IS THE life assurance industry facing a commissions free for all now that its long standing Agreement on Maximum Rates of Remuneration for Life Business looks set to be outlawed by the Competition Authority? What are the implications for someone about to buy a pensions or savings policy or for people who have recently done so?
Under EU requirements, every industry wide agreement must be validated in Ireland, the Competition Authority is the vetting agent, working under legislation enshrined in the 1991 Competition Act.
The Irish Insurance Federation's commissions agreement, set up in 1987, was submitted to the authority for consideration in 1993. Last summer, the Consumer Association discovered that the agreement, which sets maximum, product remuneration rates for agents, tied agents and brokers, had still not been sanctioned.
Concerned that the agreement, which they claim is both anti competitive and anti consumer, was about to be enshrined as an amendment on commission disclosure in the Sale of Goods and, Supply of Services Act 1980, it filed a lengthy objection to the authority.
The Competition Authority considered both the CAI objection and another submission in support of the agreement from the IIF before it issued its preliminary notification to reject the agreement last week.
Today is the final day for any third party to submit observations to the authority and the Irish Brokers' Association, which represents about 600 brokers, told Family Money it would be making a pro agreement submission of its own. Whether the late effort, which presumably will repeat all the IIF's arguments, will sway the authority is doubtful, though a final decision is not expected for a few weeks at the earliest.
The IIF insists that the ending of its commission's agreement will result in a free for all, with companies raising commission, like they did in Britain when their agreement was abandoned, to the detriment of consumers.
The Consumer Association says this will only happen if full disclosure of all costs, including the companies own significant set up charges (which are not subject to any price fixing agreement) is not implemented by legislation. If consumers can see exactly what each company is paying the sales persons and themselves from the premiums, it will be able to compare this to what other companies are charging. Combined with a record of its fund performance this will help the consumer make a final product choice.
One repercussion, to which both parties subscribe, is the fallout in the numbers of agents and brokers in the market. Over 4,000 intermediaries are affected by the Competition Authority's decision and many of the smaller, less efficient ones will find it difficult to maintain offices if commissions are lowered, or are spread to take into account persistency (i.e. policies that are held to maturity rather than encashed early by badly informed or disgruntled customers). Some industry sources suggest that while some insurers may increase commissions, it will only be to intermediaries who offer quality volume business. Only bigger firms will be able to meet that sort of criteria.
Lower commissions, or those that are spread over the term of the policy, will obviously benefit the consumer who will see more of their monthly contributions going directly into their investment fund rather than directly into the salespersons pocket.
Already clients who buy policies from Equitable Life enjoy better early fund values because this company does not pay commission similarly, the bank assurers offer low cost savings plans because of the way they rely on their existing branch officials to sell their policies.
But Irish Life is a good example of a life company that has been steadily bringing down its own costs to be able to offer better initial fund allocations. If Irish Life was to raise commissions tomorrow to outside intermediaries, the impact of this could, presumably be absorbed by the company because of its own cost cutting efforts and not be passed onto the consumer.
Unfortunately, anyone who already has a life assurance savings plan or pension is probably stuck with it most policies deduct the charges within the first year to 15 months and pay them to the intermediary over that period. Even if the insurer changed the commission structure with the result of better early value, the money has been paid and could not be recovered.
More than one industry source has admitted that there is a question mark over the nearly four year delay between the time the agreement was submitted to the authority and its ruling, and have expressed concern over whether clients who took out policies over the period have a valid complaint about the commission deducted from their contributions.
The Consumer Association's case against the agreement was wide ranging. It claimed that the rates laid out by the agreement were not "maximum" commissions, but rather the only commissions that were ever paid, and therefore a form of price fixing, outlawed by the 1991 Competition Act.
By allowing the life assurers to work in concert with the intermediaries on the matter of commission but not their own charges, the agreement led to a lack of transparency at point of sale and made it impossible for consumers to adequately price discriminate between one product and another.
The agreement, claimed the CAI made all sorts of aspirations about quality advice, but included no mechanism to either check to see if the same was being applied or to apply sanctions against members if the agreement was breached. It is a document, they submitted, "of which the vast majority of consumers are ignorant - and have trouble understanding".
Since it pays the same commission to all, regardless of the quality of advice and service offered, the agreement discriminates against professional and efficient advisers who can show a high persistency rate - that is, a high number of clients who keep their policies to maturity, rather than cash them in early. The good intermediaries are forced to subsidise the bad ones. The agreement, rewards new sales to the detriment of proper advice.
In its own summary of the facts of the case, the Competition Authority, under the heading Applicable EC Law, noted that while agreements in which insurance companies co operate on statistical research and risk calculations and some other "specified areas" are permitted by EU Commission Regulations, "the specified areas do not include dealings with intermediaries".
In what appears to be a relevant reference to commission payments, it added that "concerted practices on commercial premiums, i.e. the premiums as actually charged with their loading to cover administrative costs and profit margins, are not exempted". It then offered a number of cases where insurance agreements in other EU states had been outlawed for violating various regulations.
The IIF has always maintained that paying the same commission to everyone meant that the intermediary would not be influenced by the remuneration he was to receive when dealing with clients and that it helped to maintain the intermediaries independence from the product provider.
In its summary of facts, however, the Competition Authority noted that: "The service provided by an insurance intermediary, not unlike that provided by a travel agent is a combination of services to the insurance company and to the retail customer. They are not clearly, or exclusively, or continuously the agent of either the insurer or the customer."
The ambiguity about the independence of agents and brokers, caused by the commissions agreement may finally be addressed if and when the agreement goes ahead. Some brokers may prefer to abandon the commission regime altogether by charging a fee for their advice and remitting any commission that comes with the product back to the client in the form of a fee rebate or as an allocation to their investment fund. (A small number of brokers already operate such a system.)
Some companies will undoubtedly introduce remuneration payments (as opposed to upfront commission) that will reward persistency, paid on an on going basis over the life of the policy, thus having a smaller impact on fund values. Others will pay what is known as indemnity commissions, an upfront commission in which the risk of lower persistency is taken by the insurer.
If the client encashes or stops a policy early, clawback provisions allow the life office to recover money from a distributor's account, without impacting on the fund value. Indemnity commissions, claims the CAI, requires the insurer to apply high quality credit risk assessment to the intermediary, something they have not had to bother with under the commissions agreement. The IBA dismisses this suggestion and says that indemnity commission, has done nothing in Britain to improve early surrender values or persistency. Actuaries there build in the inevitable cost of recovery of funds into the policyholder's costs.
However the system changed, there is certain to be a period of confusion and uncertainty. But the central issues - transparency and full disclosure of all costs that impact on the investment value of a savings or pension policy - are here to stay".
