While there have been a number of options tried over the years (such as the short-lived triple indemnity offered by Halifax which paid three years commission) the most common choice is between an indemnity, in which all the first year commission is paid up front, and non-indemnity, in which commission is paid monthly.
So what represents the best choice? Far be it from me to tell you what is best for your business. But if I outline the potential cost to your business that indemnity represents, it might help your decision-making process.
First, ask yourself whether you need the money upfront with an indemnity or whether you would benefit from more regular cash flow. If you opt for an indemnity, then ask yourself whether you need more than usual on the first year’s policy sales. If the answer is yes, then you must be very careful to work out the cost you will incur over a three-to-five year period.
Drilling down into a little more detail, the difference between taking year one indemnity on standard commission terms (or more than that) may make up to a 10 percent difference in the amount of income you receive over a three year period. Industry standards show that over 40 percent of your clients will stay with you for five years, so if you extend that period out to five years, then the difference in income could be a reduction of 30 percent.
I appreciate that it is tempting to receive extra cash flow on non-bank terms in the current climate, but the reality is that there will be a price to pay. A 30 percent reduction in income over five years is something many brokers simply cannot afford. As it looks like the UK is going to take a good while to recover from the recession, can you afford to take the risk?
A real benefit of GI renewal income is that it greatly enhances the value of your business if you are considering a sale anytime in the future. If you sell this potential income for a few extra pounds now, this decision will directly impact the value of your business down the line.
Indemnity commission can become addictive and businesses can find it very hard to wean themselves off. Be aware that once you have started down the indemnity route it may be difficult to change back to non-indemnity.
So my advice is to choose your commission structure carefully. Work out the costs to your business over a three- and five-year period and above all, make sure you understand the risks that could impact your future success.
