The Melville Jessup Weaver Life Insurance Report has some worthwhile ideas, which the dispute over commission has overlooked.

MJW recommends that "insurance market conduct" be regulated, preferably by the FMA. 

MJW recommends that an ICNZ-style Fair Insurance Code be established, again under the FMA.

This could include areas like requirement to offer a "worthwhile product" and to meet claims within a "reasonable period".

MJW also recommends that rules around replacement business be established, so that reasonable replacement can be distinguished from churn.

MJW also recommends that the associations be professionalised and made compulsory.

The issue of commissions did need to be talked about by NZ insurers.

The FMA is examining this and for industry to ignore the issue would be stupidity. A move to ban soft dollar and change the upfront-trail mix are obvious recommendations.

However the bad parts of the report are extensive. The worst part of the report is not the recommendations but the low level of analytical quality and the clear mistakes. There are many unsupported assumptions made, based on minimal proof and faulty data.

1) MJW cite the higher commission advisers receive and then correlate this to higher rates of policy lapse by independent advisers than bank policies and then act as if fact A caused fact B, without any attempt to examine the markets. They say "our analysis" but then state no analysis. A few moments  thinking about the issue raises questions like; bank-originated polices are tied to mortgages so won’t be cancelled; or behavioural issues like bank clients are younger, know little about how other policies may be superior, and  have received no advice about this.

2) MJW says the differential in lapse rates is caused by a poor culture, without any analysis of exactly what this cultural issues is. Actually the differential in churn rate may be linked to quality issues - advisers may be replacing badly-sold bank-originated policies because the sums and conditions are inappropriate, whereas bank staff will just accept good quality adviser-originated policies because these suit the customer. Research is available on these behavioural issues but MJW seem unaware of it.

3) MJW don’t understand the extent or the reasons for under-insurance. MJW haven’t even read the FSC underinsurance report! If they had they may have understood that NZ doesn’t have a quantity issue, instead there are quality issues – inappropriate sums insured, and little income/ trauma/TPD insurance. Their proof for under-insurance is a table comparing annual life premium per capita across countries, without understanding that table includes investment-linked life policies, which are actually investment, and compulsory, often inappropriate, group-life,  so are meaningless.

4) MJW give no reasons for the recommended maximum levels of upfront and trail commission. Instead they just take them from Trowbridge. This ignores the quite different cost structures between Australia and NZ, especially the larger scale in Australia and that life insurance comes with superannuation. The MJW comparison looks at gross commission rather than adviser profit levels. Any useful analysis would include costs for totally new customer policy origination, costs for replacement customer policy origination, costs for policy maintenance, lapse rates, time discounting, etc. I am staggered that MJW, being actuaries, include no modelling of the issues, and offer no online excel spreadsheets of the impact of their recommendations on adviser income.  They could have asked me – I’d have directed them to my spreadsheet for free!

My spreadsheet shows that using MJW’s figure of a 10% lapse rate p/a, 3% discounting, $1500 premium, and seven-year trail, 30 polices sold per year, no fees, with reasonable cost figures of $1200 policy set-up, and $150 p/a maintenance cost, then moving from a 210%/7.5% mix to MJW’s 70%/20% mix drops adviser profit from $66,781 to $6,626. Business valuation based on a three-times multiple drops from $200,342 to $19,878. The financial impact on new entrants is even worse.

5) MJW do not offer any analysis of the cost differences between bank staff and advisers in terms of policy origination. This is not hard to do.

6) MJW concentrate on sales issues affecting advisers – soft dollar and commissions - and imply that since bank staff don’t have these, then bank-originated product are better. Yet the FMA has only ever commented on issues relating to poor-selling by bank staff, and have found no issues with advisers. Banks use tactics like "naming and shaming" to ensure staff meet quotas, which MJW seems unaware of.

7) MJW advocate inclusion of insurance within Kiwisaver. This is useful at a casual glance, but any analysis of Australian reality reveals that while coverage rates are high, sums are inappropriate as cover increases with income, and other personal insurances have lower cover than NZ. MJW are again mistaking quantity for quality.

8) MJW also assume that all NZ insurers use the 210%/7.5% spilt. Yet NZ insurers use a variety of models, with Fidelity having used a lower upfront/ higher trail for years.

9) MJW are inconsistent. They say that under-insurance is an issue, that insurance needs to be sold and that more advisers are needed, yet they recommend drastically reduced adviser income, and therefore a sole reliance on bank staff.

Summary

The good parts of the report are common industry knowledge and most of the recommendations are cut-and-paste from other reports.

MJW offer no new data or modelling, and did not even request the correct data. The policy analysis is weak, and would be failed any university examiner.

I’m not sure what the FSC paid for this report but I could have mocked it up in a weekend for a tenth of what it cost, and put in far more interesting insights. Put out an open call next time, FSC.

Commentators have attacked the report for coming to a pre-set answer. That is irrelevant - normally these reports are produced to justify an already-agreed solution. I’m surprised that FSC members didn’t understand that process. They shouldn’t resign because they disagree with the results, but should be bitter that their money had been wasted on a cut-and-paste job. Commissions are not the biggest issue in industry, but it is vital that industry comes to some agreed alternative to the current unsustainable levels.

The biggest issue with this report is the missed opportunity to do that properly. MBIE are now free to impose whatever solution they think fit.