Tan Kin Lian's Blog: High distribution cost

Thursday, September 06, 2007

High distribution cost

COMMENT POSTED IN MY BLOG

Wonder if all insurance company sell low cost, will the insurance company survive the business environment?

Is the distribution cost paying the agent commision only? What about the CEO's pay where does it come from?

So it is not fair to always lament on the commission earn by agents. What the agent earns is only part of it, distribution cost goes to pay more than agent commission.

I wonder if Mr Tan will comment on this or allow this to be posted.

REPLY:

Products that are simple and meet the real needs of the consumers can be sold with a low distribution cost. It can have a reasonable margin for all parties to earn a reasonable income.

Unfortunately, many products are designed to be complicated, costly to administer, costly to market, and give poor value to customers.

The insurance agent can easily sell these high cost products to naive customers, and earn a high commission from the sales. The managers and CEO can also earn high salaries from the high profit margin.

After the product is sold, the customer is locked in for 20 to 30 years, and can only terminate the contract at a great loss. If they keep the contract, they get a poor return from their years of savings.

I hope that businesses will be ethical and will market products that are fair and give good value to customers.

18 comments:

Anonymous said...: Examples of high cost products are
limited premium critical illness plans, repackaged endowment like REVOSAVE, wholelife plans and regular
ILPs like ID2 and other s from other insurance companies, high expense ratio ILPs.
They have high distribution cost with part of it which goes to agents as commission. Because of high cost the return is affected.; September 01, 2007 1:41 AM
Anonymous said...: Since the critical year saga the insurance companies were rolling out products with limited premium on the premise that customers do not like to pay for life. The question one should beg is " is it to the benefit of the customers" The answer is yes and no. Yes,it benefits the high earners and the rich without their compromising their needs for high coverage.The rich never have this problem of servicing the premium.
For the poor it makes it even worse for them.Before this they were already struggling with the premium for a normal wholelife.Now the premium is even more menacing for them. Lapsing seems inevitable ,just a matter of time. Why then insurance salesmen still recommend limited premium to the average income customers. I am sure if they have done fact finding limited premium would never been recommended. As I have said insurance salesman is a salesperson.He sells with one objective, ie. to close the sale.
The means is not important, it can be any means, illegal, immoral unethical, as long it justifies the end, the closing.But the customer saddled with a huge premium to bear for next 20 years and having to pysche himself or herself that after paying it he or she will be covered for life. 20 years is not short.It is really a PMA game. Good chance it will be cancelled.
Does the agent bother whether the customer continues the premium for the next 20 years? He has collected the huge commission and if the customer should lapse he can sell him another one with high commission, an opportunity to make a sale.That is good strategy.
So what should be done to this type of insurance salesmen?; September 01, 2007 9:40 PM
Anonymous said...: I agree. Most of the distribution costs go to the salesman and there is little left to the company or even the fund manager. Hence, it results in the system being short sighted and little benefit to the policyholders. I agree with Mr Tan's comments that a cap be set to the distributor who does not do much except sit with the customer for an hour. Then, it incentivises the company and its manager to think about longer term products.; September 03, 2007 8:30 PM
hongjun said...: Hi Mr Tan,

1) How does the distribution cost actually get calculated?

2) Why limited life plans are not good? It sounds rather ok since we do not need to pay for life and will get life insured.

3) If I were to get a savings plan, what type of plans should I get? I actually sat down with a Pru adviser today after being approached by them on one of the roadshows. They actually recommended PruSave and PruCash. I don't like the idea of having only around 5% of interest and having to lock-in to 25 years. I think I can do better if I were to do investment. However, I know savings is part of the whole financial planning. What do you advise?

I thank you in advance and I would say your posts so far are all very enriching.

Regards
Loh Hon Chun; September 06, 2007 11:20 PM
Anonymous said...: Mr. Loh, limited premium plan takes a lot of your premium at the expense of your coverage. Imagine the premium you pay for them can actually buy you a bigger coverage. Secondly, you are locked in for next 20 years and by the time you are about to stop your need has declined. Thirdly, it is in your early years that you need high coverage not when you are old. Yes, at this time you are likely to be ill but the critical years are when you have the highest financial
responsibilities and you need more money when something happens. You don't need very much when you are old maybe just treatment cost if you should contract dread decease.
Don't be fooled by life time cover gimmick. Even with term cover you can have lifetime( 100 years old) coverage and at very affordable premium.What you need at old age is money to spend your retirement and not a big insurance coverage.
The truth is limited premium insurance gives agents high commission and they would try their
level best to sell it to you.
Just think about it.Read what Mr. Tan shared.; September 07, 2007 12:59 AM
Anonymous said...: This is the example of a good product, no entry cost, no lock-in and guaranteed return, the BIG-E by Aviva.This is direct. No agent.
The big-E guarantees a return of 3.5% for your CPF-OA and SRS account, but for a limited period till end September. There is no gimmick and you get what you see.It is selling like hot cake.
Many of the single premium endowments have a long lock in period and you get the return only if you hold it till maturity. Like Growth endowment from NTUC, to get 3% you need to lock in for 5 years and also no guarantee.For BIG-E there is no lock in and the 3.5% is calculated based on average monthly balance.
This is the kind of product we should be looking at , simple and easy to understand, no hidden catch.; September 07, 2007 9:49 AM
hongjun said...: Thanks to all.; September 07, 2007 8:10 PM
Anonymous said...: About 6 month ago i put 50k using CPF into growth policy from ntuc.
Do you think i can cancel and transfer to the aviva Big E. Aviva is better. no need to lock for 5 year.
Before i also ever asked agent whether good to transfer to specail acount to get 4%. She said no good because I cannot take out to buy house.Ask me to buy growth policy.Now I think over I don't think i need to use it. I don't know i get different
advice from diferent people. What is your advise Mr.Tan?
Thanky you

