Making life insurance products transparent and affordable

~ By Felix Ling ~

After reading the reported argument by Manulife CEO’s analogy “The Lesson about putting a car on the moon”, in relation to whether to import fee-based system for insurance sector here, I would like to share my experience and understanding about life insurance distribution channel; mainly on the commission-based tied agency system here.

In Singapore, large majority of life insurance and related product sales are contributed by the tied agency distribution system. Though there are other alternative distribution channels such as Bancassurance and Independent Financial advisors, brokerage etc, the volume of life insurance sales by tied agency force is beyond question.

The issue of adopting fee-based system for insurance sector is not new. In year 2000 I was a sub-committee member involved in the insurance distribution channel review initiated by MAS.  The outcome was to introduce Need-based Selling process for all the distribution channels including the main tied agency force. Of course the FAs (Independent Financial Advisors) are already practicing fee-based approach in which the Need-based process is their main tool. 

Recently both the regulator and insurance industry have raised the subject of whether fee-based system to be implemented across the board. This is definitely a sensitive issue not only for the insurance operators/manufacturers and product distribution agencies but it also has a cost impact on the customer.  Is it truly a case of “putting a car on the moon” as what Manulife Chief has said? Fee-based approach, as I would say that this is not such a ridiculous scenario of a car on the moon but rather, a case of putting customer first.

My viewpoint is based on the following key considerations:

a. Multi-tier commission system as in the case of life insurance products remains a major cost factor in the equation of product pricing as well as benefits (for the policyholders).  Such system has no direct linkage to better customer service in the process of insurance sales. This system aims to “hold on tied” to the agency force so that insurance operators could leverage on its powerful sales approach (sometimes it leads to churning). Therefore, if the insurance industry continues to hold on to the commission-based system, high cost of customer acquisition will continue to be born by customers.

b. Though in Singapore insurance market scenarios, it may not be viable to switch from commission-based to fee-based system overnight, but it is definitely a significant step and a right direction in which both the regulator and insurance industry should consider serious; albeit it must have a master blueprint and in stages for transition from commission-based to fee-based. The long-term perspective of Singapore insurance coverage will become more and more crucial for aging population in general masses, albeit that the middle-income group would continue to be served on investment needs (i.e. wealth creation). Therefore, going forward, it is highly important for traditional life insurance protection & saving products to be much more affordable to the masses. Multi-tier product commission-based system will not contribute to lower costs of customer acquisition. Fee-based coupled with the currently practiced Need-based Selling approach/process is a logical way to open up the “commission sacred cow”.  In the long-run, customer will benefit more from this approach, albeit that consumer education remains an integral part of the fee-based market approach. 

c. Fee-based approach is still a powerful eyeball to eyeball sales process.  What it requires is professional knowledge and & skills in much wider scope of financial planning, in order to be of value-added to customers. With the converting to fee-based across the board, it is expected that the insurance industry will “lose” up to 1/3 of its current strength of agents. On the brighter side, those who remain in the industry will surely have to be more capable and knowledgeable to serve the market. Productivity increase will continue to bring in stable income for them.

d. As for the key leadership of tied agency distribution that rely heavy on commission-based system, insurance operators should start to explore the future of “hybrid” tied agency system in which, agency leaders/managers can come under employment of insurance company with much more stable and distinct career development and progression. In this scenario, agency management will be enhanced on quality in distribution channel supervision.  Training infrastructure will shift its focus accordingly. Performing agents are put on fee-based (not on the moon) with clear fee structure and levels of advisory scoping tasks, be it wide spread of insurance products or in most cases, bundled products with investment elements. Overall this approach further opens up the otherwise, “closed box” cost structure inherent with the commission structure/system.

I am fully aware that why industry operators are voicing their objection to fee-based approach.  It is the fear of losing hold onto the tied agency distribution force that current form the backbone of insurance life insurance premium income for the companies. The reasons quoted about social security system in UK and Australia, product bundling, etc. have little if not irrelevant to the review of implementing fee-based approach. Indeed very little was mentioned about customer benefits in this context. 

I experienced the core value of tied agency system when I was with the insurance industry. And I know that proficient tied agents have no problem taking the challenge going forward if they were to take customer needs in perspective. In fact, they will excel. What’s crucial for regulator and insurance industry is that, such fundamental change must not be done abruptly and without first of all, putting in place a practical framework that governs fee-based approach to insurance sales, as well as involves key organizations of insurance industry such as the IFPAS etc, to iron out foreseeable structural issues and market forces influence.

I am not an advocate of following this practice of “Letting the customer choose whether they want to pay commission or a fee” style of market conduct. Life insurance and bundled products are not that simple to understand in the commoner’s eye. So it is unfair to “push” such decision to the customer. Furthermore, allowing in the market place, some to pay fees and some to pay commission for similar products, it is a sure way to create confusion for the industry if such “let people chose” rule be implemented across the industry. It will also add to the problem of market conduct, to have double-standards of payment for product advice.

Felix Ling is a former senior management staff from the life insurance industry