Faced with falling profits, market consolidation and tighter regulatory requirements, the nature of the relationship between major life insurance companies, risk advisers and financial planners is set to change, according to the latest risk product market evaluation conducted by Harvest Partners.
And the most significant manifestation of that change appears likely to be a substantial revision of the commission structure that has traditionally underpinned the adviser and planner distribution relationships within the risk product market.
These radical revisions of commission structures are expected in circumstances where the Harvest Partners data reveals that senior executives see upfront commissions as one of the primary issues impacting on profitability.
What is more, the changes to commission structures are likely to be imposed on both sides of the Tasman, with Harvest Partners for the first time examining the New Zealand environment and revealing many similarities between the two markets.
Harvest Partners’ Peter Ramjan believes the data confirms that the existing commission structure is simply not sustainable.
“It grew out of the old tied-agent arrangements where high commissions were paid to keep agents on side, but all that has changed with the advent of the Financial Services Reform Act (FSRA) where advisers’ primary obligation is to their clients, not to the insurance companies,” he says.
“The clear message coming out of this is that the system is going to have to change, and as further industry rationalisation occurs it will be the remaining product manufacturers who increasingly have control and who will move to implement a more profitable regime,” Ramjan says.
He describes the New Zealand market as being hypercompetitive in much the same way the Australian market was two to three years ago.
“Australia took the hard decisions then, New Zealand is yet to do so, but there are indications change is on the way,” Ramjan says.
He believes where commissions are concerned, New Zealand finds itself in similar territory to that of Australia two or three years ago, with commissions of over 150 per cent in the first year.
However, Harvest Partners’ survey data does not reveal the continuing high level of commissions as a particular issue for senior executives across the Tasman.
Harvest Partners’ Steven Davidson says this is because the New Zealand market has not yet been forced to make the hard decisions but is coming to terms with profitability issues.
A common element in the survey data for both countries is that senior executives expect further consolidation in the industry.
The Harvest survey asked senior executives how many companies would still be operating in five years and concluded that the industry was likely to be “very different to the one we know now”.
In Australia, 61 per cent of senior executive respondents believed there would be only between 11 and 15 companies left operating, while 31 per cent said between six and 10, and 8 per cent said 16 to 20.
This compares to the New Zealand situation where Ramjan and Davidson remarked there were over 30 life companies, albeit that the top 14 account for 96 per cent of the market, and where 58 per cent of respondents believe there will only be six to 10 companies operating in five years time, while 25 per cent said 11 to 15 and 17 per cent said 16 to 20.
Interestingly, none of the respondents on either side of the Tasman believed there would be more than 20 companies left.
Davidson and Ramjan believe that apart from a substantial revision of the commissions structure, the other factor likely to affect advisers and planners will be broader changes in distribution strategy, many of them a result of the changes imposed by the FSRA.
The Harvest data suggests that distribution will continue to be a powerful element in the risk sector, there will be greater demand for distribution branded products and life companies will utilise “multi-channel distribution”.
“The way companies operate will also continue to evolve through the utilisation of outsourcing for certain functions,” the survey says.
“One hundred per cent of respondents believe that at least some functions will be outsourced,” it says.
“By far the most popular nomination was information technology at 100 per cent. This may be due to the high cost and speed of change in this sector making it difficult to keep pace by relying on in-house resources and expertise,” the Harvest data says.
Administration also scored very highly with a 92 per cent response, while claims and distribution both rated 54 per cent and underwriting rated 39 per cent.
All respondents were asked where they saw their competitive advantage coming from in the future, with most listing product features and price as being key elements across almost all categories — disability income, trauma, and total and permanent disablement.
Harvest notes that while this outcome might be partly due to the inherent nature of price and benefits being more measurable and therefore more easily used as a comparative guide, the outcome was still cause for concern “if companies maintain the potentially profit damaging practices of continual price and benefit improvement”.
