How the Insurance Industry Is Being Disrupted, and Why Now

Where to Start

The major reform of insurance has to begin with the removal of commissions to create disruptive pricing. The commissions that are built into the pricing of traditional products drive up costs significantly — anywhere from 25% to 85%. So, consumers get far less for each dollar in the policy because so much of the initial premium and subsequent account growth is siphoned off to pay the agent their sales commission. And in products like annuities, cost is not often discussed, so the consumer rarely knows how much they are paying for the contract.

And then, for the fee-only advisor who does not accept commissions, insurance products (particularly annuities) create the opposite conflict. An advisor loses money when their client purchases an annuity using a portion of the assets the advisor is getting paid to manage — this can be a strong motivation to not recommend annuities to clients even when the annuity may be in the client's best interest. And, can lead advisors to dismiss consideration of all annuity products for their clients, thereby shirking their fiduciary obligation.

Pressure for Complexity

And one final impact of commissions is less obvious but no less damaging to the products and their image. In a sales-driven world, product differentiation can be critical to success — after all, commissioned agents need bells and whistles to attract attention and drive product sales.

This has led to complex features being designed into insurance products to make them seem special and different from competitors on the market. So much so that often hundreds of pages of prospectus documentation are required for each product, to the point that insurance professionals even struggle to make sense of it. It's no wonder annuities are derided as complex, expensive and opaque products.

Given these facts, it becomes obvious that insurance needs an overhaul that starts with the elimination of the commissions from the products. When commissions are removed, costs are reduced, and value increased for consumers. Conflicts of interest go away for fiduciary advisors. And there is no longer a need to design complexity into products to drive differentiation and sales.

That said, eliminating commissions from insurance products is far easier said than done. There are many strong forces at work that need to be overcome. Insurance carriers need to rethink how they design and price products, and they risk alienating their current commissioned insurance distributors on whom they are dependent. For commissioned insurance agents, their livelihood is threatened.

And, for fee-only advisors who have long sold against annuities to preserve AUM, their argument is null and they now have to rethink their approach to the financial plan.

One Way Forward

This stark reality of insurance and the need for disruption is why I founded my own company, DPL Financial Partners. At DPL, we work with 20 insurance carriers (and growing all the time) to bring commission-free insurance products to market, including life, annuities, disability, and long-term personal care.

At a time when Americans need these products most — as interest rates hover near 0%, as traditional fixed income investments are no longer able to fund retirement, as retirements are expanding to 30 plus years, as pensions are disappearing and self-funding retirement is the norm — market participants need to ensure consumers' best interests are at the forefront of product design and distribution.

It's truly a revolution, and it will change the insurance landscape in the same way Schwab changed the mutual fund business with OneSource four decades ago. No one ever wished for the return of the commissioned mutual fund. And we won't miss commissioned insurance either. It's time for fee-only advisors to join the revolution represented by commission-free insurance and the value, transparency and accessibility it offers advisors and consumers.

David Lau is the founder and CEO of DPL Financial Partners.