As the insurance industry sails along, largely unscathed by the turmoil that has rocked much of the rest of the financial services sector, Investment Executive’s 2010 Insurance Advisors’ Report Card survey found that insurance advisors are thriving by taking refuge in the relative safety of their core business.
Indeed, while the fallout from the global financial crisis has been the dominant force in the lives of most other retail financial advisors over the past couple of years, the insurance industry has remained relatively calm. To be sure, its clients and advisors have been touched by the recent recession, but they haven’t had to deal with the same level of market exposure, or the reputational risk, dogging other parts of the financial services sector. If anything, the damage caused by the crisis has highlighted the value of investment safety and capital preservation.
So, it is hardly surprising that we find that reps in this year’s survey of insurance advisors are focusing their practices more intently on the unblemished insurance business at the expense of the tarnished banking and investing components of their books.
That’s not to say insurance advisors are abandoning these secondary parts of their businesses. Indeed, average assets under management for the reps we surveyed were up slightly, to $17.3 million this year from $16.6 million last year.
Some of these year-over-year comparisons are not exactly apples to apples because of a change in the list of firms we surveyed this year vs last year. Dropping Guelph, Ont.-based Co-operators Group Ltd., whose advisors focus mostly on property and casual insurance, from the survey has affected comparability — particularly in categories in which Co-operators had a large influence on overall results, such as in client household totals and P&C commissions.
That caveat aside, it appears there was a small uptick in average AUM for this year’s survey over the previous year. More accurately, there was a jump in AUM for advi-sors that operate through managing general agencies, one large enough to overshadow the decline in AUM for advisors that belong in the dedicated/independent direct sales agency channel. Average AUM for advisors at MGAs rose to $18.3 million this year from $14.3 million last year. This leapfrogs the MGA side of the industry past the dedicated sales agency advisors, who report an average AUM of $16.7 million, down from $17.5 million in 2009.
MGA advisors are also deriving a notably heftier portion of their compensation from first-year commissions vs DSA advisors, at 64.9% vs 53.7%, respectively — although the latter figure is up from last year’s 49.9%.
Renewals remain the second-largest component of overall advisor revenue, at 21.5% on average, but this is down from 26.4% in last year’s survey — largely due to a slide to 22.8% from 29.3% among DSA advisors. Both channels of the industry report a greater reliance on fee-based revenue in this year’s survey and lower exposure to transactions and fee-for-service revenue.
But it’s within the data on first-year commissions that signs of an increased reliance on core insurance products — at the expense of savings and investment products — are revealed in this year’s survey.
For example, advisors saw a notable jump in their estimated first-year commissions from life products, with the reported average in this year’s survey jumping to $146,376 from $92,296. However, this year’s number was skewed by one very large producer; if we drop his reported totals, the industry average is closer to $105,000 — still a significant gain over the previous year.
@page_break@This increase was driven by the MGA side. Whereas DSA advisors saw their estimated first-year commissions on life products rise modestly, to $54,742 from $53,699, MGA advisors saw their reported life-product first-year commissions skyrocket to $277,616 from $169,933. Again, this number was heavily inflated by a single respondent; dropping out that data brings the 2010 MGA average to $177,425, which still indicates a solid increase.
Estimated first-year commissions for living-benefits products were little changed from the previous year but plunged on the savings and investment side of advisors’ businesses; commissions from segregated funds, in particular, dropped from the previous year.
In last year’s survey, advisors reported that first-year seg fund commissions generated almost as much revenue as first-year life insurance commissions on average. This year, the seg fund figure was almost halved, to $45,871 from $90,857. Both MGA and DSA advi-sors reported a decline — although the drop was much steeper among DSA reps.
Similarly, average estimated first-year commissions from money products were also halved, to $18,472 from $37,523. Again, it was the DSA advisors who registered the big decline. MGA advisors actually saw their average first-year commissions from money product tick upward slightly year-over-year.
These same basic trends are reflected in the asset allocations reported in the survey. The market share for all sorts of traditional insurance products — term life, permanent life, living benefits and fixed annuities — all rose year-over-year, while the share for seg funds dropped. Once again, it’s important to remember that these year-over-year comparisons aren’t exactly apples to apples, due to the change in companies surveyed, which drops the share allocated to P&C products to just 0.5% from 9.3% last year.
Looking solely at MGA firms (which saw the addition of Calgary-based PPI Solutions Inc., formerly known as Financial Management Group of Cos. Inc.), seg funds’ share of book declined slightly to 16% from 17.2% last year. Meanwhile, permanent life, living benefits, and the group/other products category all enjoyed an increase in share of book; even the P&C category captured a tiny share of 0.4%, up from zero last year. Only seg funds and term life suffered any decline in share of book in the MGA channel.
As for the investment products that insurance advisors have been selling, there appears to be a trend toward plain, old mutual funds and away from costlier managed products. Mutual funds now represent 79.6% of the average insurance advisor’s investment revenue, up from 75.5% last year; both proprietary and third-party managed products saw declines.
This trend applies to both MGAs and DSA firms, although it was most striking for MGA advisors, for whom mutual funds’ share of book jumped to 84.4% from 74.5% and the share for third-party managed products plunged to 12.2% from 21.1%.
These underlying changes in product distribution, revenue sources and basic market trends have all filtered down to advisors’ compensation, resulting in more advi-sors residing at the top and bottom ends of the pay scale.
IE