South African life assurance industry’s Hiroshima

Trevor Manuel

December 14, 2005

Her face was one big snarl. Although dutifully recording my responses her whole look shouted out: who do you think you are, you upstart know-nothing? Actuaries, doctors, other people infinitely smarter that you have calculated our commission structures. Who are you to criticize them?

This was 1984, the year of Orwell’s Big Brother. The power of life offices was at its zenith. A time before Robin McGregor sold out to the Evil Empire, when he still railed about four groups controlling 80% of corporate South Africa. And how three of them were assurance companies.

So I expected reaction to a series of articles criticizing the hefty up-front commissions earned by agents of the assurers. After all, my employer, the Sunday Times, then as now produced the biggest newspaper in the land.

But for an outwardly brash, self-confident though still twenty-something reporter, the industry’s response was intimidating. Mostly because I was pretty much out on a limb. Bruce Cameron’s sustained campaign would only begin years later. The rest of the media were occupied elsewhere, or so it seemed.

My pen-bearing assassin had been sent by the insurance industry’s trade journal. She didn’t disappoint. Expecting the worst didn’t cushion much of the blow.

It’s gutting to be the subject of a lengthy feature detailing how stupid, ill-informed and misguided you’d apparently become. Even if you can intellectually appreciate the writer was providing her gang with exactly what they wanted. Rather than what they might have needed.

So forgive the touch of schadenfreude seeping through in the wake of this week’s dramatic developments.

Two decades on and we’re millions of column centimeters and a new Government later. Critically, the country now has a Minister of Finance whose priorities exclude a desire to secure post-retirement chairmanships from financial institutions (ahem, Messrs Horwood and Liebenberg).

Trevor Manuel is determined to change things. Time will prove that he has. Right now, the life offices might not fully realize it. But the change in their commission structures will force a revolution in the way assurance is peddled as surely as The Bomb transformed Hiroshima.

Assurance policies, the industry has long told us, are sold not bought. Which means there’s an obvious, direct relationship between the incentive to sell (ie commission) and the business that’s actually written.

Extrapolate the argument and it becomes clear Manuel’s R2,5bn plus fine is not the deepest cut to a rotten structure. Rather, it’s the way he forced life offices to guarantee at least two thirds of any money “invested” with them – no matter when the client might decide to change their monthly contribution or even stop it entirely.

At some assurers, within a year “investors” cancel an 40% of all policies brought onto the books. Forget for a moment to morality of this obvious mis-selling. More relevant, until now Joe Citizen got zippo back. After deducting the cost of the salesman’s commission and life assurer’s admin, nothing remained of his monthly premiums.

By introducing the new money-back guarantee Manuel will effectively force life offices to abandon up-front commission payments. They will no longer be able to afford giving salesmen, in advance, a cash reward worth up to 13 months’ of the client’s premiums. Instead, the salesman will only get his commission as and when the money is actually received by the company.

The practice of advance commissions is sure to baffle those who operate in the real economy. For them, the disciplines and demands of working capital is a given. Often their clients only settle months after getting their cash.

And what’s this about being paid a commission for money that might only be contributed years into the future?

The mighty life assurance industry has been built on this game where there’s only one loser. The hard earned savings of unwilling citizens (policies have to be sold, remember) grease the assurance machine’s wheels.

To make things worse, only when they hit an emergency will the citizenry discover their contributions have been used to settle, in advance, the commission demanded by that friendly salesman. And because of this, policyholders remain blissfully unaware that it can take years before their supposed investment becomes worth anything near what they actually put in every month. Much less providing any growth.

A fascinating half hour on my radio show last night focused on the impact of abolishing up-front commissions. Investment intermediaries are a diverse bunch. Their ranks range from failed second hand car salesmen to genuine financial advisors. But most are breathing fire.

There are some good ‘uns among them. Like one of last night’s guests who, in a previous interview had described up-front commission as “morally indefensible”. He copped plenty of flack for outburst. In a nutshell, from what those in the know were saying, there are some obvious consequences from this week’s development.

For one, the ranks of investment product salesmen will shrink, perhaps dramatically. When similar changes were introduced in the UK, three quarters of the “financial advisors” relocated to the Tupperware circuit, share boiler rooms or back to the British equivalent of a Jules Street second hand car shop.

Industry bodies fret that with so many leaving the business, “the emerging market” will be neglected. They should find another argument. The changes have been introduced because Pension Fund Adjudicator Vuyani Ngalwana and his boss Trevor Manuel tired of seeing using moral suasion and strong language in hoping to stop their constituency being ripped off.

With fewer salesmen pounding on the nation’s front doors, another obvious result will be lower inflows by life assurers. That, in turn, will force them to really address internal excesses. On this score, Liberty and Sanlam have led the industry. But even they will need to cut a lot deeper if the businesses are to survive in their current form.

On the positive side, with the rats being driven off the good ship Investment Advice, there is sure to be a dramatic re-rating of financial advisors who remain.

Better still, the change should eliminate a nation’s cheerful abdication of responsibility of its people’s financial future to those who know a whole lot more about selling than the art of investment.

As this truth dawns, South Africans are sure to absorb a couple of critical truths: nobody cares about your own money quite like you do; and the investment world is a lot less intimidating than those with vested interests want it to seem.

Bravo Trevor Manuel, Vuyani Ngalwana, Rob Rusconi and the many others who helped build and drop the assurance industry’s version of The Bomb. History will judge you far less harshly than it does General Paul Tibbets and his crew of the Enola Gay.

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