Product Commission – Is it Justified?

Should you be concerned about commission when arranging your insurance? With recent media commentary following the Reserve Bank and Financial Markets Authority paper, the way in which insurers remunerate or incentivise their staff and advisers has been raised around industry’s culture and conduct.

Massey University’s research revealed New Zealander’s are hugely underinsured compared to the rest of the developed world. Without a robust insurance market here, it would severely impact on our social welfare resources. Every day, $3.3-million are (is) paid out on claims, i.e. $1.2-billion a year. Premiums charged by insurance companies are directly impacted by the amount of claims paid.

Insurance is an intangible product which is seldom actively sought by consumers. The need for insurance and the protection it provides is usually identified and articulated by an adviser, or by an insurer selling its own insurance products. Unless someone loses someone, or something, the realisation of the need for insurance is rarely recognised.

Those who persuade others to get insurance should be rewarded and incentivised. It’s challenging work and usually involves considerable time and complex effort before, during, and after insurance is arranged. Commission paid by product providers to advisers has proven to be the most cost-effective approach, as research shows that few New Zealanders are willing to pay fees for advice on personal life insurance. Only businesses are prepared to pay a fee for such advice.

Criticism has been levelled at (what appears to be) high levels of commission paid to NZ advisers. But just like other businesses, advisers incur significant overheads running their businesses, e.g. office rent, staff, equipment, professional fees, etc. It would be rare for an insurance adviser to personally receive more than 45% of the commission paid.

Commission only rarely affects advice as explained in this article.

Besides the documented recommendations, what is important to you is professional disclosure. This is an issue that the FMA and MBIE will soon set legally-defined appropriate standards. This is especially relevant if you are advised to switch to different policies by either an adviser receiving commission, or an incentivised salaried person. Greater industry transparency and ethical standards must be improved.

There is a cost attached to providing suitably qualified, competent, and much-needed financial advice, and cost is only an issue when value cannot be identified.

“Insurance is best sold with a sound degree of ethical advice.” Especially to those who most need it.