Chapter 5

Question 1

List the 4 different sales channel through which insurance products can be sold? (4)

Answer 1

1. Brokers
2. Company agents
3. Direct response marketing
4. Bancassurance

Question 2

Describe the broker’s sales channel? (2)

Answer 2

• Independent brokers are self-employed brokers who do not represent any one particular office, and will have sales contracts with a number of insurers
  o Commission is paid directly to the broker’
• Corporate brokers are companies that have been established as brokerages and are often owned by a bank.
  o Favours specific insurers where the insurer and the bank have cross shareholdings
  o Insurer pays commission to the brokerage, which in turn remunerates its sales staff

Question 3

Describe company agents sales channel? (3)

Answer 3

• Commissioned agents are employed by a life office and mostly are only permitted to sell products of that office for commission

o General agents are commission agents who are allowed to sell products of a limited number of specified other insurers in terms of agreements between the insurers

• Salaried agents do not sell on commission but on fixed salary with performance bonuses (e.g. in worksite marketing)

Question 4

Describe direct response marketing sales channel? (4)

Answer 4

• Media advertisements
• Direct mail
• Telesales – can allow for sales process to be completed immediately
• Internet sales – becoming increasingly popular

Question 5

Describe Bancassurance sales channel? (2)

Answer 5

• Selling of banking and insurance products through the same channel (usually to bank customers)
• E.g. banks insist on life insurance for mortgage borrowers, personal loan holders, credit card holders
  o Borrowers are not obliged to buy insurance from the lender – but many do so as it is an easy option

Question 6

Describe the challenges associated with multiple sales channels? (2)

Answer 6

• Conflict between channels
  o Independent brokers need assurance that their client information will not be given to company sales staff, especially if the broker no longer supports the company
  o Direct response canvassing may compete with brokers or agents when aimed at the same target market
• Experience differs  challenges for underwriting and pricing
  o E.g. if brokers’ business has better experience  they can place the business elsewhere
  o  provide different prices for different channels
  o OR provide brokers and their clients with additional services that will justify the higher price

Question 7

Describe the general regulation and principles underlying commission payments? (5)

Answer 7

• Commission paid to brokers and company agents are regulated under the Long-term Insurance Act
• Principle of “equivalence of reward”:
  o total sales cost must be materially in accordance with the maximum commission regulation
• Companies often pay lower commission to agents, but then pay production and persistency bonuses not directly related to sale of the specific product  BUT principle of equivalence of reward must be adhered to
• Fee-based structures where clients pay a professional fee for the adviser’s time is becoming more common
• Commission is specific to the insurance industry. Unit trust and linked investment service providers (LISP) have “advice fees” which are not regulated

Question 8

Describe the three different methods of paying commission? (7)

Answer 8

Upfront commission:
* Commission is paid in full over the first number of years of the contract, based on the full contract term
* Calculated using premium and term of policy
* Single or recurring premium policies

As-and-when commission:
* Commission is a percentage of every regular (monthly) premium and is payable when the premium is received, with payments continuing throughout the full policy term
* Recurring premium policies only

Trail commission:
* Commission is a percentage of FUND VALUE with payments continuing throughout the full policy term
* Aggregated trail commission paid may not exceed the maximum aggregated as-and-when commission that can be paid (regulation)
* Single or recurring premium policies

Question 9

What is a broker required to be registered

Answer 9

FAIS

Question 10

ASISA TCF Best Practice wrt commission and fees

Answer 10

ASISA requires its members to follow TCF principles with regard to commission and fees