How are risk advisers paid?
Most advisers are paid most of the time by commissions. The commission is usually a percentage, or a derivative of a percentage, of the premium paid by the client to the insurer in the relevant year.
In some cases advisers are paid salaries by the insurer, and the salary computation may be in part based on the amount of the premiums paid by clients to the insurer.
On some cases advisers charge on a fee for service basis, either on a time spent basis or an agreed amount basis. These advisers rebate or refund all or part of the commission to the client. This distorts, and overstates the effective amount of commissions and understates the cost of insurance premiums. No statistics are available on the extent of commission refunding.
Advisers can reduce or “dial down” commissions, in return for a lower premium for the client. But this is not common because the reduction in the premium is usually much less than the reduction in the commission.
Commission rates are relatively similar between insurers, although in early January 2016 there was some evidence that some insurers were already moving to the post 1 July 2016 caps, discussed later in the context of the Trowbridge Report.
Commissions can be loosely classified into three main types, being:
- up-front commissions, being a first year commission of between 100% and 130% followed by an on-going commission of around 10% a year for subsequent years
- hybrid commissions, being a first year commission of between 50% and 70% followed by an on-going commission of around 10% a year for subsequent years
- level commissions, for example a first year commission of up to 30% followed by an equal commission in each subsequent year.
Most insurers impose a one year “claw-back” rule whereby the first year commission is paid back, in full or in part, if the policy lapses in the first year.
Most adviser must pay their AFSL a percentage of their commissions. Dover advisers are not required to do this. Dover does not receive a percentage of adviser commissions because this can create product bias and a conflict of interest when reviewing and approving adviser SOAs.
Commissions and other fees must be clearly disclosed in all SOAs.
Most insurers distribute most of their products through the commission model, and most commissions are up-front commissions of up to 130% followed by an on-going commission of 10%.