Unless you’ve been under a rock, you’ll be aware that there are significant changes coming very soon (January 1st) to the life insurance industry – changes that will have a very real and immediate impact on advice businesses. I have recently finished a series of workshops around Australia, talking with advisers about what the new life insurance framework will mean to their business. There was a good mix of financial planning businesses who include risk in their proposition, as well as risk-only specialist advisers, and every one of them will be impacted in some way, with the degree of impact varying significantly between different business models, depending on the current structure of their business.
If there is one piece of advice I can give to any advice business that provides risk insurance advice it is to look at the impact of these changes sooner rather than later. The two main parts about the reforms that will have an immediate effect are the new commission structure, and the extended clawback period. To refresh your memory, the current upfront version of insurance commission will disappear as of December 31st this year, replaced with a phase-in period for the ‘new hybrid’ commission option:
- business written in 2016 calendar year – up to 80% upfront and 20% ongoing
- business written in 2017 calendar year – up to 70% upfront and 20% ongoing
- business written after 1 January 2018 – up to 60% upfront and 20% ongoing.
The level commission option is likely to still be available, although some recent commentary has suggested it may be changed.
The clawback provisions are being extended from their current structure so that any policy that lapses within the first year will see the insurer clawing back 100% of the upfront commission paid, a lapse in the second year will see 60% clawed back, and a lapse in the third year will see 30% of the upfront commission clawed back.
So what will these changes do to your business? If you haven’t already modelled it, Zurich have a handy calculator that will enable you to input your current business (renewals as well as new business written) so that you can see the impact on your cashflow and likely business valuation over the next ten years. Chat to your Zurich BDM to gain access.
Depending on the ratio of initial vs renewal income in your business and the income method you currently use, it is likely that you will see a decline in income over a number of years, before the increased renewal income has a positive affect on your cashflow. In fact, most of your peers found that it would take 5 – 7 years before their income returned to current levels if they’re using the upfront commission option now. You might find it is similar in your own business. That is, if you choose to be remunerated by commission only. That’s right – you have a choice.
If you haven’t already, it’s important to take stock of the amount of work involved for you to deliver insurance advice to your clients. I have provided a guide to this in my post on ‘What’s the future of risk commissions?’ , but it is important for you to assess this in your own business – determine your own charge-out rate and then apply it against the process you use. Don’t forget to account for the time you don’t charge clients directly for – doing your CPD, updating your knowledge on product & regulations, marketing to find new clients, managing your business and staff, and of course, your most important service – managing claims for your clients. (You can access our online Pricing Advice software to help with this.)
When you do all of that, it is likely that you will discover that you currently don’t get paid enough in many instances with the upfront commission option, and most certainly will not generate enough from the new hybrid structure. So…what to do? Most advisers will figure out how to start charging a fee in addition to (or instead of) receiving commission for your insurance advice.
We have found through the businesses we coach, that this is indeed possible, and our Adviser Pricing Models Research Report has revealed a significant number of businesses who are already doing this successfully. Don’t fall for the urban myth that clients won’t pay a fee for insurance advice, they certainly will.
In our experience however, this is not simply about determining a number and starting to charge a fee – pricing insurance advice is a lot more complex than that. Changing your pricing methodology (doing it well that is) takes time, and a whole lot of effort. You’ll want to revisit your value proposition, your processes, likely even your whole sales and client engagement process, and you’ll want to articulate (and deliver) an ongoing service offer. You’ll want to have a model that is sustainable despite the new clawback provisions, and you’ll want to ensure it covers all scenarios – providing value even if clients don’t get covered, delivering your claims management service, and you’ll want to start using terms of engagement letters that define the scope of your engagement and allow clients to engage you, as well as ongoing service agreements.
This is a really important issue to address. We know that we need to get more Australians to protect their families from financial risks and for many, the best way to do this is to take professional advice. At Elixir, we are dedicated to help advisers in any way we can, to build a sustainable business model and to keep getting great advice out to clients who will benefit immensely from it.
I’ve given a bunch of ideas on what clients will pay for in this article published by RiskInfo, and if you’re wanting to get a handle on how others have priced their services, we’ve just released an Insurance edition of our Adviser Pricing Models Research Report.
I will also be travelling the country with the AFA in the next two weeks, speaking on their roadshow, ‘Facing into Transition’. There is a great line-up of speakers and it will be a really valuable morning for those who attend. Book your spot here.
These changes are forcing every business owner to review how they deliver – and how they get paid for their insurance advice. I’ve heard many protest that we will lose experienced advisers and will only worsen the underinsurance problem in Australia because they can’t get paid enough for what they do…..but I disagree. I hope that my crystal ball is better than theirs because what I hope will happen, is that as business owners reflect on how they deliver their services and build a sustainable business, they will review the way they position their advice to their clients, and likely also review the service proposition they provide. They’ll get better at educating clients and prospects about the need for quality advice and they will attract more clients to them, who will take greater responsibility for protecting their families.
If you’d like to get help from one of our consultants now, shoot us an email to [email protected] …but at the very least, play with the numbers to see the impact on your business, and start thinking seriously now, about how you will handle the changes that will be upon us very soon.