Over the last 12 to 18 months, there has been a continual flow of papers, reports, and articles aimed at reducing intermediaries’ life insurance commissions in the life insurance markets in Australia and New Zealand.

The latest contributions from the Reserve Bank of New Zealand (RBNZ) and the New Zealand Institute of Economic Research (NZIER) are fairly typical of the tone, content, and quality, of the previous contributions.

The response to the latter report from Dr Mike Naylor hits the target in that inadequate data creates questionable conclusions. Despite the lack of provable, testable data than can be replicated for verification, NZIER comes to the conclusion that reducing commissions would be beneficial, despite the likely loss of advisers from the industry.

The (incorrect) presumption here is that lower commissions will encourage advisers to leave the industry.

If that were the case, the converse would be true and the level of commissions made available in NZ from product providers over the last five years would have seen entrants flocking to join the ranks of advisers.

To my certain knowledge, no such flocking has occurred.

There are further jumps from supposition to conclusion in the NZIER paper that Mike Naylor identifies more eloquently than I, and that call into question the quality of the work produced.

Mike’s criticism is based on a researcher’s perspective and questions the significance, relevance, and utility of the metrics used in the NZIER Report.

In a similar vein, the intervention of RBNZ in the debate is curious. Here is the regulator expressing a view that the current levels of commission may threaten solvency. Actually, all expenses threaten solvency, but leaving that aside for one moment, would the author care to express specific concerns in the area of solvency or capital adequacy? How does the commission level threat to solvency metrics manifest itself?

Now I don’t expect to receive an answer, but the approach of RBNZ and NZIER is typical of the approach adopted by the Trowbridge Report, the Melville, Jessup, Weaver Report, and sundry comments that commissions are too high.

Incidentally, the mantra that wraps around this view is something like…”and which produces poor outcomes for consumers”.

The “outcomes” are, of course, never defined, mainly because this would require subjective evaluation of product solutions that the commentators are simply not competent to make.

Nevertheless, the inclusion of these words – or similar - justifies the direction of these publications that have been, either inadvertently or deliberately, supported by regulators, politicians, academics, and media commentators.

However, as any sensible person involved in the financial services industry will tell you, highest commission does not equate to highest premium – nor does nil commission equate the cheapest premium.

Commission, as an acquisition cost to some life companies, occupies the role of distribution expenses in organisations that do not pay intermediary commissions.

Similarly, some companies have tightly controlled General Operating Expense Ratios, while others have expense over-runs that render their retail pricing higher.

To compensate for these expense-overruns, a number of internal alternatives are available, including, but not limited to;

• Reduce shareholders’ dividends
• Reduce management compensation packages
• Avoid investment in systems innovation
• Avoid product innovation
• Reduce distribution/acquisition costs

Each of these requires a conscious choice on behalf of the leaders of these organisations at senior management and board level, and each is fraught.

Trimming rewards to shareholders can cause senior management to be publicly criticised, pilloried at the AGM, or stood down altogether.

Reducing the senior management compensation packages is unlikely to be suggested or supported by senior management.

Avoiding systems innovation is easy by referencing the capital cost, the failure of the last IT project to deliver on time/on budget, and the general lack of awareness at Board level of the importance and impact of technology.

Likewise, the archaic product design, development, and roll-out process held so dear by the “progress prevention” commissars helps to contain the expense of introducing benefits that will genuinely serve the needs of the consumer.

Finally, there is commission.

And what a rich supply of ideologically driven, ill-informed, poorly researched, material has been generated in the recent past to facilitate and encourage others to view adviser compensation as something akin to a communicable disease.

From the British academic at the Financial Capability Conference in Auckland last year who declared all commissions to be evil, to the various reports mentioned earlier, the concept of pricing a product to contain commission acquisition expenses has been condemned, vilified, and demonised.

All expenses in the P & L of any organisation – life insurance companies included – are the responsibility of management to contain within budget.

However, the commission item in many life company models is the stimulant of revenue, and, as such companies tend to market more complex products that require professional advice, why should this model be the target of these poorly constructed reports?

In truth, distribution costs are only a part of the overall expenses of an insurance policy - including the company’s profit margin - and while suggestions that regulating, controlling, or reducing commissions will bring price stability and product sustainability, the spoke in that wheel is the impact of claims.

Mortality is predictable and has plenty historical data to support appropriate premium levels.

Disability claims are more volatile, less predictable, more prone to unexpected ‘spikes’, and pricing is much less stable, as we’ve seen from recent experience in Australia.

So claims that commission containment is a panacea are highly suspect, but it does take the focus away from the inefficiencies of companies with expense over-runs elsewhere, poor product development records, and suspect innovation practices.

A free market economy – or even a mixed market model – seeks to facilitate and stimulate the most efficient solutions on behalf of the wider community.

At present, we’re being assailed with so-called evidence, based on unsubstantiated research, where the conclusion appears to have been reached before the research commenced.