Misaligned Incentives

I had a chat with a friend who turned into a financial planner (which of course has become a bit of a new title for what we used to call ‘insurance agents’). I realised soon based on what he described of the industry, that insurance, much like property, has the feature of growing naturally alongside a growing economy.

And insurance agents, like property agents/brokers, have the advantage of earning their income through commissions which are linked to the underlying transaction value. In the case of insurance agents, it is the premiums. And of course, premiums are functions of insured sum, and everywhere we know, financial protection is often calculated on the basis of income capacity (rather than in expenses). This means a growing economy and rising incomes will raise the financial protection needed, and raise the premium payments, thereby naturally uplifting the commissions of insurance agents in absolute sum even though there might not be a change in the value of the service rendered.

More significantly, I’ve always been against the way the incentives are structured in this industry. Sales commissions on the basis of insurance sales is simply an unsustainable way of incentivisation and there’s fundamental misalignment of interest between the agents and the customers. I’m still a champion for Do-It-Yourself when it comes to financial planning. While I do think you can free up your mind-space on financial planning by going to a financial planner, I’d rather go to a fee-based financial planner rather than someone whose incentives are based on sales/product commissions. Especially not one who is subjected to sales targets.

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