Regulation establishes full value of life policies

THE method in which life assurance commissions are to be disclosed is back on both the consumer and political agenda, after a meeting this week between the Minister of State for Commerce, Technology and Consumer Affairs, Mr Pat Rabbitte and the Consumer Association of Ireland. The two sides are understood to have discussed the commissions issue in the context of the Minister's proposal to include compulsory disclosure in an amendment to the Sale of Goods and Supply of Services Act.

Last summer the CAI filed an objection to the IIF commissions agreement with the Competition Authority "when it discovered that it was being considered by the Minister as the benchmark for any disclosure regulations in the Sale of Goods Act, i.e. commission would only need to be disclosed if it exceeded the terms laid out in the IIF agreement. The ministerial order, Family Money understands, was delayed to await the outcome of the Competition Authority's ruling. A fortnight ago, the authority informed the Consumer Association that it did not intend to approve the commissions agreement, though we understand that it will permit the IIF an oral hearing in addition to the written defence of the agreement already submitted.

The Minister's latest draft regulation for life assurance commission disclosure, which Family Money has seen, bears little resemblance to the previous one. It requires full disclosure of commission at point of sale in the clearest cash terms. It also requires that sales persons follow a standard formula set out in the draft for showing the impact of deductions on any early encashment or surrender of the policy.

At the end of each of the first five years, then at the end of years 10, 15 and 20, the salesperson must show the cumulative amount of premiums paid, the cumulative. deductions for the cost of the life cover to date, this includes all costs and charges, including the commission), the assumed rate of return in percentage terms and the projected surrender or encashment value, less any penalties.

This information should certainly help to establish the value of any life policy, and the Minister went one step further by also tackling the thorny issue of the "bombing out" of many whole of life assurance policies. Under his new draft order, the insurer will need to clearly state how long a policy will last under the illustrated premiums and whether or not return is guaranteed at those premium rates.

What this draft order does not provide is the sort of transparency of information the Consumer Association and other critics of the IIF commissions agreement were seeking in their submissions to the Competition Authority.

The CAI declined to comment on last Monday's meeting with the Minister, or the contents of the draft order: "Until the draft is further advanced we would prefer to wait before making any further comment," said a spokesman. But the Consumer Association has made no secret that it wants not just disclosure of commission at point of sale, but disclosure of all the costs, including the ones charged by the company in order that this information can be used by consumers to compare one company's charges with another.

This view is endorsed by the Equitable Life Assurance Company, the only IIF member company which made a submission to the Competition Authority opposing the IIF commissions agreement. As the only life company which does not pay commission to outside intermediaries, and which has the lowest reported cost ratio of all life companies both here and in Britain, the Equitable Life submitted that the disclosure procedure introduced in Britain in 1995 should be adopted here.

A spokesman for the company told Family Money that the British life assurance regulator, the Personal Investment Authority, requires life companies to show over each of the first five years, and then at years 10, 15 and 20, exactly how much in premiums has been paid, the total actual deductions from those premiums, including the amount paid to the intermediary or sales agent of the company as well as the amount taken by the company; the effect of the deductions on the level of growth illustrated as well as early encashment or transfer values of a policy (the latter applying to pension contracts). If the growth illustration level is, for example, 9 per cent per annum, the company must also disclose the percentage impact of the deductions on that growth level. In other words, while the growth projection is 9 per cent, that value could drop to 7.9 per cent because of the cost of the commission and charges. This is known as the "reduction in yield".

"The current soft disclosure terms are totally artificial," says Equitable Life manager Donal Brady. "At the moment the impact of charges only has to be revealed, but not broken down into commission and company costs, after the sale and when the 14-day cooling off notice arrives through the letterbox. Consumers need to be aware of both the cost of the commission and the charges a company is making against its contributions and not just for the first five years either. We would welcome a full disclosure environment."

Without full disclosure at point of sale of all costs the Consumer Association warns that consumers will be unable to determine the true cost of the policy they are buying and will be unable to make a proper price and value comparison with other policies on the market.

If the Competition Authority bans the existing commissions agreement, without there being a statutory order for full disclosure, all sides, including many insurance companies Family Money has spoken to, agree that commission levels could rise to the detriment of the consumer. Commissions in Britain did rise considerably in the period between 1990 when the commissions agreement was abolished and 1995 when full disclosure regulations were introduced, but have now finally levelled out after five years of steady increases.

Industry sources are now suggesting that the timing of new regulations will be crucial, with all parties - the Minister, the Competition Authority, the insurers and consumer interests - all needing to work together to avoid the mistakes that were made by the industry in Britain.