The embedded value of insurance sales

Five-year mortgage deals overtook two-year products for the first time in Q4 2017, according to the Paragon Financial Adviser Confidence Tracking Index and, although they fell slightly in Q1 2018, five-year deals still accounted for 46% of all business.

This is a significant shift in business cycle for brokers. With more clients tied into five-year products, you can no longer rely on the traditional two-year rhythm of remortgage business to deliver a regular income.

For many clients, a longer-term fixed rate mortgage represents best advice for their circumstances, so how can you look to replace the regular remortgage income to which your business has been accustomed?

Unlike a mortgage proc fee, which is a one-off payment every few years, the income from a general insurance sale can be earned every year, while the policy remains in place.

A typical general insurance case takes around half an hour and the average commission is just over £80 each year. If the policy stays in place over the course of five years, this adds up to a total payment for that half hour’s work of £400.

What’s more, as the commission is paid out each year, total earnings can quickly add up in year two and beyond.

According to the Paragon FACT Index, the average number of mortgages introduced per office in Q1 this year was just over 22. Over the course of a year, it is therefore fair to assume that a broker firm might place 88 mortgages or let’s say 7 a month.

If the firm makes successful general insurance sales on around 40% of its mortgage completions, so just 3 submissions a month, it can expect to earn around £3,000 in commission in the first year and then each year those policies stay in place.

Assuming this firm makes the same number of general insurance sales in year two, even factoring in some client attrition, it can expect to earn around £6,000 then £8,500 in year three and so on.

The cumulative effect of general insurance commission quickly adds up and delivers real embedded value within a business as future earnings can become more predictable. Over the course of five years, total earnings from doing just three cases a month could be more than £40,000.

With some insurance providers it is even possible to sell future commission streams back to the provider in return for a cash lump sum or exchange the future income from an existing portfolio of policies for a lump sum on retirement.

The shift to longer term mortgage deals might mean that you miss out on proc fee income, but if you used this as a stimulus to include general insurance sales into your advice process you could find that you build more consistent income and embedded value within your business.