Level best?

AMII chairman Wayne Pontin wants the PMI industry to move to level commissions. Sam Barrett finds out what it could entail

For years, level commission has been regarded as an important but difficult step for the group medical insurance market. But, while some have been bold, with the new chairman of the Association of Medical Insurance Intermediaries (AMII) making it one of the key objectives for his term of office, the market could be set for change.

“Larger corporate business is already fee-based or written on a level basis and I will be setting up meetings with all the insurers to lobby for a move to a flat rate commission structure for SME business too,” says Wayne Pontin, sales director (West) at Jelf Employee Benefits and chairman of AMII. “Some argue that higher initial commission is necessary to cover the acquisition costs of new business but it can also lead to some dirty tricks that aren’t good for the long-term sustainability of the market.”

These dirty tricks include churning, where business is moved every year to tap into higher commission levels, and commission sacrifice.

With this, the adviser rebates some of the commission to their client, effectively giving them a discount on the premium. “It’s a short-term strategy,” adds Pontin. “If you give back 40 per cent of your commission in the first year, you’re stuck with a big price jump when you get to renewal the following year. It’s not transparent and the industry has to address this or it will find the regulator forcing change upon it.”

While there’s clearly a snapping point with this strategy, current market conditions are doing little to help. With the battle for business fierce, insurers are happy to undercut one another to win market share. This makes it easier for brokers to find a renewal deal that will mask the commission sacrifice.

There’s also plenty of debate around higher rates for volume business. Stuart Scullion, managing director of the Private Health Partnership, says it’s naive to think that these deals don’t exist and that it’s fair that an adviser should be rewarded for generating more business for an insurer, but he says he would never consider a commission deal that involved some form of trigger for a higher level of remuneration. “If the level of commission increases at, for instance the 100th sale, it can affect behaviour,” he says. “The incentive to place that 100th company with the insurer to trigger the higher level of commission will be great.”

Unsurprisingly, there’s plenty of support for a move to level commission from both advisers and insurers. Glen Smith, managing director of Healthcare Partners, prefers to receive level commission. “I’m not really interested in getting more money up-front,” he says. “I always look at the level for renewal as this forms the bedrock of my business.”

It’s also an approach adopted by the Private Health Partnership, with Scullion saying he looks to get level commission deals with the main providers for all group business. He says that this more fairly represents the amount of work involved but that it also encourages advisers to place business with an insurer for the long-term. “We don’t want to move business every year: it’s not right for the client and it’s expensive,” he explains.

To support this model, his firm conducts a due diligence process to be sure that factors such as benefits, price, customer service, claims payment record and renewal pricing strategy are more important than commission levels.

Insurers are also keen to move to commission levels that reduce the likelihood of these behaviours.

Christine Stewart, director of SME at Bupa Health and Wellbeing, welcomes the industry moving to a more level commission structure. “As an industry we need to ensure there are mechanisms in place which encourage companies to view healthcare as a long-term purchase and ensure there isn’t unnecessary churn due to high initial commission levels,” she says. “Our current intermediary strategy is in line with this.”
Axa PPP Healthcare is also supportive of the call for level commission. Its standard terms are 12 per cent initial and 8 per cent renewal but it will tailor commission levels for its key intermediaries. “We will consider it but we’re not having our doors beaten down by advisers demanding level commission,” says Paul Moulton, sales and client relationship director at Axa PPP Healthcare.

He also questions whether a move to level commission would be sufficient to stop business being moved every year, pointing to the fact that the remuneration models for advisers with high lapse rates included some with level commission as well as others with higher initial commission.

While most insurers are happy to offer level commission when an adviser wants to be remunerated in this way, some have gone a step further and made it their only method of remuneration.

PruHealth stuck its neck out when it announced it would only be offering level commission on its SME business from April 2011. Dave Priestley, sales director at PruHealth admits it was a tough move but says he hasn’t encountered any major problems with the strategy. “We do find there are two responses,” he explains. “While some advisers understand the market benefits and have their businesses set up to accommodate level commission, some do operate business models that are dependent on high upfront commission. Philosophically they might be in the same place but it’s hard to move if you need the commission to fund your business model.”

Among the business models that do gravitate towards higher upfront commissions are those that have higher business acquisition costs. These include companies that use telesales; those using a pay per click model; and, in some cases, those with self-employed advisers looking to make a living from commission.

But while some insurers have moved towards level commission, others have found it a difficult strategy to maintain. WPA has offered level commission for many years but recently revised its policy, offering a choice of level or the more traditional higher initial commission model. Adrian Humphreys, managing director of corporate clients at WPA, explains: “Feedback from the brokers we work with showed they wanted higher initial commission to reflect the additional work they do to win new business. I don’t really have a problem with offering this as long as it’s transparent.”

Exactly what constitutes a fair rate of level commission is also up for discussion. As well as putting remuneration firmly on the agenda, PruHealth’s decision to offer level commission at 10 per cent inevitably fired up the debate around whether this was enough. Pontin believes it’s too low. “Level commission of between 12 and 15 per cent is a decent amount for the work that an adviser should be doing on behalf of their clients,” he says. He backs this view up with simple maths, taking a typical model of 25 per cent initial followed by 5 per cent renewal and averaging it over a four or five year period to give a level around 15 per cent.

Priestley accepts these calculations but believes that a rate of 10 per cent more fairly reflects the market. “Everyone wants more but we have to look at our bottom line too,” he says. “If the market could move to a higher price point for the product and reduce the amount of commoditisation then we could support higher levels of commission.”

His view is supported by some advisers too. Scullion believes insurers should be able to make a profit, pointing to recent market consolidation as evidence that this hasn’t been the case. “Consolidation isn’t good for anyone in the market and it threatens the long-term viability of advisers as well as insurers,” he adds. “We must get the balance right.”

While profitability may be at stake when it comes to setting the rate for level commission, some argue that the adviser model also needs to adapt to the new market conditions as this would make lower levels of commission more palatable.

As an example, Humphreys says that advisers need to look at how they can make themselves more efficient. “We see so many 1970s work practices, such as requesting lots of quotes at renewal, but this isn’t always necessary as technology makes it much easier to automate this process,” he says.

Another area where he believes advisers are creating unnecessary work for themselves is with the handling of post. He says that many advisers insist they receive their clients’ post but it is much more efficient to send electronic copies directly to both the broker and the client. “Many advisers have a fixation with doing the insurers’ job but they should really stick to providing the advice and leave us to pay claims and so on,” he adds.

Getting the balance right between insurers, advisers and the commission they receive is essential for the survival of the medical insurance industry. Under-pricing business, whether through a desire to win market share or a commission sacrifice deal, can only devalue the product, causing margins to shrink further still. “We must demonstrate the value that an adviser brings to the sale of medical insurance,” concludes Pontin. “Advisers must move from being transaction based to being advisory. Level commission will help to support this.”