Life insurance companies are exploring the possibility of adopting levellized commissions for insurance agents to better align their compensation with the long-term nature of the policies they sell, industry executives said during a panel discussion at the Canadian Association of Independent Life Brokerage Agencies’ national conference in Niagara-on-the-Lake, Ont. on Thursday.
However, the executives said the change would likely face resistance from many insurance agents and such a shift would need to be implemented in a gradual way.
“There’s a lot of value in levellized commissions,” said Phil Marsillo, senior vice president of individual distribution at Toronto-based Canada Life Assurance Co., during the panel discussion. “There’s an opportunity to get there, but I don’t think this will happen overnight.”
So-called levellized commissions spread out an insurance agent’s compensation on a life insurance policy sale over many years rather than paying the bulk of the commissions in the first two years of the policy, as is done under the existing “heaped” commissions structure.
With the second phase of the client relationship model (CRM2) having put fees and commissions into the spotlight on the investment side of the business, the insurance industry could soon find itself under similar scrutiny, said Paul Brown, chairman and CEO of Mississauga, Ont.-based IDC Worldsource Insurance Network Inc.
“Some people have the view that once CRM2 is implemented, the [focus] is going to turn to the insurance industry and compensation,” he said. “Why aren’t insurance companies getting together and figuring out how to make a change to levellized compensation?”
The executives suggested that under a levellized commissions approach, compensation is delivered in a manner that better reflects the long-term nature of the policies agents are selling; it also ensures they are compensated for servicing the policy and providing advice to the client on an ongoing basis.
“There are a lot of benefits to it,” said Dean Chambers, vice president of individual insurance with Toronto-based Sun Life Financial Inc., which has long provided levellized compensation to the agents in its career sales force. “It creates that lifetime longer alignment with the customer.”
However, the panelists acknowledged that there are challenges associated with adopting this type of compensation. New advisors, for instance, would likely struggle to build up a sufficient level of compensation during their early years in the business without a heaped commission structure.
In addition, established advisors who have built their business around the existing heaped commission model may struggle to cover their costs during the transition process to a levellized model.
“Their business model can’t take the immediate change where all of a sudden that new business compensation is dropping by a factor of 75% or 80%,” said Chambers. “The transition would be very tough for many people.”
Despite the challenges, the panelists said they are very interested in exploring ways of adopting a levellized compensation model.
“We will look for ways to be proactive,” said Steve Krupicz, regional actuarial consultant with Toronto-based Manulife Financial Corp. “We will look for ways to edge into it as we move forward.”
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