Gemma Harle is managing director of TenetLime
One of the changes we have seen since the credit crunch has been the switch by brokers to protection business.
A sensible diversification, sales of this product have grown exponentially as a result however it brings issues.
The cash-flow attraction of indemnity payments over two or four years as opposed to lifetime commission payments means that many principals are leaving themselves exposed to significant claw-back risks.
It's not hard to imagine how registered individuals who move on may churn the business leaving the claw back liability with the principal - or that persistency rates (the rate at which sales remain successfully with one provider for the indemnity period) among staff may suddenly drop off again exposing the principal to the risk.
Because cash-flows have been eroded by the credit crunch it is not unfeasible that some principals have taken the indemnity payments in order to meet other business demands.
It's not quite like robbing Peter to pay Paul but you can see how managing this issue will become an increasingly hot topic. As a network we are developing solutions to help principals mitigate these issues.
Solutions are not just about keeping money back for a rainy day but may include revisiting the contracts they have with their registered Individuals or employees to ensure that any bonus paid out for sales of protection products is reclaimable in the event of churn.
As the protection market flourishes, all brokers should be increasing their sales of this product but with an eye to eventually taking the lower life time commission payments that embed real value in the business.
Indemnity payments are an attractive source of cash-flow but they come with significant risks that require some thought.
