New Zealanders may be paying too much for their insurance policies because of the commissions paid to financial advisers, a new report says.
The report was prepared by actuarial firm Melville Jessup Weaver (MJW) and was commissioned by the Financial Services Council (FSC). The FSC represents most life insurers, along with banks and investment firms.
The report has raised the issue of whether some people are being unnecessarily moved from one insurance company to another. It also estimates this could be adding around 10 percent to the cost of premiums in an industry that generates around $1 billion a year.
It found that up to half of the new policies being sold by advisers were to people who already had life insurance. This compares to 10 percent for new policies being sold by the banks.
MJW's report says that advisers are paid an upfront commission when they sell a new policy. An adviser can earn a one-off fee of up to 200 percent of client's annual premium when they place business with a new insurance company.
The report was funded by the FSC and its members. But it has been issued with a disclaimer that "some members believe there are matters covered in the report that are outside the scope approved by the funders".
"The report's findings and recommendations are MJW's alone and are not necessarily the views of either the FSC or its members."
MJW has several recommendations that it hopes can lead to a 10 percent to 15 percent reduction in costs each year:
1. Full disclosure of the premiums the client will pay and the commissions that will be paid to the adviser. It also recommends there be full disclosure of the corresponding premiums that would be paid if there was nil commission.
2. Reducing the up-front commissions for advisers from a maximum 200 percent. Instead there would be an initial commission of no more than 70 percent for new customers (50 percent initial payment and 20 percent servicing commission). The would be a cap of $5000 in the total payable commission. It also suggests no commission be paid when a customer moves companies within seven years.
It favours lifting the servicing commission to a maximum 20 percent to encourage better continuing service to customers.
3. Banning incentives like cash or overseas holidays.
FSC chief executive Peter Neilson says the report demonstrates it isn't a simple matter to definitively differentiate between good and bad policy replacement. However "there is a need to address the incentives on offer to financial advisers".
But he says the report also notes that "the payment of commissions by insurers to advisers is justified by the importance of life insurance for New Zealanders and extensive evidence consumers rarely buy adequate life insurance protection without the support of a consultant".
The full report can be found here.