View our new e-book: Fifty ideas to take your risk insurance practice from good to great

Dover has completed a comprehensive study of the effect of the 2018 LIF commission cuts on a on a typical start up risk insurance practice. The study shows that a hypothetical new practice opening its doors on 1 July 2018 faces a drop in the real value of its commission income by as much as 40% in the first year, compared to earlier times. The new practice will recover somewhat in subsequent years as the increased trailer commissions are paid, but not completely, leaving the typical new risk insurance practice about 20% worse off after seven to eight years.

hand cut euro coins with a knife on a cutting board, separating them as pieces of foodThis is a much worse result than most other observers are predicting. Other observers are just comparing the halving of the first year commission with the doubling of the subsequent year commissions and concluding all will be well, in the end. They ignore the effect of:

    1. doubling the claw back period to two years
    2. chronically high and growing lapse rates and
    3. the time value of money.

The drop in the real value of gross commission income effects all practices not just 2018 start-ups. The effect of the LIF commission cuts is best observed and measured by creating a hypothetical new practice without trailer commissions. But the effect is the same on all practices not just start up. The real value of their commission income will fall by at least 20% over seven to eight years.

We chose seven to eight years because this is the life of an average risk insurance policy. Most commission streams stop by the end of the eighth year, on average.

Existential threat

This dramatic drop in the real value of gross income is an existential threat for most risk insurance practices. Few will survive such a big hit to their top line.

Net cash flow, profit and goodwill values will fall by more than 20%. Short term results will be even worse. In many cases profits will disappear completely: risk insurance practices just aren’t this profitable.

Fewer new advisers will enter the risk advice space and many will leave it. This will worsen the already chronic under-insurance position and increase social welfare costs for the government.

The events leading to the LIF commission cuts and their catastrophic effect on future practice viability are explored here: Fifty ideas to take your risk insurance practice from good to great.

One man’s income is another man’s cost. The drop in the real value of the advisers’ gross commission income will be matched by an equal drop in the real value of the insurers’ gross commission costs. It’s a zero sum game won by the insurers. It’s a profit shift from advisers to insurers worth hundreds of millions of dollars a year, and billions over time.

What can be done about it?

Dover explains what risk advisers should do now to adapt to their changing environment. This includes practical advice on improving their systems, reducing the length, time and scope of their statements of advice, emphasizing strategies over product placement, and widening the range of services provided to clients. The key is generating more clients and handling their work more efficiently to compensate for the sharp drop in commission payments, particularly in the early years of the new LIF regime.

Fifty ideas to take your risk insurance practice from good to great is just part of Dover’s 2016 emphasis on helping Dover advisers create better practices by emphasizing sustainable strategies over short term product placement.

Dover believes the time to act is early 2016. 2018 will be too late.