Insurance premiums fund junkets

An investigation by the Financial Markets Authority (FMA) found life and health insurance companies spent $34 million over two years on overseas trips and other perks for sales reps.

Consumers ultimately foot the bill for these incentives – known as “soft dollar commissions” – through higher premiums.

Soft dollar commissions, paid on top of the financial remuneration that insurance advisers earn, can range from overseas trips to gifts, prizes and loans. Over the 24 months the FMA reviewed, insurers spent:

• $18m on trips for advisers
• $5.5m on training and software subsidies
• $3.8m on dinners, conferences and other events
• $1.7m on sponsorship
• $1.6m on gifts, rewards and prizes
• $3.5m on other soft commissions, such as discounted loans.

Most consumers are unlikely to be aware of these incentives because advisers don’t have to disclose them. However, they come with a real risk that consumers will get skewed advice and sold products they don’t need.

The FMA research shows soft dollar commissions directly influence adviser behaviour. When one insurer stopped offering overseas trips, sales of its products dropped by a third.

We’ve been calling for these types of incentives to be banned because of the risk they present to consumers. At a minimum, commission payments must be publicly disclosed.

Key facts

• The FMA’s investigation included nine insurers: AIA, Asteron Life, AMP, Fidelity Life, Nib, OnePath, Partners Life, Southern Cross and Sovereign.
• Collectively, the companies spent $34m on soft commissions, equal to 9% of the income they earnt from policies.
• More than 50% of the $34m was spent on trips for insurance advisers. Destinations included Tahiti, Japan, the US, Singapore, Fiji, China, Britain, Argentina, Taupo, Bay of Islands and Queenstown.
• About 3000 advisers went to dinners and other events; a similar number received gifts and prizes; and 800 went on trips.
• Close to half the soft commissions paid required reps to meet sales targets.