Offer better value to consumers

100 years ago, it was difficult to sell life insurance.

An insurance agent had to spend many months to learn about insurance and selling skills. A productive agent sold 20 policies in a year. It was hard work to convince people to buy life insurance.

The agent had to earn enough to make a living. So, commission had to be high, as much as 1 year of premium, to make it worth while for the agent.

The government gave tax relief to the policyholder. If the policyholder kept the policy for 10 years or longer, the saving in tax relief was more than the commission earned by the agent. The return to the policyhoder from life insurance was quite attractive, in spite of the high distribution cost.

About 20 years ago, the government in many countries removed the tax relief or made it worth much less.

Around that time, the life insurance funds were able to earn a high rate of investment return. If the policyholder kept the policy for a long period, the net return was still quite attractive, even after paying for the high distribution cost.

For example, if the insurance fund earned a net rate of 7% per annum, and the expenses effectively took away 2.5%, the net return to the policyholder was still quite attractive at 4.5%.

The scenario changes when investment return dropped. If the investment return was 4.5%, and 2.5% was deducted for expenses, the net return to the policyholder was only 2%. This would be unattractive for a 20 year investment.

Life insurance agents changed their selling pitch. They sold to customers about the importance of insurance. But the product is not really the right one, as it is too costly and give a poor return.

What is the solution?

Life insurance agents and companies have to change their approach.

They have to offer better value products to their customers. They have to reduce their distribution cost and other expenses, and distribute a larger portion of the investment return to their customers.

How can agents survive on lower commission? By finding new ways to increase the volume of sales, without having to work longer hours. In other words, by being more productive.

They should sell 50 to 100 policies a year, and not only 20 policies. The commission can be lower for each policy, but the income on the higher volume of sales will be higher.

Life insurance companies must also do their part by streamlining operations and reducing expenses.

By working together, agents and their companies can lower costs, increase returns and remain competitive in this new consumer-savvy environment.

NTUC Income is making the changes to provide better value to the customers. By adapting, we expect to prosper in the insurance industry of the 21st century.