Authority poised to shake up assurance

THE cash reward that insurance agents and brokers receive for selling life and pensions contracts has been a source of controversy for years.

In the 1970s and 1980s life companies were paying intermediaries up to 150 per cent of the value of the first year's premiums for selling a policy.

When the companies' own set up charges were added, two years worth of contributions or premiums could be absorbed by charges. It wasn't until the third year that any premiums found their way into the investment fund.

The commissions agreement was created in 1987 after the industry was warned that statutory controls would be imposed if it did not voluntarily reduce the commissions. The agreement reduced those rates to a maximum of 90 per cent of first years premiums on savings policies and 60 per cent on pensions.

Renewal commissions were also established. A structure for the payment of commissions was also set by the agreement and it itemised and limited the bonuses that could be given to intermediaries, such as corporate gifts, education, technology and entertainment.

Ten years after the setting up of the Irish Insurance Federation (IIF) commissions agreement, which has been amended subsequently to reflect market and economic changes, the Competition Authority looks set to blow it away altogether and usher in a new commissions free for all.

But this time with one important difference: unlike 10 years ago, there is now a demand for full disclosure of all costs and charges (there is already partial disclosure) and a realisation, in consumer quarters at least, that when large industries make agreements and regulate themselves, they tend to do this in their own and not consumers interests.

It was the Consumer Association of Ireland (CAI) which called into question the legality of the agreement last summer. The long awaited Consumer Credit Act 1996 was expected to include a provision for full disclosure of commission on life assurance related products. But when it was published, the disclosure clause was missing.

The Minister responsible, Mr Pat Rabbitte, announced he would instead include commissions disclosure by way of ministerial order, as an amendment to the Sale of Goods and Supply of Services Act 1980.

A draft copy of that order was leaked to the Consumer Association and it was revealed that only commissions in excess of the IIF agreement would have to be disclosed - in effect, the voluntary IIF agreement was being enshrined in a piece of consumer legislation.

Coincidentally, the CAI also discovered that the agreement, submitted to the Competition Authority in 1993, had still not received a certificate or been granted a licence as required under the Competition Act.

The CAI's financial services director, Mr Eddie Hobbs, who has produced hard hitting reports in the past on endowment mortgages and life assurance savings policies, submitted the Consumer Association's, objections to the licensing of the agreement.

The idea was that if the agreement was not licensed, it could not be used as a benchmark for disclosure of commissions in the Sale of Goods and Supply of Services Act.

Ironically, Mr Hobbs is now facing a possible restriction order under the Companies Act as a result of the collapse of the Taylor Group of investment companies. Mr Hobbs, who left the Taylor Group before its collapse, was instrumental in uncovering the fraud allegedly perpetrated by its founder, Mr Tony Taylor.

The IIF has always maintained that a standard remuneration level means that intermediaries can remain independent and not be wrongly influenced by the commission when they recommend a product to a customer. Without the agreement, the IIF told the Competition Authority, commission rates would be pushed up by life offices in a bid to attract intermediaries' business, ultimately at the consumer's expense.

Independent advice, they said, would no longer be forthcoming to the client because the intermediary would be unduly influenced by the size of the commission. It also stated that the agreement allowed the participating companies to concentrate on producing high quality products rather than the inducements that could be offered to intermediaries to distribute them.

The Consumer Association, on the other hand, argued that the commissions agreement was a price fixing one that had prevented full disclosure of the life company's own significant policy costs. It had not just fixed the cost of distribution, said the CAI, but discouraged innovation and competition between insurers who might otherwise pay higher commissions to sell their policies, yet still be able to offer good value to consumers because of lower overall operating costs.

With a close eye on the Competition Act itself, which states that an agreement will be void if it "directly, or indirectly fixes purchase or selling prices or any other trading conditions; limits or controls production, markets, technical development or investment; shares markets or source of supply", the CAI argued; that setting the commissions level also prevented competition between intermediaries since it fixed a standard payment to all, regardless of the quality of their advice or service. It forced more efficient, better qualified intermediaries with higher persistency rates (that is, more clients who keep their policies to maturity) to subsidise the less efficient intermediaries who have a high number of dissatisfied clients.

The system, said the CAI, rewarded new product sales to the detriment of proper advice and servicing.

If the agreement goes, the pressure will be on the Minister to ensure there is full disclosure of all costs in order to protect consumers from insurers tempted to raise commissions to attract more business. The fact that commissions may go up need not affect the value of the client's investment, since it can be offset by the cost efficiencies that may already exist in a company.

Both the Irish Brokers' Association (IBA) and IIF spokesmen conceded that the collapse of the commissions agreement would result in a gradual fallout in the intermediaries market, with smaller, less efficient agents and brokers losing out to the larger, better run companies. But the IBA insists that bigger does not necessarily mean better and that the loss of a small operators who currently offer good advice will be a loss to consumers, not a gain.