View from City Road: Coming clean on the real costs of life assurance

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The Independent Online
All professions, George Bernard Shaw wrote, are conspiracies against the laity. Most pressure groups, be they composed of doctors, teachers or life assurance sales staff, like to argue that people should be denied the fullest information because they will not properly understand what they are told by experts. They will make wrong decisions that distort markets or damage the national interest. The spokesmen for the life assurance industry were therefore characteristically incandescent yesterday about Sir Bryan Carsberg's demand for more information for consumers.

Instead of a hotchpotch of partial and sometimes misleading disclosure Sir Bryan rightly wants the facts on the table before investors sign on the dotted line. And the word investor is important, because the insurance element in the products on offer amounts to a few per cent of premiums.

But there is one area of disclosure where the issue is particularly difficult. This is the question of payment to independent financial intermediaries, whose commodity is advice but whose remuneration comes in commissions paid directly to them by life assurance companies. The commission is ultimately paid by the customer, because it is part of the company's costs. It represents a fee paid by the investor for independent advice.

One argument against disclosure is that commission is only one of the many expenses involved in providing the product, so it should not be isolated from the others because it will mislead the buyer about the true costs. But this is special pleading. Investors should be told up front what they are paying for advice. They may be alarmed and shy away, but that is their prerogative.

Another argument is harder to dismiss. This is that independents, a fifth of the market and thus important to consumer choice, compete with tied agents contracted to a single insurance company, who are paid a mixture of incentive bonuses, perks and help with back-office costs. If independents are forced to disclose commission and the tied agents are not, the playing field will be tilted. The tied sales forces will be able to claim tiny commissions even though their total pay is high.

It would be possible, with a bit of sweating over cost allocations, to devise a system of fair comparisons. But Sir Bryan is right to be sceptical about the value of such an exercise. After all, the point of independent advice is that it provides added value, beyond that available from a tied sales force, so there should be an additional payment.

There is a good case for doing something to even things up again to help independents, perhaps by using the SIB's original proposal to declare the total expenses of a company and its agents - tied or otherwise - in setting up a policy. But that should be an accompaniment, not an alternative, to accepting Sir Bryan's views. Independents should be open about their charges.

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