An industry veteran challenges current compensation practices
By Bud Blake
I suppose I am a person with a long-term commitment to the insurance business. My grandfather and father were insurance men before me, and now with almost 44 years in the business in my own right, I have a serious interest in what is happening within the industry. It is disturbing to observe the many scandals while at the same time realizing that within the last 4 years, there has been an 89% attrition rate of new agents according to the latest annual Agent Production and Survival study from LIMRA International.
I have a vision for professionals who work in the industry. My vision is void of the long-held perception of agents as “policy pushers.” Rather, I see the role of agents as client builders, people who develop a comprehensive service plan for their clients over an extended period of time. Brokers and agents only can benefit from engaging in client building, and customers will be better off from gaining greater control over their insurance purchases. I challenge carriers to redesign the way their agents are compensated.
The time is now for carriers, agencies, producers and customers to join together in examining the way agents are compensated for their services. There can no longer be a veil of secrecy about the cost customers incur in relation to products and services offered them. The National Association of Insurance Commissioners’ proposed Broker Disclosure amendment to the Producer’s Licensing Model Act is clear about this, and the Department of Labor requires that ERISA-qualified business report all compensation, including bonuses and fees, to customers.
Now that the customer has become such an important part of the formula, it is especially important for carriers to consider the impact that pricing and agent compensation will have on their customers. One insurer addresses this issue by reminding producers that when they charge customer fees, they must obtain written consent in order to receive any compensation from the company. The company recognizes that compensation for services can come from the carrier, customer or both as long as there is full disclosure and a written agreement.
With variable products, there may be resistance in some quarters to the Securities and Exchange Commission’s proposal to make full disclosure of costs at the point of sale. The National Association of Insurance and Financial Advisors along with the Association for Advanced Life Under-writing contend that customers already have access to fees, risks and expenses in the product prospectus. Their call is to keep it simple. Where does this really leave customers who fail to fully understand the prospectus? The answer lies in redesigning the way in which agents are compensated. I propose that carriers pay agents commissions that are prorated over a period of 4 years. In my discussions with two veteran actuaries, one from academia and the other from a large insurer, they say it is a simple process to include the retainer fee expense in the pricing of different insurance policies.
With that in mind, I recommend that beginning with the fifth year,agents enter into a written agreement with their clients that defines commissions and fees along with products and advisory services which will be provided. The future is now for producers and agents to assume the role of advisors offering ongoing services to meet the evolving needs of their clients.
Historically, compensation of agents has been a very highly scrutinized and volatile issue. So, there is nothing truly new here. I propose that the first-year commission paid by the carrier be prorated over the first 4 years of a new account. Thereafter, the client will pay the retainer and sign the Producer Service Agreement espoused in the newly amended producer licensing model law. This will enable producers to focus on evaluating clients’ needs and on doing the necessary research required to offer them the optimal choice of products and services.
David Woods, NAIFA’s CEO, in an interview in National Underwriter (March 29, 2004), suggests clients will be willing to pay more in order to work with a professional advisor. I agree. I have found that my clients appreciate knowing the amount and the way in which I am compensated. That is why I make full disclosure of compensation and expenses to provide clients with insurance coverage and any services I perform such as estate planning.