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.