An insurance war is driving record sales commissions, with Sovereign - the country's largest life insurer - paying incentives of up to 230 per cent of a life policy's first-year premium.
Upfront commission generally ranges from 170 to 200 per cent of the first year's premium, with the adviser also getting a far smaller annual commission, about 7 to 10 per cent of the premium paid.
One financial adviser, who did not want to be named, said 230 per cent was a "new high".
"The going rate for the last five years has been 100 per cent plus 50 per cent production bonus - plus the ‘soft dollar' incentives - such as trips around the world. Prior, it was about 70 per cent plus the rest. Then 200 per cent crept in but that was not across the range. Now 230 per cent and, to the best of my knowledge, this is a new high."
The commission is so high an executive from a rival life insurer, who did not want to be named, said "it brings into question what is the fundamental driver".
Naomi Ballantyne, chief executive of Partners' Life, which increased competition among insurers when it launched in 2010, was critical of the continued media "obsession" with commission levels, but said the Sovereign offer could spark scrutiny by the Financial Markets Authority (FMA) which is concerned about the potential for commission to bias advice.
"By doing this, they are potentially exposing advisers to that very thing, which is commission was the driver. That's a very scary place to be at the moment," Ballantyne said.
Authorised financial advisers are required by their code of conduct, established under the Financial Advisers Act, to place the interests of their client first and to act with integrity.
A raising or lowering of commission levels should, therefore, have little effect on the advice given.
But with fierce competition since Partners Life launched in 2010, commissions appear to have a continuing role in driving sales.
Sovereign's new commission applies when a life insurance policy is sold with health insurance, following the relaunch of its health business.
It said the move was a way of saying "thank you".
"We'd like to offer you an added incentive for promoting the perfect combo - life with health," it told advisers in an email.
Sovereign chief executive Symon Brewis-Weston said the level of commission offered came in response to rivals' actions. He said the campaign was aimed at raising awareness of new health products and gaining traction in a highly competitive market.
"It's a short-term campaign - running until the end of December," he said.
"The level of commission on offer for the current campaign - which is only applicable on the sale of a health product along with a life product and only on the life product - is in response to actions of a number of other providers who have continued to raise the level of commissions over the past two years."
He said Sovereign trusts advisers to act in the best interests of their clients and give correct advice on the products they sell.
Sources say that when the act is reviewed next year, commissions should go under the microscope.
Some insurers, such as New Zealand-owned Fidelity Life, are attempting to shift advisers away from high upfront commissions to higher ongoing commissions, which it hopes should reduce "churn".
Sovereign also offers lower upfront commissions, and higher ongoing commissions for advisers who want to be paid that way.
The FMA said conduct obligations under the act include the requirement that a financial adviser must exercise "care, diligence, and skill".
Authorised financial advisers (AFA) are held to even higher standards of conduct than registered financial advisers, including that insurance advice must be balanced and provide a clear explanation of both the benefits and the exclusions or limitations of the product's cover.
"In practice, when we monitor advisers what FMA is looking for is that the customer is informed about policy exclusions and limitations as they relate to the customer, as well as claims information including common reasons for claims rejection, and the [provider's] financial stability rating," the FMA said.
An AFA is also required to disclose details of remuneration received from anyone other than the client.
"There's always going to be that tension between doing the right thing by the consumer, and ensuring that an advisory business has a viable business model."
- Sunday Star Times
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