MetLife’s announcement this week that it was changing the way it planned to compensate agents selling the company’s newly released Premier Accumulator Universal Life (PAUL) product isn’t the first time a major carrier has tweaked its approach to how agents get paid.
Jackson National tried a similar initiative about 20 years ago, according to life insurance author, speaker and industry consultant Tony Steuer in Alameda, Calif.,
The compensation model fell flat after agents showed little interest.
“Some of the agent groups weren’t in favor of it and people at that time didn’t put a lot of thought into the long-term ramifications of switching the compensation system,” Steuer said.
Yet two decades on, the life insurance market is a very different place.
Life insurance sales are stagnant, low interest rates have persisted longer than anyone anticipated, a new generation of young buyers don’t see much need for life insurance, and an aging and shrinking life-insurance sales force doesn’t portend particularly well for future life sales.
Regulators have also shown they are serious about developing a fiduciary framework to make sure that brokers sell insurance products to protect buyers, not brokers.
In a press release, MetLife said PAUL offers financial professionals “the potential to earn compensation through an asset trail based on the cash value.”
The strategy is a change in the way carriers determine the combination of premium-based commission and trail-based commission that flow to the agent, a process known as “levelizing” compensation.
Gene Lunman, executive vice president of MetLife Retail Life & Disability Insurance, said that levelizing compensation models have been tried at various times by the industry over the past 30 years, but life carriers have not committed to it over the long term.
With traditional life policies, more than 100 percent of the premium paid by the client in the first year goes to the distribution system. In successive years, the compensation is very small and often short term, he said.
Loading up on commission income in the first few years of a life insurance contract gives brokers more incentive to sell new policies.
Less income later on means less incentive for agents to serve their in-force policies because there’s so little money to be made from doing so.
With PAUL, advisors are paid less in the first year or two, and more over a longer period so that agents have more incentive to provide a service to policyholders. “PAUL is more aligned with the client’s lifetime needs,” Lunman said.
Steuer said life insurance remains one of the last bastions in financial services where agents make the bulk of their income up front.
Commission revenue from auto and homeowners policies have been levelized for years, which is in part why property/casualty agents call more often to check on whether the needs of the policyholder have changed, he said.
“Agents selling life are under big pressure to keep selling new policies instead of maintaining their book of in-force policies because the new commission is 50 percent to 100 percent of the first-year premium and renewal can be from 2 to 5 percent on premium,” he said.
Term policies don’t pay a renewal commission, so the financial incentive for the agent is to keep writing new business.
“When I came into the business, guys were making good renewal commission and people spent time with clients and meeting their needs,” Steuer said.
“Back then, if the agent left, the carrier would reassign the policy,” he said. “Now the insurance carrier does the servicing themselves and they don’t have to pay anybody. The carrier isn’t calling me to say, ‘Do you need to make any changes?’.”
Erich Sachse and John Ristuccia, vice presidents in the professional services division of the performance management consultancy Synygy in West Chester, Pa., said the PAUL compensation model is reminiscent of compensation structures used by financial advisors rewarded through a percentage of assets under management.
Ristuccia said independent agents and financial advisors, in search of the best financial arrangements, often compare commission rates and plan designs between carriers.
MetLife’s tactic will not necessarily appeal to all brokers, but for agents with large books of business with millions of dollars’ worth of in-force policies, a cash value-based compensation could be attractive.
“This approach will appeal to different types of brokers and I wouldn’t be surprised if they (MetLife) put more commission and compensation options in for other products in the future so they get a recurring commission,” Ristuccia said.
Sachse said changes in the compensation model don’t come as a surprise given the challenges faced by life insurers. Raising the level of trailing commissions “would encourage a closer, more intimate relationship with the client.”
Lunman said MetLife would consider similar changes in compensation structures for other life insurance products.
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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