SK Ang; September 08, 2007 12:52 AM
Anonymous said...: So what can a person do when caught in such a situation. Locked in for life and not getting adequate service. Insurance companies can just ignore you since you have bought all the necessary policies. They are now concentrating all their efforts to snare new customers who can give them top commissions in the new policies. It takes many years to find out the bitter truth and by then it is too late.; September 08, 2007 5:31 PM
Unknown said...: Yes Mr Loh, savings is an important part of financial plannin, but do not forget e other components like personal accident,critical illness,permanent dis or a shield plan.A gd advisor will discuss with you on these factors too..

Best of Luck!; September 08, 2007 9:38 PM
Anonymous said...: Good news for customers and policyholders who are aggrieved by the misdeeds of insurance agents there are legal clinics provided by the Law society at Community Clubs and CDCs for them to seek legal advice.
For those who have been deterred by cost or ignorance this is an additional avenue for free legal consultation.
I hope the Society can also provide third party review for policyholders who suspect that their insurance agents have not given appropriate advice and recommendations or have been sold useless insurance under undue influence or under duress or other underhand means and to be advised if there is ground for legal redress. Hope that with this available the industry can be more professional and to deter those who have no serious intention to make this a career and to weed out the incompetent, dishonest and ruthless
predator insurance agents.
The Sunday times has a cut out guide of the venues which will provide the clinic.; September 09, 2007 5:50 PM
Anonymous said...: Lately we have been hearing about agents' unethical dealings and yet nothing is done about it . The relevant authorities are mute. Except for AIA and Manulife, ( I am not endorsing)the other companies seem indifferent and have lackadaisical attitude. This may send wrong signal to the errant insurance agents.
Everybody has a part to play and customers play an even crucial role.Without them there is no business to be done and so are the other parties would not exist. Therefore I urge all customers, with the trump card in your hand you can change the rules of the game.
1. You have the right to distrust
all insurance agents.
2. Demand to know their qualifications and credentials.
3. Demand to know their vested interest in the products you buy.
4. Demand all disclosures, for and against your interest .
5. Demand a money back guarantee in the event of inappropriate advise.
6. and so on.
If we demand all the above and to let the insurance agents know we are serious about our financial future and that they will be in hot soup if they don' t measure up to these demands.
Customers must be united in our effort to eradicate the rogue insurance agents otherwise we will still have our woes.; September 10, 2007 5:40 PM
Anonymous said...: I think someone should set up a platform to air the views of policyholders who have been shortchanged by their insurers. I say this because it is very difficult and present facilities inadequate to reflect this problem. For example, it is to the insurers' benefits if policyholders give up their policies after many years of paying the premiums. If this information can be made available, then we will not only be exposed to what insurance companies want new potential customers to see through advertisements and in return get good reports in the major newspapers. There should be some other avenues for policyholders to air the injustices that they have suffered under these big insurance companies.; September 10, 2007 10:09 PM
Anonymous said...: Before you rush to sign on the dotted
line for REVOsave or SABOsave quickly grab a copy of the NEW PAPER and read what Doc. Money has to say about it.
You be shocked that the insurance agent didn't tell you the truth or didn't know how to present in a truthful manner but zigzaging all the way till you get very dizzy and confused and then he went for the kill.
All about rainy and sunny days will end gloomy for you.
Doc. Money has no vested interest in the product. What he did was an objective analysis of the product and his conclusion is obvious.
A joke? No, not a joke. It is a stark truth of the REVoSave; September 10, 2007 10:23 PM
Anonymous said...: HOW MANY INSURANCE AGENTS DOES IT TAKE TO CHANGE A LIGHT BULB?
Answer: 2
One to take out the burned bulb and drop it, the other to try and sell it before it crashes.

Anonymous; September 11, 2007 9:36 AM
Thomas Phua's Blog said...: To know if the product is good, ask if your agent have that policy himself.; September 12, 2007 4:19 PM
Anonymous said...: Yes, ask Income agents whether they have bought a revosave. If all of them have bought one let us all shut
up. Let's support them. Indeed they put the money where their mouth is. But if they put their mouth in their backside then revosave is a questionable product. If it is not good for the agents what makes you think it is good for customers.
I dare say that only one out of 50
agents may buy.....; September 13, 2007 11:19 PM
Thomas Phua's Blog said...: I got Pru Cash, but this revosave is much better than Pru Cash....but too bad I am already committed.

I think revosave has more flexibility.; September 15, 2007 11:22 AM