If you’re thinking about what’s best for you and your business, consider these questions:
- What is your revenue structure?
- Does it meet the needs of your business today?
- And possibly the most important of all, does it meet your desired objectives for tomorrow?
There has been (and I’m sure will continue to be) a lot of conversation around the structure of life insurance commissions and the sustainability of the industry, in particular the debate over upfront versus hybrid/level. The conversation is valid, and as professionals of this industry we should try to understand why the argument for hybrid and level over upfront isn’t going away.
The simple fact is if you’re looking for a revenue structure that will provide a reliable income stream, sustainable growth and position you well for succession planning, a hybrid/level structure may be your best option.
I’m aware that one size doesn’t fit all and there will always be reasons for upfront. But if you haven’t implemented some type of hybrid/level solution into your business, I must ask why not?
What we’re talking about
| Commission type | Typical initial payment | Typical trail payment |
| Upfront | 110% | 10-15% |
| Hybrid | 85%/70% | 20%/25% |
| Level | 32% | 32% |
As you can see in the table above, upfront commission wins in the short term. But how long are you planning on being in the risk business? If you look at the trail payments, hybrid/level can far outshine upfront commissions.
What is sustainability, really?
A sustainable remuneration model is important for a few reasons.
- The focus is on long-term revenue, not short term gains without a bigger picture focus.
- An advice practice can be “future-proofed” with a reliable income stream and ensures clients are provided with long term protection products that do not require new underwriting just because the business is replaced after a few years.
- Practices are well-positioned for succession planning, merger or acquisition by delivering a greater line of revenue which makes the business more appealing.
Comparing these outcomes against the different commission types, you could argue that upfront commissions are now in last place.
The difference in long-term performance
The chart below illustrates the cumulative commission payments paid from different commission styles for a single $2,000 policy. I’m often surprised at the misunderstanding around hybrid/level commissions because as the chart clearly indicates, there is long-term appeal in both maximising recurring income streams and business value.
Graph 1: TAL {reference}
For a policy that remains in-force for 10 years, the revenue generated through level commission is double the upfront commission. That ratio climbs to 250 per cent after 15 years.
With a client-centric business strategy, and the multiple of commissions rule to value a business, the implications are profound.
Client-centricity is key. It’s ensuring your client discussions are not focused purely on product transactions, or set and forget, but long term advice with ongoing communication and review.
Look for support and start planning now
I strongly believe it is the role of a licensee to help advisers understand the benefits of different remuneration models and the best value proposition for your business. Like in a good financial plan, it’s integral that you look at a complete and accurate picture for your business, not one that is specific to a manufacturer’s product type and structure.
While upfront certainly has its place for clients with short term objectives, hybrid/level structures offer far greater value over the 4 to 10 year time scale. These higher performance commission structures provide better cash flow management, greater commercial sustainability and revenue certainty.
Armed with a long-term and sustainable revenue stream which features a mix of hybrid and level commissions, your business will be more attractive to potential buyers when you’re ready to sell.
Craig Parker is the general manager of Affinia. He has over 20 years of experience in both retail and institutional banking, with a strong focus on strategic planning and continual innovation.
