Dangers of the Three Tier Agency System

Life insurance is sold in Singapore, in most cases, through a three tier agency system.  I want to share my concern about the three tier agency system, and what is the real problem that many people may not realize. I did not realize it myself until recently.

Under the three tier system, you have an agency manager who supervises unit manager who recruits the agents. 

The agents earn a commission on selling the life insurance policies. The unit managers earn an overriding commission, say 30% of what the agent earns, and the agency manager earns an overriding commission, say 15% of all the commissions earned by all the agents in the agency. 

On the surface, this type of systems looks quite acceptable. After all, there is the cost of recruitment, supervision and training - and they have to be met by the insurance company. The payment of over-riding commission, which is tied to actual sales, looks like an efficient system.

Now, here is the danger!

Many of the agents are young people, most probably graduates or even undergraduates from polytechnics or universities.They are trained to pass the examinations and then on the "positive features" of the products that are being sold. 

Some are even told lies about the products, e.g. that the investment linked products can earn a yield of 9% and is better than other types of investments. They are also told that this yield is possible because the insurance company is able to manage the funds to earn this type of return. The net yield, after using a more realistic projection and allowing for the high deductions, is probably 3% or less. 

These new agents, being naive, goes to tell their friends how wonderful these products are! In some cases, the agents knowingly tell a lie to clinch the sale, but it is also quite likely that most the agents believed what they were told and honestly sold the products in the belief!

It may take the agents a year or two to realize that they were making the wrong statements. They then drop out of the business. This accounts for the high attrition rate. 

The agency managers and unit managers take over the business abandoned by the agents and continue to recruit the next batch of agents. 

This type of business model has been operating for decades. I did not realize earlier that it could be the umbrella for the massive mis-selling, using innocent young people to tell the lies to get customers to buy the life insurance policies.

Remember, it is difficult for the experienced agency manager to tell lies directly to his or her own clients. It is easier to train a young recruit to tell the lies. If this is found out, it is easy to wash off the blame by saying that the new agent has mis-understood the terms of the contract. 

This type of mis-selling is now easier with the sale through the bank channels. The bank staff are told by the insurance agency manager on what to "sell" to the customer. I have come across many cases of consumers who were given  incorrect information.

I wish to clarify that the above statement does not apply to all agents. It may be possible that most agents and agency managers practice the trade ethically, and it may apply only to a small number. But, we do not really know how big is this proportion of mis-selling, and what portion is deliberate mis-selling. 

I honestly do not know why it is necessary, in the year 2012, to continue this mode of selling life insurance  through three tiers and for life insurance companies to continue paying high commissions on these policies sold to unwary consumers.