Pundits commonly measure the life insurance industry’s financial health and success in terms of product sales, top-line revenue, operating income and other measures that impact the bottom line. Less commonly used yardsticks are the amounts in commission paid to the companies’ agents and brokers.
If guided by this benchmark — albeit one limited to compensation paid producers by a sample of the industry’s leading insurers— then one might reasonably judge the industry’s recent performance a net positive, for payouts are indeed on the rise.
Tabulating the numbers
According to statistics obtained from SNL Financial LC (which maintains an agreement with NU’s parent company, Summit Professional Networks, to provide data on 20,000-plus U.S. financial institutions) the top 25 writers of life insurance and annuities paid a combined $34.5 billion in commissions in 2012. That’s up 5.9 percent from the aggregate $32.5 billion paid in commissions in 2011 and up 11.5 percent from the $30.9 billion distributed in 2010.
Taking the prize for the most commissions paid was Aflac Inc., which doled out an extraordinary $3.4 billion in 2012, a 9.6 rise from the $3.1 billion released in 2011. Two other companies among the top 5 that experienced double-digit increases were Prudential Financial Group ($2.3 billion paid in 2012, up from $2.1 billion in 2011, a 12 percent gain), and Jackson National Life Group ($1.9 billion in 2012 vs. $1.4 billion in 2011, up 30.3 percent).
Companies that enjoyed the most substantial gains included Berkshire Hathaway Inc., which paid a whopping 602.7 percent more in commission in 2012 ($914.2 million) than in 2011 ($130.1 million), Reinsurance Group America Inc. ($1.7 billion in 2012 vs.
, $937.1 million in 2011, representing a 76.4 percent rise), and American International Group ($1.2 billion in 2012 vs. $747.1 million 2011, up 58.5 percent).
To be sure, a number of NU’s Top 25 reduced commissions in 2012. Among those that cut back: MetLife Inc. Though occupying the second spot in NU’s Top 25 list, the company cut commissions in 2012 to $3.1 billion, a substantial 25.8 percent dip from the $4.1 billion paid 2011. Also suffering double-digit declines were Manulife Financial Corp. (down 14.9 percent) and Nationwide Mutual Group (off 12.2 percent).
These laggards aside, the trend has been positive. Of the 25 companies, 16 paid more in commissions in 2012 relative to 2011. Just over a third of the insurers (9 companies) saw declines. The number of winners and losers are identical when comparing 2011 against 2010 results.
What accounts for the gains? In a word: sales. As one would expect, commissions in 2012 increased in tandem with premiums generated on new policies written, notably permanent life insurance and indexed annuity products.
According to a fourth quarter 2012 individual life insurance sales survey from LIMRA, individual life insurance new annualized premium grew 6 percent in 2012, resulting in the third consecutive year of growth. The number of life insurance policies sold grew by one percent for the year, making 2012 the second consecutive year of positive annual policy growth — a benchmark last achieved in 1981. The leader among permanent products was universal life, which witnessed an 8 percent premium gain in 2012, followed by whole life at 7 percent.
Indexed annuities achieved a record high, hitting $34 billion in 2012, up 5 percent from 2011, LIMRA reports. However, these sales gains failed to compensate for dismal results in other annuity lines. Upshot: Aggregate annuity sales dipped 8 percent in 2012 to $219 billion. Variable annuities sale fell 7 percent to $147 billion. And traditional fixed annuities declined 11 percent to $72 billion, a 12-year low.
Whereas, however, life insurers are paying out more in aggregate commissions, there is no discernible upward or downward trend in respect to payout rates on individual life products. Among permanent life offerings, the commission rates have (on balance) remained within a predictable range in recent years, as carriers have kept to a long-standing formula for determining the producer’s compensation.
To wit: the commission is calculated as a percentage of a policy’s “target premium,” an amount the insurer believes to be adequate to fund the policy. This percentage will vary by carrier, product line and even by producer, depending on the agent’s performance.
Juli McNeely president-elect of the National Association of Insurance and Financial Advisors (NAIFA) and president of McNeely Financial Services, Inc., says her brokerage-general agent generally pegs sales commissions at between 80 and 90 percent of target premium. Depending on the producer’s sales volume, the BGA will tack on a bonus, boosting the commission to 100 or 110 percent of target premium.
“The first-year payout can vary depending on several factors,” says McNeely. “If, say, a client is over-funding a life insurance policy — putting in more than the target premium — I’ll get paid a percentage above that of target, though the increase may be small.
“First-year commissions on term products is typically much lower than that on permanent products,” she adds. “The range is generally between 50 and 75 percent of target premium.
A lower percentage of target premium may also be paid if, for example, the producer is an employee of an insurer that provides other benefits, such as a retirement plan, health insurance, sales training and salary-like compensation that declines over time.
Case-in-point: New York Life. The mutual insurance company stipulates a 55 percent commission of first-year target premium. Mark Pfaff, the company’s executive vice president of agency operations, say this level has remained unchanged since he joined the company some 30 years ago. While acknowledging the percentage of target is lower than rates available through other insurers, he insists that New York Life’s other employee benefits compensates for the gap.
“Our commission structure supports a career agency position,” says Pfaff. “If you work at New York Life for an extended period, you can expect renewals on policies still on the books, persistency bonuses and a company pension plan.”
Squeezing the BGA
While the commission rates issued on life sales to producers have followed an historical pattern, the same cannot be said of compensation paid to wholesalers. Alyse Blumberg, president of Blumberg Financial, a Philadelphia-based brokerage general agency, observes that increased transparency about commission rates “on the street”—information communicated among producers by word-of-mouth — are hurting BGAs’ and independent marketing organizations’ profit margins.
She notes that life insurers’ contractually stipulated commissions must be divided between the wholesaler and the selling producer. The more that agents and brokers are knowledgeable about top payout rates, the greater is their leverage to demand those rates from wholesalers that want their business. The result is a reduced share of the commissionable pie for the wholesaler.
“More and more BGAs and IMOs are forced to pay the highest available compensation to obtain the producer’s business,” says Blumberg. “The rules of the game have changed.
“For a lot of brokers now, the commission paid on the sale, rather than anything having to do with the value of products or services available through the wholesaler, is the factor that decides whom they partner with,” she adds. “This is one of the biggest issues in distribution today.”
See also: What advisors want from BGAs
The issue is of particular concern in the northeast corridor, most especially New York State, which has imposed a cap on commissions. Add to this the fact that that the cost of doing business is higher in the region than nationally. Upshot: Wholesaler margins are even thinner.