Commission crunch time

The increasingly desperate fight for new business is leading advisers and providers to adopt more aggressive business practices, says Sam Barrett

“It’s got much worse in the last year or so,” says Glen Smith, managing director of Healthcare Partners. “There isn’t much new business around so we’re seeing some insurers and advisers having to resort to unethical practices to win business. It’s not good news for advisers but it’s not good news for the industry either.”

One practice that is causing concern, and creating a dual pricing environment, is rebating commission to clients. Stephen Hackett, head of health and risk at Bluefin Corporate Consulting, believes that this is the cause of many of the complaints. “The rates for the risk are identical but if one broker rebates half of its 20 per cent initial commission to the client, where can someone receiving 10 per cent initial commission go?” he says.

Colin Boxall, director of ADVO Group, is also frustrated by this practice. He believes it is misleading for clients but warns those using it that it may turn round and bite them in the long term. “Doesn’t this prove commissions are too high? I have no issue with other firms receiving higher commissions than us but I have a real problem when it’s used as part of a sales process to rebate and undercut to a scale that’s impossible for others to match,” he says. “Shouldn’t clients be able to choose on the ability of advisers to support them, not because of their ability to rebate commission?”

Competition is meant to be good for consumers, but it is no surprise that advisers do not appreciate direct competition from providers, feeling it is hard to maintain an intermediary/provider relationship where competition exists between the channels as well.

One insurer that comes in for criticism from advisers is Axa PPP healthcare, with several reporting cases where they’ve lost business to the insurer’s direct sales force. Paul Moulton, sales and client relationships director at Axa PPP healthcare, admits this can happen but stresses it’s not intentional. “If a client has an intermediary, or intermediaries, we’ll work with them to keep the business. Our direct sales force will only provide the company with a quote if it explicitly asks for it,” he says.

He believes the problem is a result of the state of the market. “With so few new start-ups in the SME market, everyone, whether an adviser or someone on the direct sales force, is working off the same prospects lists,” he explains, adding that this may have been the case when Sage targeted its own consultancy customers, some of whom already had a relationship with a PMI intermediary, with a medical insurance scheme from Axa PPP healthcare.

This increased competition for a shrinking pool of business is certainly causing problems. While insurers do their best to keep their direct sales people away from advisers’ clients, the problems they face can be seen in the number of advisers competing for every piece of business. For instance, Moulton says he regularly sees clients that have five or six different advisers requesting quotations on their behalf.

This battle for business means the sales strategies used by some advisers also come in for flak. Mike Izzard, managing director of Premier Choice Group, says some advisers play on the lack of transparency around claims history. “A competing broker can put spurious information into a quote engine about the company’s claims history and generate a lower quote,” he explains. “Although the premium may increase if the claims history is disclosed, by that point, we may already have lost the client and their trust.”

A simple solution to this would be to introduce claims history disclosure in the SME market. This is already the case at Groupama, but Izzard doesn’t believe there’s any appetite among other insurers to introduce this.

There isn’t much new business around so we’re seeing some insurers and advisers having to resort to unethical practices to win business

Also causing concern is a practice that definitely doesn’t fit within the ’Treating Customers Fairly’ regulatory environment – re-underwriting business to secure a cheaper deal.

Unless a piece of business is completely clean, re-underwriting is likely to result in exclusions and therefore a reduction in benefits. But Smith has seen this happening more and more. “It’s like going back 20 years. It’s incredibly naive: the industry doesn’t need this,” he says.

While these practices are frustrating for the advisers that lose business as a result of them, there are also concerns that these strategies will have a long term damaging effect on customers. Where commission has been rebated or a scheme has been repriced based on an incomplete claims history, premiums will inevitably need to rise more sharply. Likewise, where a scheme has been re-underwritten, the client may find gaps in their cover when they come to claim. Ultimately both outcomes result in unhappy customers and an increased risk of cancellation, which has implications for the sustainability of the medical insurance market.

But while there may be instances of unacceptable behaviour on both the insurer and the adviser sides, many feel these are simply the result of more fundamental problems with the way advisers are remunerated.

While other areas of financial advice have shifted to level commissions or net pricing, the medical insurance market, particularly in the individual and SME markets, has clung on to front end-loaded commission.

“High, front end-loaded commission doesn’t work,” says Dave Priestley, sales director at PruHealth. “If you pay too much the customer has to pay for it in future years with higher premiums. This leads to cancellation by those who don’t make many claims and we end up with a very poor risk pool. Maintain this practice and the medical insurance market will continue its slow, painful death.”

To illustrate the problem, he says that in the SME market the claims ratio is around 70 per cent. On top of this, insurance company expenses run at around 15 per cent, leaving 15 per cent to cover commission and profit. So, if commission rates are higher than 15 per cent it means the insurer is running at a loss.

Paying a higher initial commission can also influence adviser behaviour. “If you run a sales team and reward them based on the amount of commission generated, there will be a temptation to switch business between insurers. It has to lead to bad practice,” says Hackett.

Removing the commission-based remuneration is one way to prevent this. For instance Boxall says his advisers are salaried rather than paid commission, so the only focus for their advice is to provide the best for the client depending on their circumstances, rather than a preferred commission rate. “We need to ensure the few who chase the money do not undermine general confidence in the rest of us,” he adds.

While this is a practical way to remove the temptation, and one used in many firms, level commission is regarded as the real long term solution to this problem. A level commission rate would discourage unnecessary moves between insurers.

High, front end-loaded commission doesn’t work. Maintain this practice and the medical insurance market will continue its slow, painful death.

The market is certainly beginning to shift this way. Bupa already offers level commission and PruHealth recently made it the only option on its SME product, paying 10 per cent for initial and renewal business. Priestley admits it wasn’t the easiest of moves. “Although we get a positive response from the executive level of intermediary businesses, unfortunately it doesn’t mean that the sales people feel the same way. This may mean it’s going to be harder to get some advisers to work with us.”

To create a level playing field and remove the temptation to churn business, he would like to see other insurers move to level commission. But there is resistance. Moulton says that, although a huge difference between initial and renewal isn’t healthy, paying a higher initial commission is fair. Axa PPP healthcare pays 12 per cent initial, 8 per cent renewal as standard. “It’s more expensive to acquire business and this should be reflected in the commission paid,” he adds. “We’re not seeing a lot of advisers that want level commission.”

But those in favour of level commission dismiss this argument. “If you’re doing your job properly there’s just as much work to do for the client at renewal. Front end-loaded commission fosters churning,” says Izzard.

For many intermediary businesses, level commission also makes sense from a business perspective, evening out the amount of commission received each year and making it easier to manage budgets. Boxall says that although there can be greater pain in the first year when business moves to an insurer paying level commission, this is compensated for in the longer term. “With level commission it’s unlikely that we would be profitable in the first year because of the work involved in managing a transfer, but we know that managing the scheme effectively over the following years would be profitable,” he adds.

And although there’s resistance from parts of the market to move to level commission, it’s conceivable that the regulator will force the industry to adopt this form of remuneration.

“If we don’t get a grip on this ourselves then the regulator might do it for us,” says Priestley. “It’s happened in other areas of financial services, and if we allow this to happen it could be a much tougher environment for everyone.”