Disclosure fails to dent sales of life insurance

Seeing how much commission they pay has not deterred customers, reports Richard Thomson

Until it happened, it was being touted by the life insurance industry as the biggest disaster since the Flood. Now it has become reality, the future does not look quite so bleak.

The potential disaster, of course, was the introduction on 1 January of disclosure of costs to customers buying life insurance and pensions. Companies must now state clearly exactly how much money gets taken out of insurance premiums to pay commission tosalesmen and charges to the insurer itself.

For 18 months the industry fought a desperate rearguard action against this measure. It claimed that if the public ever got to know just how much it was paying for life assurance, no one would buy it. Certainly, it seemed likely the public might be shocked by the hundreds and often thousands of pounds of premium payments that are swallowed up in costs by brokers and insurance companies.

But the initial indications are that the experts were wrong.

After only three weeks it is too early for any hard statistical indication of how selling is going. But the anecdotal evidence is strong; it is becoming clear that the public is far from giving up the life assurance habit.

"Sales have kept up surprisingly well," said Norman Turner, strategy manager at Prudential. "Our centralised quotations office in Reading is taking 5,000 calls a day. Disclosure is not making much difference."

Jeremy Budden, assistant managing director of Sedgwick Financial, part of the Noble Lowndes group, is equally bullish. "I'm standing on the seventh floor and I'm not about to throw myself out of the window," he said. "I have just spent two days with our regional directors to find out what's going on, and I'm a little surprised how well commission disclosure seems to be going down with the public. Indeed, there has been an increase in the number of people coming to us."

Inquiries coming into Sedgwick so far this year are up 25 per cent on the same period last year and 22 per cent up on December.

Up to a point, of course, you would expect them to sound upbeat. Moreover, comparisons with last year's business can be misleading, since sales were bad in 1994. The scandal over misselling of pensions, and the fact that the sales forces of several companies were taken off the road for retraining meant that sales of life and pensions products slumped. Some pick-up this year, therefore, as the industry recovers its poise, seems almost inevitable.

But insurers and independent advisers make the point that the costs attached to many of the most basic insurance products are not actually all that high. "It is only the very large cases that generate very large commissions," said David Seviour, public affairs director of Allied Dunbar. "A typical commission on a savings plan with a £30 to £40 a month premium would be only £300."

Again, you would expect the industry to play down the costs. It has, after all, spent the last year frantically looking for ways to reduce charges now that they can be directly compared with one another. Even so, the public seems remarkably unfazed by what one experienced broker called the "exorbitant" charges imposed on life products.

Part of the reason is no doubt that people still do not pay enough attention to the small print of their policies and so still do not see just how much they are paying. The form of disclosure is also complex and potentially confusing, so it may be that many consumers simply do not understand what they are being told. "We've found it hard enough to get our intermediaries to get to grips with disclosure, so heaven knows what the customers make of it," one company representative said.

The recent success of independent financial advisers such as Sedgwick may also indicate that greater disclosure is leading people away from tied salesmen towards independent advice. Their hope, probably justified, is that there is more chance of comparing several products and charges with an IFA than with a tied agent.

But another realisation is also dawning on the industry. It may just be that the public does not buy on price alone. Charges for insurance products are still unquestionably high, but people who need insurance will have to buy it somewhere. In which case,they are just as likely to be looking for a well designed product, efficient service and a range of other qualities as they are at the price.

"Our most recent research shows that although price was an important component, it was not the only one," Mr Seviour said. In other words, consumers are more sophisticated than the insurance industry suspected.

The new ability to compare charges, Mr Seviour believes, will force insurers to think more carefully about how they will compete with one another. "Will they compete purely on price, or on service, or on value for money, or what?

"Originally, we all thought that the new regime would cause the consumer to do more shopping around," he said. "Now I don't think it necessarily will as long as they believe they are being offered an overall package that suits them."

But isn't this what the insurance industry was supposed to have been providing all along? Well, yes. But it looks as if disclosure is forcing it to tighten up its act in all departments and compete in ways it never has before. And that has to be good foranyone buying life assurance.