Canada’s largest life insurer has proposed controversial changes to its commission structure that would shake up insurance agent compensation practices that have long been in place across the industry. However, pushback from advisors has prompted the insurer to backtrack and temporarily shelve the changes.
In mid-October, Toronto-based Manulife Financial Corp. revealed plans that would allow for renewal commissions on inforce insurance policies to be redirected from one advisor to another when a client requests a new agent of record on the policy.
Under the industry’s existing compensation model, all commissions on a policy typically are attributed to the advisor who originally sold the policy – even when that advisor no longer is working with the client.
Manulife’s proposal aims to align compensation with the advisor who is servicing the policy and providing ongoing advice to clients, according to a company notice to advisors that outlined the proposed changes.
Rick Forchuk, special advisor, distribution practices, with Kingston, Ont.-based Empire Life Insurance Co., says Manulife’s proposal is an encouraging initiative that would give insurance advisors an incentive to work with clients who already have an insurance policy, but don’t have an advisor actively servicing it.
It’s a change that all insurance carriers have been considering, according Forchuk: “We’ve all been waiting, as carriers, for someone to be first. I applaud [Manulife] for doing it.”
However, advisors’ reaction has not been so positive. The changes could mean less ongoing compensation on future policy sales, compared to what advisors are accustomed to receiving. Furthermore, some agents have expressed concerns that the change could enable the carrier to redirect commissions to its preferred advisors, and that it could result in clients switching advisors without the original agent’s knowledge. It also raises questions about who will ultimately be liable for those clients.
“What happens if they assign my clients – where I have a fully vested commission, where I am the agent of record – to another agent, unilaterally?” asks Lawrence Geller, president of Campbellville, Ont.-based L.I. Geller Insurance Agencies Ltd. “What happens if the agent doesn’t service them? Am I still liable?”
Adds Geller: “How can I comply with my duty as I perceive it to my client, if I’m no longer the agent on the case I wrote?”
Manulife’s proposal was set to take effect in January, and the insurer indicated that the new commission structure would apply only to policies with an effective date of Jan. 1, 2016, or later. The insurer also stated that in cases in which a policyholder’s request for a change of the agent of record is received for a policy that is still in its first two years – the period in which the bulk of a policy’s commissions are paid – the commissions would remain with the original advisor until the 24th month following policy issuance.
Given the negative response that Manulife received on its proposal, however, the insurer notified advisors in late November that the insurer had decided to defer the effective date on the changes in order to “work through a few remaining details.”
“Since October, we have received valuable input from our partners into this process,” says a Manulife statement emailed to Investment Executive (IE). “Based on that input, we decided not to proceed at this time. We will be reviewing the input and will be incorporating that feedback into any future direction we take with this initiative.”
In a notice to advisors, the insurer stated it still is committed to making the changes, and will confirm details in 2016.
Forchuk says the existing commission structure for insurance agents is problematic in that it provides ongoing compensation to advisors even if they fail to keep in touch with clients who have bought policies or retire from the business. The result is a slew of “orphaned” clients who don’t have access to an advisor for assistance with managing beneficiaries, increasing coverage or making other policy changes.
“It’s terrible for clients,” Forchuk says. “Nobody is servicing the clients, and yet [the original advisor is] getting paid.”
Other advisors, meanwhile, have no financial incentive to service these orphaned in-force policies under the existing commission structure. Rather, the system creates an incentive for advisors to sell clients an entirely new policy rather than service an existing one, even if that’s not in the best interest of the client.
The change proposed by Manulife could reduce the frequency with which this occurs, says Jim Ruta, president of AdvisorCraft Media and Consulting in Toronto, and a video columnist for IE. Even though the renewal commissions are typically small, he says, some compensation is better than none.
“[Manulife’s proposal] should eliminate that commission incentive to replace old business,” says Ruta. “[The proposal] solves the problem of unserviced policies, because now at least you get paid something that will help you then maintain that contract and not replace it, which is a good thing for your [client].”
Sean Long, insurance consultant based in Kitchener, Ont., is worried that policies he sold could be transferred to another agent under the proposed compensation structure even if Long has been providing ongoing service to these policies. Long is concerned that Manulife could use the commissions to reward those advisors who generate a high level of sales, in terms of both insurance and wealth products.
“It’s about controlling distribution,” Long says. “[Manulife] could grow its money side by giving the commissions to those dedicated Manulife people to grow their portfolio.”
Despite the advisor backlash, Forchuk suspects that if Manulife moves forward with the planned change, other carriers will follow suit. In fact, he believes the industry eventually will face legislation regarding policy servicing.
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