Without compulsory disclosure of commissions, life assurance companies here will be free to pay intermediaries whatever level of commission they wish - a reward that is usually taken from the client's first year's contributions.
The Irish Insurance Federation insists normal competition between the companies will keep these payments in check, but without full transparency, the consumer can only wonder whether the policy they buy is being genuinely sold on its merits, or because of the potential size of the commission to the salesperson.
Even where the commission takes up the bulk of the overall charge, it may be reasonably argued by the company that its own overheads are low enough to justify rewarding good salespersons or brokers with a larger than average commission. Certainly, if the overall effect on the customer's fund is "reasonable", there should be no cause for concern. The problem is that the customer simply cannot determine this if the company refuses to reveal the figures.
In Britain, where there is full disclosure of all charges, consumers of life assurance products are told, in cash terms, exactly how much of their contributions are being absorbed in commission (or in the upkeep of a direct salesperson who is paid a salary) and how much is being taken by the company as its set-up fee.
The effect of these charges is translated into a percentage figure known as the "reduction in yield" and what it produces is the real internal rate of return of their investment fund. If the fund performance is projected at 7 per cent and the reduction in yield is 2 per cent, then the customer knows that the real return from that fund is 5 per cent.
So what should Irish consumers do? How can they protect themselves against an industry which seems determined to keep its customers in the dark about the true cost of the products they are buying?
Ideally, consumers should avoid dealing with commission-based intermediaries altogether and instead seek out independent fee-based advisers. Where they recommend life assurance investments, the commission will be "stripped out" and paid directly into the investment fund. Fee-based advisers, unlike commission-based brokers, will not overlook the range of products available from the likes of Equitable Life and Ark Life, or even the Post Office, none of which pay commissions. If you cannot find or afford to pay for independent advice, but still want to buy a pension or a life assurance savings plan, be very careful if you deal with a member of a life company's direct sales force or with a commission-paid broker.
If there is no commission disclosure and if the existing commissions agreement is abolished, it will be in their financial interest for you to buy the policy that pays them the biggest commission. The onus will be entirely on you to get a breakdown of all the associated charges. If the salesperson refuses to give you this information, go to a company that will. Make sure to ask for 10-year performance figures and compare these as well.
The welcome by the Irish Insurance Federation for the Minister's decision to retreat on this fundamental issue of costs disclosure is a clear warning that consumers should be on their guard. The IIF's insistence that it is too difficult to work out a fair standard for the commission element in the overall charge and that breaking down the charges would result in an "information overload" anyway, is clearly nonsensical. The majority of insurance companies here would prefer that their customers did not know the true cost of their policies because the insurer may not be able to justify those costs if put to the test. Tighter EU controls and an increasingly better informed consumer lobby has contributed to the improvements in life assurance practices over the past few years. This latest decision by the Department of Enterprise and Employment, if enacted, is a major setback to those improvements.
