Banks making huge insurance profits, report claims

HIGH upfront commissions on life insurance have delivered super profits to banks, a report by actuary Melville Jessup Weaver claims.

Bank life insurance operations have been making “very high-profit margins” as a result of weak competition, a report released on Monday claimed.

In its report on the future of commission in the life insurance industry, actuary Melville Jessup Weaver (MJW) said high upfront commissions paid to insurance advisers by non-bank insurers had inflated premiums for life insurance by 10-15 per cent, or around $100 million a year.

And bank-owned insurers which did not pay commission to advisers weren’t charging lower premiums even though their costs were lower.

“Companies that operate without advisers, and that includes two of the major banks, charge similar prices to the adviser based insurers but with much lower expense rates,” MJW says.

“As a result they are able to make very high-profit margins rather than passing on the benefits of their lower expense structures to their customers because there is limited price competition in the market across sales channels.”

As well as recommending high commissions on the sale of life insurance be reduced, the report, which has no official status, called for banks to be forced to tell customers more about the incentive systems they used to get staff to sell policies, and to make it clear bank staff were salespeople, not advisers.

And, where the bank earned commission by selling a third party’s insurance, they tell the customer in a similar way to independent financial advisers.

The MJW calls for upfront commissions to be cut, as they have in Australia.

Upfront commissions, now often over 200 per cent of the first year’s premium, would be capped at 70 per cent, if MJW’s recommendations were ever adopted, which would impact banks as much as independent insurance advisers.
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Banks are what is known as Qualifying Financial Entities (QFEs), which take legal responsibility for the actions and advice given by all their staff.

But where QFE staff were selling products and not providing advice- and the customer acknowledged that – banks should be allowed to do so on an “execution-only” basis.

MJW said in such cases the bank should not be able to pocket an upfront commission on execution-only sale.