not a cost to you; it’s paid by the insurance company.”
is very common when an adviser gives insurance advice. This assertion is commonly heard when clients receive their Statement of Advice. On the surface, this appears beneficial, suggesting that the insurance company bears some of the advice costs, potentially reducing the expense for the client. However, this idea is incredibly misleading.
Contrary to the belief that commissions are costs exclusively borne by insurers, the truth is that these commissions significantly impact premiums. If an adviser decides to forgo commissions, the resulting premium payable would be considerably lower.
Premium Differences
Some simple research was conducted to illustrate this point. A comparison of 10-year cumulative premiums for an average level of Death, TPD, and Income Protection cover for a 34-year-old male across five leading insurers used by financial planners reveals substantial differences. The findings are as follows:
| Difference | 1 | 2 | 3 | 4 | 5 |
| 36.6% | 37.9% | 33.3% | 31.0% | 33.3% |
The difference between each insurer is largely irrelevant, however the difference between the premium with commissions and without is very telling. These results highlight that the presence of commissions can inflate premiums by over a third.
Typically, advisers receive commissions amounting to 66% of the premium upfront and 22% of the premium annually (including GST). Although the 66% is higher than the circa 30% difference in premiums, remember that this 30% difference is every single year. If the upfront commission was amortised over the life of the policy, the 30% difference is probably largely accurate to how much the adviser is paid.
Are commissions fair?
Considering all of this, it is incorrect to suggest that insurance commissions are essentially free money from insurers as they are ultimately funded by clients. The common justification that ongoing commission covers free assistance during claims is also questionable. Claims are relatively rare, and most advisers lack extensive claims handling experience. Claims specialists, who work on a fee-for-service basis, might offer a more effective alternative.
Unlike ongoing advice fees, insurance commissions are not required to be opted into each year, nor is any service required to be provided each year the commissions are paid. Whilst there would be some commission-accepting firms that actively engage their insurance clients, many would not and instead treat the income stream as an annuity that increases in excess of CPI each year. This would not be an issue if the commissions weren’t being indirectly paid from a client’s premiums and instead by the insurer themselves, something akin to mortgage broker commissions.
It’s interesting that there seems to be little interest in this discrepancy amongst the financial media and government regulators. Clients should be adequately informed of how their adviser is being remunerated, including the impact of such remuneration on their insurance premiums. Any adviser that argues against this disclosure is essentially admitting to withholding that commissions actually do cost the clients’ money.
Advisers often argue that commission rates are too low to provide advice to those who need insurance the most, younger people with higher debt levels. This necessitates the charging of fees in addition to the commission which precludes many from receiving the advice. This is a valid point, but it seems less of a criticism on insurance commissions themselves rather the issue remains with the high cost of providing advice in most firms. If a client could receive insurance advice simply and cheaply without the commission being required to cover the the advisers’ fees, this would be an ideal outcome.
Not mentioned is the obvious conflict of interest that remains with volume-based remuneration in the form of commissions. This is not avoidable and seems to have been swept under the rug by regulators and advisers alike.
Clients seeking insurance advice should be encouraged to consult advisers who do not accept commissions. While this may entail higher upfront costs, it is likely to result in long-term savings and more objective advice, as the adviser has no financial incentive to recommend excessive coverage or more expensive insurance options.
Read our follow-up to this article here: A Final Word On Insurance Commissions
