For decades, insurance companies have debated the issue of leveling out–or “levelizing”–commissions paid to producers who sell life insurance products.
The discussion has had its share of controversy. The approach has been favored by some interests but rejected by others, due to the impact levelizing may have on producer income, product pricing, marketing and more. Still, in the worksite life insurance market, producers and insurers may find the plusses outweigh the minuses.
To see why, we will look at an example of the way worksite life insurance commissions could change if they were made level. Then, we will discuss possible reasons why it is in the best interests of the producer to consider making a switch to a levelized commission pattern.
A levelized commission means that the company has reduced the first-year commission but increased the renewal commissions associated with sale of the insurance policy in question.
An equal commission rate in all policy years is the ultimate in levelized commissions. However, this may not be an acceptable option for producers, especially when making the first step in changing from traditional first-year commissions to levelized. Instead, a reduction of 20% to 30% in the first-year commission rate with an increase in renewal years may be more acceptable.
The chart on this page shows why such a shift may be in the producers long-term best interests. The chart compares the commission paid on a worksite universal life product assuming three commission patterns. The values are based on an eight-dollar-per-week premium, using a model that encompasses a variety of issue ages and risk classes.
Each commission pattern is priced in such a way that the insurance company obtains the same profitability from the product. (Profitability is measured in terms of the internal rate of return on the initial investment of the insurance company.)
In this example, it is assumed that the policy persistency rates did not vary based on the commission pattern, so the outcome is more conservative than it might be in everyday life. That is because levelized commission patterns may well produce higher persistency rates. This might happen due to the increased service the producer will likely provide to the worksite group.
Therefore, the total commissions paid for the levelized commission patterns may be even higher than what is shown in the chart.
Even without incorporating the persistency advantage, however, the chart shows that there can be several advantages to electing a reduced first-year commission.
First, if the reduced first-year commission is selected, the total commissions paid through policy year 10 are significantly larger than if the plan offers the traditional 60% first-year commission. Specifically, the total commission increase is 66%, if the 30% first-year commission option is selected instead of the 60% first-year commission option. This increase jumps even higher, to 81%, if the level 19% commission option is selected.
Second, the renewal commissions from worksite life insurance sales can create large commission payments after the initial worksite sale is made. As a producer recently commented when discussing this, “It is great when January 1st rolls around each year and I find a big check in the mail.”
Third, the commission pattern is more like that found in the property-casualty industry among agents who often sell in the same worksite marketplace. These p-c agents achieve success in this market by focusing on keeping the business on the books through service to the clients. Life insurance producers could have similar success.
Producers should be aware that, should commissions be levelized in some manner, the first-year commission will be greatly reduced from the level to which they have become accustomed.
However, this change fosters greater persistency, as noted earlier. This will, in turn, be in the best interests of producers as well as insurers. For example, the producer will receive the higher renewal commissions through a levelized commission pattern, and the company should receive additional profits.
By contrast, should the producer receive only small renewal commissions, as occurs under the 60% first-year commission plan, the producer may have little incentive to see to it that the products persist.
Worksite life insurance products are prime candidates for levelizing the commission pattern. These products often have higher than normal lapse rates, making it necessary for producers to work hard to keep the insurance in force. The levelized commission structure would provide a valued incentive to perform this work.
Further, the levelized structure should be an incentive to producers to bring the most desirable cases, from an underwriting standpoint, to the worksite insurer. After all, the products in the worksite market often have only limited underwriting. This means the producers have quite a bit of control concerning the mortality and morbidity risks they bring to the insurer. When they bring groups with good risk profiles, this increases the likelihood that persistency will be strong.
Finally, if the worksite product has a portability feature, the producer can encourage the continuation of insurance as employment changes, thus keeping the renewal commissions going.
In short, the long-term gains of shifting to levelized commissions for worksite life insurance may outweigh the short-term loss of high first-year commission.
Kent C. Scheiwe, FSA, MAAA, is a principal in the Indianapolis office of the Milliman USA actuarial consulting firm. His e-mail is [email protected].
Reproduced from National Underwriter Edition, March 24, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.