Life assurers count the cost of new rules: Regulations requiring full disclosure of commissions have shaken policy sellers. Caroline Merrell reports

A SMALL earthquake will run through the world of life assurance tomorrow when Equitable Life becomes the first company to tell its customers the exact costs attached to the sale of policies.

From 1 January next year, life assurance companies will have to disclose all commissions and expenses before the point of sale; between now and then such disclosure is 'voluntary'.

So far, only Equitable Life has volunteered to submit itself immediately to this regime - hardly surprising, given that it pays no commissions and, in a recent survey, had the lowest costs as a percentage of premiums sold.

The prospect of 'hard commission disclosure' has sent tremors through the industry. When Kenneth Clarke, the Chancellor, announced his verdict last year and the market realised that the life insurance industry would have to spell out how much their sales staff earned on each policy they sold, the share prices of life companies plunged.

Since then they have recovered, perhaps perversely, since the industry believes commission disclosure will have far-reaching consequences that may affect profits.

The new disclosure regime also includes a requirement for the surrender values of policies to be properly disclosed.

This is aimed at stopping the huge number (nearly a third) of both life and pension policies that lapse paying little or nothing in the first few years.

Companies will also have to tell consumers what effect their own expenses will have on the maturity value of their policy.

The threat to profits comes from the fact that as soon as consumers are able to compare the commission and expenses charged by different companies they will start to shop around. They will begin to take account of the amount of commission earned by the seller and the expenses of the company.

Until now, only a limited form of disclosure has operated. The consumer had only to be told the amount of commission earned in terms of a percentage of premiums paid. Moreover, they would only have received details some time after they signed up.

One side-effect of the new regime is likely to be a premature end to the payment of 'upfront' commissions - the practice of life offices paying intermediaries who have sold the policy the full commissions payable over its lifetime at the outset. Instead they are likely to begin paying commission on a regular basis.

The industry hopes that consumers will find the fact that their advisers are paid pounds 100 a year for four years more palatable than their earning pounds 400 in one lump sum.

Perceptions are also likely to be changed once customers see the different costs attached to different sales methods.

Life companies traditionally have three methods of distributing their products: through independent financial advisers, who can advise on a range of products; through tied agents, who sell only the products of one company; and direct sales staff. Tied agents and staff tend to be paid higher commission than independent financial advisers.

A recent survey from Lautro showed that the average commission paid to an independent financial adviser on a pounds 50-a-month 25- year endowment policy was pounds 507 compared with an average commission paid to a tied agent or direct seller of pounds 578. There is the same disparity on personal pensions.

Many commentators therefore predict that the companies with expensive sales forces will be the most vulnerable. They will then come under intense pressure to cut their costs.

The UK's biggest life insurance company, the Prudential, has the largest sales force with a total of 9,000 staff. In anticipation of the new disclosure regime it has begun stripping millions of pounds out of the running costs.

It is also training its sellers to offer a wider range of Prudential products to cut numbers and make individual sellers more cost-effective.

Significantly, it has recently switched its strategy so that more of its new business comes from independent financial advisers.

Others heavily reliant on direct sales staff and tied agents for distribution include Legal & General, London and Manchester, Irish Life, Allied Dunbar, GRE, Abbey Life, Royal Life and Refuge. Some of the smaller life companies which do not have the Pru's capacity to cut costs may become takeover targets.

Consolidation has already started. Hill Samuel, a subsidiary of TSB, recently sold its sales force on to Allied Dunbar.

Another effect of the new regime could be that sellers start to be paid on a salary basis rather than on commission. It could herald the end of the traditional image of a commission-hungry salesman forcing unsuspecting customers to buy a policy that they do not need, cannot afford and do not understand.

Norwich Union, for instance, has switched its seller from being paid commission to earning on a salary basis, and a new sales force being set up by Clerical Medical will be paid only a salary. Start-up company Leeds Life will also pay its staff on a salary.

The new regime could act in favour of the bancassurers - life companies wholly or partly-owned by banks and building societies. These companies include fast- growing Lloyds-owned Black Horse Life, NatWest Life, Barclays Life, Midland Life and Abbey National Life.

Whatever happens, full disclosure is something from which no- one in the industry will be immune. Even those life companies that use independent financial advisers will have to overcome the negative effect that disclosing what they earn will have on the selling process. The tremors may yet become an earthquake.

(Photograph and graph omitted)