Over the weekend, it was reported in the newspaper that insurer Axa Life was trying to claw back S$7 million worth of commissions paid out to Finexis, one of the financial advisory firms in Singapore. The reason was over the high lapse rate or surrender of a particular term plan, Future Protector, that Finexis was aggressive marketing for Axa Life.
You can read the whole article reproduced on my colleague Patrick’s blog below. He’s also the same person quoted inside the article.
How the marketing worked was that Finexis would offer to pay for the first year’s premiums of this plan to their prospective clients. With such a offer, many people took up the deal. While sales figures looked extremely good to both Finexis and AXA on the surface, what was not apparent to AXA was that many of these clients would cancel the plan after the first year. And so they did.
Of course, this outcome was pretty obvious to many of us in the industry.
In the first place, the act of offering any form of rebates as a inducement to consumers is already a questionable practice, as mentioned by Life Insurance Association (LIA) president Tan Hak Leh.
What made the exercise a complete financial disaster for Axa was that they had paid commissions of almost 120% of the first year’s premiums to Finexis. This excludes additional bonus that was paid for meeting sales target.
This entire episode would have been avoided if AXA Life had not paid out in commissions more than what they had collected in premiums.
Other countries like UK and Australia are already moving towards the practice of zero commissions from the sale of products. I don’t see this happening in Singapore any time soon but one way we can really move forward is to regulate the commission structure that insurance companies can pay to their agents or distributors.
A heavy front-loaded structure provides an inherent bias for agents to churn products and often leaves clients without anyone to service them after their agent leaves the industry. In theory, they would be assigned “replacement” agents but without any financial incentives, the level of service will definitely be affected. Who wants to work for free? Or rather, who has time to work for free?
Currently, is it common for insurers to pay commission over the first five years. For example, it can be something like 50%, 25%, 10%, 10% and 5% over five years. A “not front-loaded” commission structure can be something like 10% for the first year and 5% for the next nineteen years.
The former structure would be one that is commonly used by most life plans nowadays while the second structure is used by the private shield plans. Note that they might be some exceptions. For example, one company already pays a commission of 10% of the premiums over the lifetime of one of their product. So, if the first year’s premiums is $500, the commission is only $50.
However, moving towards a less front-heavy commission structure will not come from within the industry. Any insurance company that “moves first” will be afraid that their agents or distributors switch to promoting for other companies. Who will be brave (or foolish) enough to test the market?
The only way for this to happen is by regulation.
With every company forced to make the change, it will become a level playing field.
The impact of this change will see upfront commissions drop significantly for insurance agents. Unable to sustain for long, many of them will leave the industry and we will see less agents in the market. Imagine a fresh graduate joining the industry earning only $50 for each product sold. He or she will need to sell almost 50 such policies in a month just to make $2500 in commissions.
Not many will be able to sustain long enough financially to stay in the industry.
For a start, perhaps we can ban upfront commissions that are more than one year worth of premiums.