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The pressure on provision: how can advisors transform?
What are the challenges surrounding the provision model in the insurance industry, why is it under pressure, and how can insurance advisors prepare for a provision-free future?
6 November 2024
From increasing regulation and changing customer expectations, to the provision model being under pressure - the financial world never stands still. For many insurance advisors, the latter in particular is a source of concern.
There is already a lot of thinking and searching for ways insurance advisors can adapt when provision may no longer be a sustainable source of income. But why is provision under pressure, and what can you do as an insurance advisor to adapt? Let's dive into it together.
Why is provision disappearing?
The Dutch AFM exercises strict supervision to make sure that advisors always work in the customer's interest – the duty of care. But provision can lead to conflicts of interest, as advisers benefit more in terms of earnings from recommending products that lead to higher provisions, meaning more earnings for them. This interferes with the duty of care and independent advice.
Insurance advisors have therefore previously been required by law to adjust their remuneration structure when it comes to complex financial products such as life insurance. Those products are subject to a commission ban.
A very brief summary for those who don't know: the provision model ensures that insurance advisors are rewarded by the insurer for underwriting and/or managing an insurance policy. This is usually factored into the premium, making it a monthly source of income.
Active provision transparency
The provision model has long been the standard for other products, and an important source of revenue. But that has changed since 1 July 2024, with the introduction of active provision transparency.
Active provision transparency forces insurance advisors to inform customers about how high the closing provision and ongoing provision are in non-life insurance for individuals.
Provision can lead to conflicts of interest, as advisers then benefit more from closing products with higher provision.
The impact of active provision transparency
This active provision transparency has its effects on the market, mostly in communication. It's an especially big change since before, the majority of customers did not even know that an insurance advisor got provision.
This transparency requires advisers to clearly communicate their revenue model, and that brings big changes to day-to-day work. Let's take a closer look at the impact of this change.
Changing customer expectations
There are more and more insurance purchasing alternatives in the insurance market, and customers know how to find them. Therefore, combined with provision transparency, advisors get more questions about the different options, and how they compare.
This can be seized as an opportunity. As clients are more aware of advisory fees, advisers need to make it clear that their recommendations are purely in the client's interest. Independence and customer focus should be highlighted as differentiators to further underpin advice fees and provision.
More openness about costs
With active provision transparency, you have to proactively share your remuneration structure with customers. So you need to clearly explain to clients the cost of insurance, what provision is, and what part is ultimately for you as an advisor.
Extra administration
Provision transparency requirements also leads to additional administration. Advisors accurately track their income and need to report more to their customers, which in part creates an administrative burden, but also builds trust with customers and regulators.
Insurance advisors are looking for different ways to monetise their expertise. Image: Alex Green, Pexels
Options for a provision-less future
Changes are expected to follow in the provision area. Many insurance advisors are therefore looking for ways to leave provision behind altogether. What are the options for working provision-free?
Service subscriptions
Instead of provision, monthly or annual service subscriptions can be used. In that case, the cost of servicing someone's policy is made clearer and shifted to the person, rather than based on the policy.
With a service subscription, the insurance advisor makes it clearer what kind of work they do for the customer. That includes services needed from the duty of care viewpoint, but should add extra services as well. For instance: answering questions, helping with claims, going over the customers' current insurance package a few times a year, and more. Especially with long-term insurance policies, it's important to regularly check if anything has changed, and such a subscription can fit.
Because these services are separate from the various insurance policies and providers, there is also less conflict of interest if customers pay a periodic fee for their insurance advisor's services.
Higher costs for advice
Insurance advisors may charge one-off fees for advice. This can be fixed, or based on how much time an advisor spent with a client through hourly billing. The latter approach nicely aligns with the demand for additional transparency, as it gives the client a good understanding of exactly what work has been done by the advisor.
The downside to this is that it does not lead to additional constant revenue, and clients have to pay more. The advantage is that consultancy fees are often already charged, so it is easy to incorporate into the business.
Extra efficient business
Technology can help them operate more efficiently, increasing margins. Consider automated processes such as online customer portals, digital purchasing lanes and more. With extra efficiency, more new clients can be added and there is more time for personal service. Digitalisation therefore allows advisors to reduce costs and improve service.
Keeping on top of change
While the transition to a provision-free model can be challenging, it also offers opportunities. Insurance advisors can improve their services and emerge stronger from this transition. Technology and new revenue models play a crucial role here.
Are you ready to further prepare your office for a provision-free future? Schedule a meeting to see how Alicia can support your business as an insurance advisor.
