Proposals calling for an end to commission caps have already evoked criticism – but this may be shortsighted Neil Thomas Many consumers buying or holding insurance products are probably blissfully unaware that
a portion of the premium they pay every month is going to the broker who sold them the product. They will not see the money going off their premiums to the broker, who receives a cash payment from the company concerned. Rather it+s an indirect payment – the money payable to the broker is removed from the premium, which means it does not go into the product, often an investment or savings component of the product. Consumers are probably also unaware that the law limits the amount of commission payable to a broker, financial advisor or company agent. This was introduced about five years ago in an attempt to stop sky-high commissions being extracted from consumers+ premiums as insurance companies tried to attract more business from brokers and successful brokers demanded higher commissions for bringing the business in. The cap on commissions varies according to the type of product or insurance policy, but is determined as a percentage of premiums. In theory, it seems beneficial to consumers – in practice, it has its problems, most notably that for the majority of smaller, individual policy- holders the maximum commission is regarded by the industry as the standard commission. It+s the old attitude that seems to surface when-
ever -free-market+ business and state regulations
collide: you want to set a limit on what we can charge, so we will charge as much as we legally can. The Usury Act is another fine example of this. All of this, however, looks set to change according to proposals calling for an end to commission caps. Not surprisingly, the proposals – published for comment recently by the Financial Services Board (FSB) – have already evoked criticism from some consumer groups and the howl of protest is expected to rise. Anxiety about scrapping the maximum limit on commissions is understandable. But it may be shortsighted. Over the past five years or so there has been a perceptible rise in consumerism in South Africa, much of it aimed at the insurance companies and banks. The ordinary person in the street is no longer the financial services fodder they used to be, though they are also far off the more militant consumerism seen in many countries overseas.
As a general principle deregulation is good, even in our less than perfect free- market
system. But the proposals to lift commission caps, if accepted, will place increasing
responsibility in the hands of consumers to ensure they protect their rights and fight for the best deal possible when buying insurance products. Ammunition for consumers will come from separate but related legislation published at the beginning of the year in the form of the Long- and Short-term Insurance Acts. Among other things, the Acts contain a new set of rules called the Policyholder Protection Rules. An important element of these rules is that for the first time brokers will be compelled to tell existing and potential clients exactly how much commission they receive from insurers. Many of them will probably try and fudge the issue, but consumers can demand an exact breakdown of commission, insisting to see how much is deducted from their monthly or annual premiums for commission. These rules are not in effect yet, but are expected to be before the end of the year. They will certainly be in place before maximum commissions are scrapped. At present, though, there+s no harm in asking your broker what portion of the premiums you pay goes towards commission. Any good broker worth their salt – and there are lots of them out there – should be happy to tell you what they earn from your premiums, and will no doubt offer strong justification for why they deserve this level of commission. It is then up to you to decide whether the advice and service they give is worth what you are paying. Remember service does not stop with providing you with the most appropriate product – it should be ongoing, adjusting your portfolio as your needs change through ongoing service. If your broker is reluctant to disclose details about commission, even though it is not yet law, start looking around for somebody else. Disclosure is one of the more valid points offered by the FSB for ending caps on commissions. They argue that commissions should be part of the marketing process, with their level determined by assessing the value of the service rendered by the broker.
One effect of the proposals is that while commissions may go up, at least over the short term (international experience showed an
initial rise, then sharp decline), brokers will have to work harder to earn them. It may well be worth paying one or two percent more for valuable service. But before signing on the dotted line, get a commitment from the broker on exactly what service they will provide to earn their commission – in writing.
Once commissions are deregulated and disclosure is compulsory, consumers will also have some space to negotiate commissions. In practice, there may not be much room for small clients – it+s the people or companies paying large amounts on a regular basis that will be able to argue commissions down. But that does not rule out smaller consumers. Brokers will probably collude and try to introduce a standard percentage of premiums as commissions on single products. But many people have more than one product through a single broker – typically a life policy, retirement annuity, perhaps short-term cover on household contents and a motor vehicle, maybe even unit trusts – and in these cases you are certainly entitled to
argue for a lower rate of commission. There is also the option of going directly to the insurance companies. This will require a lot of time and legwork but can save money. It+s even easier if you have access to the Internet and can visit company websites. For most sophisticated products, however, it+s probably better going through a broker. If the advice and service is good, it+s worth paying for. But make sure you know exactly how much you are paying, and if it seems too high, negotiate. Or find another broker.