COMMISSION earned on a whole life policy can be several times larger than that earned for a term policy - creating a huge incentive for agents to sell certain products even if they are not suitable for the customer.
The warning came from some industry players yesterday, who told The Straits Times that the sums do not even include overrides on this commission.
Overrides are fees taken from commissions that are paid to an agent's supervisor and that supervisor's manager, and could add up to as much as 160 per cent of the annual premium.
Mr Stanley Ng, senior financial services manager at Axa Life Insurance, said: 'Certain products do drive the behaviour of some of the insurance agents on what they want to sell. It does drive some insurance companies too.
'That is why they like to sell participating products (such as a whole life policy), as they are the most profitable ones for most insurance companies.'
Said one junior insurance agent: 'Term policies don't make the company money, so we have to sell other policies like investment-linked plans or whole life policies.
'I only talk about a term policy if the client asks me specifically about it.'
These distribution and management expenses will be examined in a Monetary Authority of Singapore (MAS) review of the life insurance and financial advisory industries.
The review, announced on Monday, could lead to commission being restructured or even eliminated.
MAS managing director Ravi Menon said that the Financial Advisory Industry Review will look at whether the commission-based structure aligns the interests of financial advisers with those of the customers, or whether agents have the 'adverse incentive to sell products that pay them higher commission'.
Australia and Britain have eliminated the tier structure and are considering banning commission completely in favour of a fee-based model, whereby customers pay a fixed amount for the financial advice they receive.
By July next year, commission will be banned in Britain and financial advisers will set their own charges based upon a price list shown upfront.
Mr Christopher Tan, chief executive of financial advisory firm Providend, said a fee-based approach is much more transparent and can in some cases save the customer money compared to a commission-based model.
His firm charges a flat fee of $3,000 to provide pure insurance advice. If the customer then buys a policy at an annual premium of $5,000, the commission earned on that - which could be a further $5,000 - stays with the customer.
Under a commission-based structure, the customer would pay an annual premium of $5,000 for the policy with a further $5,000 going to pay the agent's commission - so he would be worse off.
The change in pay structure could reduce the number of agents while raising the professionalism and quality of the advice provided. There are about 13,200 agents here, according to the Life Insurance Association (LIA) - the same number as 20 years ago.
Agents in Britain and Australia have mostly moved on to become financial advisers, earning a fee for the advice they provide, said some observers.
Dr Khoo Kah Siang, general manager for Singapore at Great Eastern Holdings, said the firm has been collating feedback from its agents.
'It is important that we have an industry that is able to attract people. The question is, what is the best structure?' he said.
'Perhaps there could be some tweaks to the tiered structure, and working together with the regulators, maybe we can help to come up with a structure that is workable both for the industry and the consumer.'
NTUC Income has eliminated tiers. Only sales agents get a commission, while their managers are paid a salary.
Mr Ken Ng, senior vice-president and general manager for life insurance at NTUC Income, said: 'NTUC Income has the lowest commission rates in the industry, primarily because we do not have a multi-tier distribution structure.'
LIA president Tan Hak Leh said it was too early to analyse the impact on the workforce as the review panel has not yet been convened.
'The announcement is one towards raising the competency and overall effectiveness and efficiency of the industry. Clearly, if the review can shift the industry to the desired outcome, it will be for the better of the industry.'