The South African Financial Services Board (FSB) wants to change the way consumers pay for life insurance. Why? To make it fairer on you! So just what are these proposed changes all about?
Your Life Insurance Commission
When you buy life insurance you might find yourself paying commission (a percentage of whatever is spent/earned over time) to somebody to help you with the process. Right now, 50% of this commission is paid up front when you buy a policy. The FSB wants to do away with this altogether, and instead have a flat rate that you pay which will be called an “advice fee.”
Why would they do this? Well, currently an advisor has an incentive to advise you to get the most expensive policy, since this will earn him more commission. With a flat rate, an advisor will have no incentive, and will be free to advise you about the best policy for you (rather than the one that earns him most money).
Better Life Insurance Advice for You
As well as this advice fee, the FSB wants to limit the kinds of incentives life insurance companies can give to people who sell their policies. Right now, Mr. Smith might want to sell you policy X because company Y is giving him money or other rewards. With the new rules, this won't be allowed, and this should mean that Mr. Smith is more objective when giving you life insurance advice.
Future Plans
But the FSB isn't done with life insurance. They are also looking into making changes to the way life insurance companies report profits, and to how they assess risk, for example. And in the future, the FSB would like to separate the way that life insurance companies (and banks) are controlled, so that one association will look at how the company acts in the market, whilst another will control financial matters.
The FSB is also looking at the way life insurance companies act and investigating complaints and plans to come up with more proposals for regulating the industry at a later time.
The Other Side of the Story
However, there is another side to this story. Some people are worried that by banning commissions the FSB will make getting good insurance advice more difficult. In the UK, for example, where insurance commissions have already been banned, many financial advisors now concentrate only on wealthy individuals, since this is a way for them to make more profit. Critics of the FSB are concerned that if insurance commissions are banned then regular people will find it hard to get the good insurance advice that they need from a qualified professional.
Bottom Line
The bottom line here is that the FSB is working to make the life insurance industry fairer, and maybe even cheaper, for regular customers. However, it is also possible that in trying to do this the FSB will actually make it more difficult for customers to get good insurance advice. Whilst it's a good thing that financial advisors should be objective, the FSB does need to make sure that its rulings apply to the real world, and having advisors concentrate only on wealthy clients could be disastrous for normal customers.
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Main subject: Life Insurance
