Protection advisers have been warned to expect higher levels of commission clawback as consumers look to tighten their purse strings wherever possible in the aftermath of the pandemic.
Alan Lakey, director at Highclere Financial, said he was expecting the number of clawback requests to increase over the next year or so due to the “economic climate” caused by the coronavirus crisis.
As people start to make household economies, they may start considering how much they are paying on insurance premiums, and could – if they are not encouraged to keep their protection policies – cancel to save money.
Mr Lakey said: “We will all be suffering higher levels as consumers look to cancel payments they think are unnecessary.
“The firms that will suffer the most though are telephone-based firms, where people buy the policy from them but do not really want it or understand it. They will be the first to go.”
How it works
However, it will not just be the fact consumers are left unprotected should the worst happen, but also advisers who have sold the policies will face clawback requests from insurance providers.
In some cases, these requests can carry high rates of interest – up to 18 per cent or more – that could have an effect on the adviser’s income.
FTAdviser spoke with several large protection providers and found various commission clawback policies, with differing ways of calculating the clawback on lapsed policies.
With Zurich, for example, advisers earn commission over two or four years, depending on the terms agreed. If a policy lapses during that period, however, the clawback is equal to the amount of commission that has not yet been earned.
For example, an adviser with an agreed four-year earnings period with Zurich would see a commission clawback of approximately 25 per cent if a policy lapsed after three years.
Meanwhile at LV, as a very rough rule of thumb for its protection policies, a typical clawback percentage on a four-year indemnity basis would be circa 90 per cent in the first year, 70 per cent in the second, 40 per cent in the third and 20 per cent in the last.
With Aegon’s personal protection policies, commission clawback is calculated based on factors including the policy payment and an indemnity factor (see box-out above).
Paul Reed, director and protection specialist at Vita, described clawbacks as an aspect of protection that can “make or break a business”.
Mr Reed said that while most brokers would prefer to receive commission on a non-indemnity basis, cash flow “inevitably plays its part”, especially for start-up companies.
Commission can be paid upfront on an indemnity basis, or over a period of time on a non-indemnity basis. The latter means that any commission clawback does not have to be repaid.
Mr Reed also warned that high sales volumes can often be a “false economy” if clawbacks are not provisioned for.
He said: “Pushing the client into a ‘quick sale’ seldom works as the client may not understand the true value of what they’re putting in place if time hasn’t been taken in educating the importance of the cover being arranged.
“This in itself can lead to higher clawback figures and cause the adviser financial difficulties, especially if done en masse.”
Debt to pay
Advisers have queried the sometimes high cost – and the discrepancies from different providers – of the interest rates charged on the clawback debt.
When the provider ‘claws back’ the commission paid to the adviser, interest is chargeable on the debt after a grace period, typically one to three months.
The industry standard seems to be approximately 8 per cent a year. Royal London confirmed it charged this amount, while emails from Aviva, seen by FTAdviser, show 8 per cent is also chargeable on clawback debt owed to the company.
However, advisers could see interest rates of up to 18 per cent a year charged on the debt owed to providers.
Zurich applies 1.5 per cent monthly compound interest on any debts more than three months old – which equates to 18 per cent a year.
Julian Pruggmayer, an adviser from Financial Risk Management, is currently contesting the amount of interest charged by Zurich. He claimed the level of interest was “shocking”.
His argument with the insurance giant over the level of interest, and the documentation used to evidence the charges, has resulted in a year-long dispute, which has seen his agency with the insurance provider cancelled.
However, a spokesman for Zurich maintains the provider has informed Mr Pruggmayer of both the original terms of commission and the total debt owed.
Mr Lakey of Highclere Financial agreed that 18 per cent was an excessive amount. He said: “About 18 per cent is credit card interest rates, which is very close to usurious territory.
“It is not defendable in any commercial way, not today with a low-interest-rate environment.”
Mr Lakey added that it “would be nice” for all insurance companies to charge a common interest rate so advisers “knew where they were” when it came to clawback debt.
A Zurich spokesman said: “We make [our commission structure] clear in our terms of business and on the front of monthly commission statements.
“We are committed to taking a fair and reasonable approach to any outstanding debts and our preference is always to work with advisers in these circumstances.”
imogen.tew@ft.com & chloe.cheung@ft.com
What do you think about the issues raised by this story? Email us on fa.letters@ft.com to let us know.
