JP Hughes, chief commercial officer, Friends First Life Assurance, explains why something has to give in the fiercely competitive life assurance market.
The life and pensions industry has witnessed much scrutiny and debate of late due to the practice of moving customers polices from one life insurer to another. This is known as rebroking. One of the issues raised in the media recently, is around the commission paid to a financial broker or advisor when a customer takes out a replacement policy, and whether this rebroking is in the best interest of the customer. The increase in rebroking has taken place against a backdrop of total life and pensions premiums which have declined by 60% since 2007.
As the financial crisis deepened, life assurance companies competed fiercely with each other in order to attract either new customers, or new policies from customers who were cancelling their existing policies as incomes declined and household expenditure came under increasing pressure. Competition for new business centred on the driving down of protection premiums and increasing commissions paid to brokers on new policies. It does not take a PhD in economics to figure out that something has to give in an industry built on these foundations.
Protection
Although demonstrating all the characteristics of an inefficient and unsustainable long-term model, this approach did deliver considerable value for end customers. The cost of protecting your income or your life in the event of death or a serious illness has never been lower and compares favourably with international markets. Notwithstanding this, all industry participants including customers, brokers and insurers, need to be aware of the unsustainable nature of the current commission model and prepare themselves for the inevitable changes that need to occur in the industry.
It is in this context that I believe financial brokers will have to determine and clearly demonstrate their value proposition to their customers when advising them on all aspects of their financial planning needs. Customers need to have a clear and transparent view of all the charges arising from receiving advice. If the broker can demonstrate that their advice is worth this cost, then customers will engage accordingly.
However, the current remuneration model, where high upfront commissions can arise, lends itself to a practice of comprehensive initial advice to a customer at the outset but a potential decline in service levels from the broker thereafter, as the income flow for the broker for servicing the customers’ ongoing needs diminishes.
In order to ensure that the customers’ needs are met over the longer term, transparent charges and commission, and possibly a fee structure need to apply between all parties over the longer term. This necessitates a shift from some of the higher upfront charges currently applied to products, to lower but more long-term charges.
Flexibility
This practice should also allow much more flexibility and mobility for customers’ business. In the current model, high upfront commissions and charges need to be recouped by the insurer should the customer’s policy be cancelled or moved in the early years of a product term. This is achieved through a mix of commission reclaimed from the broker or exit penalties levied on the customer’s investment fund or policy.
In a more efficient longer term model, these barriers to exit for customers should be removed. If the insurer or the broker are not delivering the value that was expected by the customer, and agreed with them at outset, then either party can simply be fired without any adverse financial consequence to the customer. In this scenario, it is the customer, rightly, who holds all the power.
Ultimately, it is the customers’ funds or premiums that pay for the services of the broker and the insurer. Therefore, if neither party can deliver on the customer expectations, then they do not deserve the business. .
Working together
In this new model, both the insurer and the broker will work together to deliver improved value for the customer over the longer term. The insurer will continue to drive down their internal costs to ensure that their product charges are acceptable to the customer and in parallel will continue to improve all aspects of their proposition including service and product features.
The value a broker can offer a customer will be driven by a pre-defined review of the customer’s financial well-being, highlighting any potential exposure or needs. This would lead to unbiased independent advice on how these needs can best be met and an agreement on service levels thereafter. There is a cost for and a value in this advice which should be borne by the customer over the lifetime of their relationship with the broker.
A recent study in the UK has detailed that matured pension funds, where the customer received advice from an independent broker, had maturity values well in excess of comparable funds where no advice was given. In addition to the peace of mind that customers derive from an independent broker or advisor looking after their financial requirements, there are clear tangible benefits for having your financial affairs managed professionally.
Brokers need to be in a position to demonstrate these benefits, through for example; strong risk adjusted returns within investment or pension portfolios. In turn customers need to value these benefits by means of a commitment to a long-term relationship with their broker and by paying for services provided through transparent fees and/or charging structures.
Ensuring that your interests, as the customer, are constantly aligned to those of your broker and the insurer will bring about a much more efficient life assurance industry which will ultimately drive greater value for you. Financial solutions will continue to evolve and improve and the relationship with your broker should deepen to ensure valuable long-term advice and added value. The key objective, after all, is for you, the customer, to achieve your long-term financial goals in the most cost and time efficient way possible.
