Content area
Full text
At LIMRA's Annual Meeting in Orlando last fall, the CEOs of Protective Life (John Barrett) and of Western and Southern (Bryan Dunn) advocated level commissions from the podium during a CEO interchange. While they were not willing to go first -with their own companies, they said that the industry would be better off if it (as a whole) adopted the concept.
In 1995, the relevant New York State regulations were changed and level commission systems could be adopted for those companies that operate in New York State. At that time, it was widely thought that several companies would adopt that approach, but here we are 10 years later and the concept of level commissions is still just talk within the United States with a couple of minor exceptions.
Back in 1995, I wrote an article called "Levelized Comp Revisited" in this magazine that addressed the issue of who would win and who would lose if levelized compensation were adopted. Given the prominent mention just given the concept, it's time to look at it again.
As both Mssrs. Dunn and Barrett stated, individual companies are not likely to adopt the concept of their own accord as they fear that their producers would leave en masse for companies still offering heaped commissions. Nonetheless, there is also a feeling that regulators might force a move away from heaped commissions in an effort to improve overall market conduct.
Is levelized compensation (LC) a good Pit in today's environment? Should the industry be proactive and migrate somehow to a level commission structure? Or are there other concepts that would be a better choice il the industry were forced (or led) to a wholesale change in its compensation structure?
A Brief Look at Level Commissions
In comparison with traditional or heaped commissions, level commissions or levelized commission rates paid in the Hrstyear of policies and spreads the savings over the renewal years. In the purest version it is literally level tor all policy years. In practice, there is usually a modestly higher first-year payment or a growth bonus added to lirst-vear pay to encourage making new sales. Traditional or heaped compensation has a much higher first-year compensation opportunity, either integrated into the commission rate or with the addition of potential bonuses.