Wednesday, April 20, 2011

PRSA (Personal Retirement Savings Account) Anomaly

Seriously, does anyone know of any other Country in the World where a employee would be put at a financial disadvantage (via legislation) in choosing one pension product over another?

There is currently an anomaly for PRSA (Personal Retirement Savings Account) policy holders where the employer is contributing to the employee’s PRSA.

If an employer is contributing €100 to an employee’s PRSA, the employee is €11 worse off than an employee whose employer in contributing the same amount to an OPS (Occupational Pension Scheme).

Although Fine Gael have committed to putting the PRSA & OPS on an equal footing in respect of this anomaly, it probably will not happen before the next budget.

So, what’s happening in the meantime? Well, PRSA policy holders (where employer is contributing) are being advised to switch to OPS’s and I am aware of one PRSA Provider that has written to the employers suggesting that they change their PRSA Schemes to OP Schemes.

To me, this seems a tad extreme. i) There is no cap on charges on an OPS - Initial commission is way more generous and providers can increase the annual management charge if they see fit and ii) The OPS route will involve some form of Trustee Training for the employer or failing this, they will be charged for complying with the legislation.

If I may make a suggestion, while this anomaly is ‘put on an equal footing’. It would make a hell of a lot of sense for Revenue/Department of Finance to allow those that are disadvantaged to claim back the 11% via the PRSI Refund Section of Revenue in Limerick.

This might stop a mass exodus from PRSAs before the legislative changes can be made.

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Monday, April 18, 2011

Life Insurance 'Model' Implosion

I’m finding the Life Insurance Industry response to ‘business retention (profitability)’ a little bit bizarre; to say the least.

You see, there’s a problem with the length of time that Term Life Insurance business is staying on the books because the product is being re-written every two or three years.

In the majority of situations the policy is moved to a different insurer by an intermediary and justified on the basis that the ‘new’ insurer is cheaper ; fair enough. As Insurers keep tweaking/reducing their Term Insurance rates, it is probably no harm for the consumer to benefit from the reductions, so long as the terms and conditions of the policy are identical.

Those consumers that avail of the commission rebates on first years premiums via discounted life insurance websites can save money by moving around this market on a regular basis also, provided they are in good health.

So, who’s ‘benefiting’ from the current model? The Consumer - because they are getting a cheaper premium. The Intermediary - because the commission structure is such that it is lucrative to re-write the policy every few years.

If the break-even for an Insurer is 7 years on a Term Insurance Policy, how are they ever going to make it profitable for themselves; and when will the current model implode?

To acquire this type of business, Insurers have resorted to i) Price matching i.e. our ‘real’ premium is €100pm but if another insurer is quoting cheaper, we’ll match it ii) Increase initial commission and override to Intermediaries & iii) Spreading higher commission out over longer periods of time.

God forbid that the Insurers ‘offend’ the Intermediary market by putting the Consumer at the top of the priority list but, in my humble opinion, these actions are not going to solve the problem.

Insurers (and Re-Insurers) need to get their act together and come up with a different business model for these products.

I’m sure that they are worried about the extent of how much re-writing will take place when the latest European Court of Justice ruling on gender equality on insurance premiums. Good for some consumers, an income bonanza for intermediaries and another nail in the coffin for Insurers.