Life Offices Tempt Agents With Million-dollar Carrots
Sydney Morning Herald
Thursday December 11, 1986
The chequebook war being waged for the top-scorers among life assurance agents has reached fever pitch and industry insiders anticipate a revolt by policy-holders.
Australia's two biggest life offices, Australian Mutual Provident Society and National Mutual Life Association, are fighting for dominance by offering interest-free loans of up to $1.5 million to the cream of Australia's life insurance agents.
It is estimated that more than $100 million is being offered.
The loans are the bait to secure the services of several hundred salesmen, who represent about 20 per cent of Australian life insurance agents and who earn up to $500,000 each a year.
AMP and National Mutual control more than half the Australian life insurance and superannuation market, which is expected to be worth $6 billion in business and new premium income this year.
The top fifth of life salesmen write 80 per cent of this business.
Some companies already have been forced to match the big dollar packages to keep their key agents. Others have not yet resolved how to meet the challenge
Critics say policyholders will derive no benefit from such massive expenditures and can be expected to make their feelings felt at annual meetings next year.
National Mutual, in a letter to agents, says: "We believe this package (the loan) will allow us to attract top quality agents from other life offices.
"The approach we have taken with our existing agents has created a lot of interest in the marketplace and we feel we should strike while the iron is hot.
"The package, I think you will agree, is a very attractive one.
"One side effect of this is that the industry will begin to polarise around AMP and National Mutual, with most of the smaller ones going out of business or being absorbed, as they will not be able to compete for agents."
The letter confirms the industry's worst fears about its destabilisation unless the Life Insurance Commissioner steps in.
The Life Insurance Commissioner Mr John Smart wrote to all life insurance companies on November 7 asking whether they had made substantial lump sum payments to intermediaries by way of loans or otherwise. All life insurance companies are required to reply.
Acting Insurance Commissioner Mr Bob Judge said quite a few replies had been received, but he was unable to comment further.
Medium and smaller life companies contacted by The Sydney Morning Herald all felt the commissioner should use his regulatory powers to halt the flow of cash away from policyholders towards already well-paid life agents.
The gloves came off with a vengeance when the AMP dropped its Supreme Court action last September against National Mutual and Helm Corporation, which owns aggressive new life office Equity Life, over poaching of senior AMP agents.
The matter was settled out of court, but it is understood that while the terms of settlement were that the two giants should leave one another's agents alone, they can still make offers to other agents.
Some of the medium and small life offices now fear they will lose up to a third of their personnel.
The big dollar approaches have gone to agents of Prudential, MLC, Greater Pacific Life, Legal and General, Zurich, Mercantile Mutual, Eagle and Capita. Legal and General and Prudential are looking at matching the offers.
All the loans offered are interest-free for varying periods and have different conditions.
One life office manager of a medium-sized company, who preferred not to be identified, said the funds seemed virtually unlimited - certainly of the order of $100 million.
As the agents are self-employ-ed, the loans appear to sidestep the fringe benefits tax - although at least one lawyer suggested the loans might be caught by the anti-avoidance provisions of the Income Tax Assessment Act.
If the Commissioner of Taxation subsequently rules that life offices must pay fringe benefits tax on the loans, the cost to policyholders could be higher.
The loans are based on a formula of between two and three times the agents'gross earnings last year.
In some cases, the National Mutual requires the recipient to place 70 per cent of the loan into a "liquidity buffer" during the first year, reducing to 50 per cent at the end of the first year and 20 per cent at the end of the second year. The remaining 30 per cent of the loan must be secured.
Some offers are understood to involve a waiver of the loan amount after a certain period, which would trigger a capital gains liability. In other cases, the agent is required to repay all the loans in full at the termination of the agency.
Some agents have been told that the life office would purchase their agency at retirement for a generous sum, from which the loan amount would be deducted.
The AMP advances "capital", which carries no interest, to agents against advance commission earnings, with repayment obligations if the agent defects before a pre-arranged date.
The loans granted can thus effectively tie the agent to the lender for varying periods.
Most of the managers contacted were convinced that their boards and shareholders would refuse to endorse them on the grounds that they failed to stand up to any conventional analysis of return on investment.
The Life Insurance Federation of Australia is keeping out of the fight. LIFA Sydney spokesman Mr John McLenaghan said it was "a marketing issue between the companies involved".
At last week's six-monthly general meeting of LIFA, one participant reported that LIFA chairman Mr Eric Mayer, who also is managing director of National Mutual, refused to open the mat-ter for discussion, while the AMP representative walked out.
The two mutuals provide more than half LIFA's operating funds.
But National Mutual's general manager of insurance operations Mr Gil Hoskins dismisses much of the market talk.
"Frankly, terms such as poaching and 'slush fund' are offensive," he said.
NML has about 2,000 agents, and the number has grown by about 8.5 per cent a year in the past three years.
NML believes it can outstrip AMP in terms of new premium income this year.
© 1986 Sydney Morning Herald