Mercifully, the fact that group risk providers don’t pay different rates of commission spares us from the brouhaha so prevalent in the private medical insurance (PMI) field, where commission rates can differ significantly between different providers – especially when large business volumes are being introduced by intermediaries.
The commission level charged in group risk, which will be somewhere between 0 and 30 per cent, is determined by the adviser, ideally after discussion with the client, rather than by the insurer. Insurers effectively just facilitate the decision reached by the adviser and client by adding any commission rate requested to product premiums.
Legal & General distribution director Colin Fitzgerald says: “I can’t remember ever having refused an intermediary a rate of commission, although we will certainly be asking questions if it goes much above 20 or 25 per cent. We might, for example, want to know if it’s paying for third party services like absence management. But, provided the intermediary is declaring the commission to the customer, it’s up to the customer if they want to pay.”
Nevertheless, there are still plenty of important trends and issues that ensure that commission – or fees – are subjects rarely far away from intermediaries’ lips.
For a start, the commission or fee evels charged by an intermediary can certainly be an important consideration if it is trying to prevent competitors from stealing its clients or trying to win a new client itself.
Towergate Health and Protection head of group risk David Williams says: “Remuneration is a key differentiating factor, along with service standards and capability. If we were looking to win a new client we might pick out certain elements of the policy we can improve and also see if we could make the basis of emuneration more attractive.
“So, it’s an important part of the overall sales pitch. We would also expand on what we provide n return for the fees or commission we are charging by itemising things ike wellness services.”
The traditional rates of 4 per cent for group life and 12 per cent both for group income protection and group critical illness cover have also become truly outdated, particularly for group life – where advisers now have to consider everything from the implications of excepted schemes, the lifetime allowance, the Equality Act and GDPR to the need to communicate the benefits of add-ons like employee assistance pro gr ammes (EAP s ) and bereavement counselling.
A commission level of 10 per cent may therefore not be hard to justify on a sizeable group life scheme, and a five-man fish and chip shop may well require the full 30 per cent.
Areas of disagreement
Transparency is constantly highlighted as crucial, and most commentators are satisfied that advisers are compliant in this respect.
Mattioli Woods employee benefits team director Sean McSweeney says: “Full disclosure has been around a long time, but I still suspect some employers don’t understand how commission affects the final premium.”
Most also feel current commission levels are broadly satisfactory, but there is some disagreement around smaller cases. Zurich head of market management, corporate risk Nick Homer warns: “Because it’s a market that has grown up very low cost or from a link to pensions, there is a danger of intermediaries under-charging rather that over-charging.”
But Canada Life Group Insurance director of marketing Paul Avis suggests that advisers who use his company’s CLASS system – most of whom take 20 to 30 per cent commission on all products – might be guilty of forgetting that they will be getting the full commission every year.
He says: “When we last did a review the average length of scheme was well beyond 10 years. So maybe some advisers could be doing it for less.”
Fees vs commission
There is a consensus that there has been a gradual trend back in the direction of fee-paying in group risk – following a shift towards commission in the aftermath of the credit crunch.
Amongst intermediaries prepared to reveal the proportions of clients who operate on commission or fees – or a combination of the two – there are some big differences. Mercer, for example, estimates that 80 per cent are fee-based and 20 per cent are commission-based, whereas Premier Choice Group estimates that 80 per cent are commission- based and 20 per cent are fee-based.
Few of either’s clients mix the two, but plenty of those of other intermediaries do, and in some cases the waters are muddied by fees received from pensions and other products.
Howden Employee Benefits & Wellbeing head of benefits strategy Steve Herbert says: “Some
intermediaries are time-costing their work so that at the end of the year they may agree with the client to charge more or to make rebates by offsetting against other services, as opposed to writing out cheques. “
This is unlikely to apply often in group life, where the chances of excess commission over the year are very slim, but with group income protection they could offer additional services to offset money not justified by time costing.”
Towards fee paying
Those who urge further switching from commission to fees invariably argue that the growth potential of the market is being stifled by existing commission structures limiting the ability of advisers to communicate the benefits of added-value features on group income protection and of third- party services.
Fitzgerald says: “Those who haven’t got the model right will exit certain sizes of business, so we need to get a consensus approach on how to move forward on this. To educate clients used to paying commission as to why fee-paying may be good for a raft of additional services we need the ammunition to persuade the finance director to pay a fee.
“Intermediaries should be well placed to build quality data and be clear about what employers are trying to achieve. The information is starting to come through but it requires intermediaries to collect, collate and interpret it and take it back to employers. To do this they need remuneration, so it’s something of a chicken and egg situation.”
One for the future
Herbert suggests a more radical proposal. If he was a benevolent despot he would scrap the current commission system and start again, making full commission dependent on intermediaries performing education and communication services.
He says: “In the short-to- medium-term I don’t see any change ahead, but I think it has to change if the industry is to move forward. If we don’t, the game will get taken away from us by government anyway and we could find ourselves competing with the equivalent of Nest in pensions.”
Do the right thing
Premier Choice Group head of risk and protection Steve Ellis says: “If all a person is in a job for is commission then they are in the wrong job.
“Group risk has been relatively free from mis-selling scandals, and the opportunity to mis-sell is quite limited,” he continues. “It is also an attractively tight-knit business community with a finite number of insurers and the ability to build a genuine reputation for integrity because everyone knows everyone else. If you started stitching clients up or giving bad advice you would get found out very quickly.”
Ellis, who used to work in pensions, investments and mortgages, observes that – prior to the Retail Distribution Review (RDR) – the scope to weight advice towards products that boosted your earnings was much greater in those fields than it currently is in group risk.