Benefits Squeezed Tighter Than Agent Commissions

By Cyril Tuohy
InsuranceNewsNet

Who doesn’t love the phrase “managing expenses,” so long as you are the one conducting the expense management?

But when carrier executives talk about expense management, look out. For agents, it’s a signal that leaner times lie ahead. For agents who haven’t yet felt the wrath of slimmer margins affecting carriers, perhaps they should prepare to shave a few points off their commissions.

John M. Nadel, managing director at Stern Agee & Co. in New York, said commission rates have come down a few points over the past few years.

By how much and how often depend on the agent and the carrier.

When spreads narrow, as they have done over the past few years, carriers use their management levers to maintain profit margins. One of those levers is to cut down on the commission rate. Another consists of pulling back on benefits.

For agents selling fixed annuities yielding 2 percent in a 10-year environment, it’s hard to make money when rates are so low, analysts and industry observers said.

“The spread is under pressure,” Nadel said. “You can’t get to make it up so one of the ways companies have to do that is to cut commission rates.”

Astute agents understand the pressure carriers are under. Changing compensation structures are related more to low interest rates than they are to the quarterly performance numbers delivered by carriers, said independent advisor Doug Warren.

Warren, a Temecula, Calif.-based seller of annuities, said low interest rates and concerns over future market volatility are having an impact on the costs of options carriers buy to credit index annuities. Carriers are reacting by changing cap rates and payouts.

“I haven’t seen compensation coming down too much,” he said. “I’ve seen the benefits come down more than the compensation.”

Besides, trimming a commission rate by a few basis points won’t necessarily push him to quote different carriers’ products, he said.

“Everyone needs to win,” he added. “In order to deliver good value to customers and agents, carriers have to remain profitable. Low interest rates hurt profitability.”

Carriers complain that they, too, are in a tight spot.

Yields on invested assets keep falling as new premiums and cash flows generated by investments are reinvested at rates below the portfolio rates.

Achieving a 4 percent average yield on new investment isn’t possible without taking on more risk. Carriers may or may not be comfortable taking on that additional risk.

“Spread management may be more challenging in 2015,” said John Matovina, president and CEO of American Equity Investment Life Holding Co. in West Des Moines, Iowa.

The company, a leading issuer of fixed annuities, reported fourth quarter net income of $31.2 million or $0.39 per common share diluted, compared with $51 million, or $0.64 per common share diluted in the year-ago period.

Josh Mellberg, president of J.D. Mellberg Financial in Tucson, Ariz., said that as long as carriers need to attract capital and make their internal numbers, they will stay away from fiddling too much with the agent commission structure.

Carriers prefer tweaking the annuity guarantees, like, say, extending the terms of an annuity from 10 years to 12 years or even 14 years, before touching agent compensation.

Mellberg, one of the nation’s top annuity sellers, said carriers would much rather consumers cool to an annuity before souring an agent off the product due to lower commission structures. The reason is because building distribution networks takes a long time.

Once companies hit their capital target, then they will drop their rates “but they need to hit their goals first,” he said.

“One company may cut commissions, but another may pull back on the lifetime benefit riders,” said Steven D. Schwartz, an analyst with Raymond James Financial.

Michael White, owner of the bank-insurance consultancy that bears his name, said lower interest rates mean pressure on carriers to lower contract guarantees. Stingier guarantees can lead to less commission to agents.

“The agent looks at it and says, ‘I can’t afford to sell this, I’ve got to go sell something else,’ “ White said in an interview with InsuranceNewsNet. “Right away the commissions that particular carrier has to pay go down.”

Big carriers sometimes “act like the big rooster in the farmyard,” he said.

“As an agent, you take what they give you,” he said. “If an agent leaves, the carrier says, ‘You’ll come back to us when we get back in the market because we know you want to sell our A-rated products instead of some other carrier’s.’”

“Carriers have been cutting commissions, I’ve heard that gurgling up from producers,” he said.

Not that annuities or life insurance contracts are going away anytime soon no matter how low interest rates are prepared to drop or whatever tweaks carriers are tempted to make to product guarantees or agent commissions.

“Companies have figured how to be stable while offering these products that people need,” said Frank O’Connor, vice president of research and outreach for the Insured Retirement Institute.  

“The population is going to continue to age, and with 10,000 a day heading into retirement, that need is not going away” O’Connor said.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].