echo sits down with Markus Lehmann, President of the Swiss Insurance Brokers’ Association (SIBA)

elipsLife echo: Mr Lehmann, how many insurance brokers are there in Switzerland?
Markus Lehmann: According to the Swiss Financial Market Supervisory Authority (FINMA), as of May 2019 there were 17'050 registered insurance brokers, 2'050 of which are legal entities and 15'000 private individuals. Of the 17'050 insurance brokers, 9'375 are employed by insurance companies and 7'675 are unaffiliated, that is to say are insurance brokers in the traditional sense.

And how many are members of the Swiss Insurance Brokers’ Association (SIBA)?
Currently, 85 companies belong to SIBA. They represent a total premium volume of CHF 10 billion for their clients. So SIBA is responsible for just under a quarter of overall market volume.

The Pension Fund Association (ASIP) wants to ban broker commissions in the second pillar. It says it shouldn’t be the pension funds that pay the commissions but rather the employers. Moreover the Federal Council seems inclined to agree. Both the ASIP and the government justify the call for a change to the system by pointing to false incentives and possible conflicts of interest. What’s your view?
We don’t see it that way at all. The reasoning behind these calls for a change is flawed. In response to a tabled question, the Federal Council has actually erred on the side of caution and wants to examine the question of banning broker commissions more carefully. It'll do this in the context of the pending comprehensive reform of Switzerland’s Pension Fund Law. Then we'll know, at the latest, that the problems confronting the country’s occupational pension system are not related to the way in which the service providers are paid but rather have quite different causes.

These being?
Because of the extremely difficult market conditions, there are currently over a trillion francs not earning interest. On top of this, the excessively high conversion and minimum interest rates are leading to a redistribution of funds from the younger generation to retirees. The annual redistribution stands at between four and seven billion francs. These are the real problems facing the BVG (Occupational Pensions Act), not broker commissions.

What do the brokers actually do to earn their commissions?
Today's pension fund market in Switzreland has a liberal character and the brokers' primary function is to advise the Small and Mid-sized Enterprises (SME's). This advisory function is necessary because of the sheer complexity of the various pension fund products on offer. The broker puts together multiple comparisons of products offered by insurance companies, pension funds or grouped pension plans. This compels all providers to stay competitive, which in turn impacts premium levels. And this, of course, generates added value for the SME's. So in this context, the brokers are the most important protectors the consumers have in the insurance sector.

You're saying that a ban on commissions would ultimately harm the insured?
Everyone's happy with the way things work right now: The SMEs and the insured enjoy lower premiums, the brokers receive commissions and the insurance companies get the business. The system's working and now you want to dismantle it with a new law? That makes no sense. The Brokers’ Association is committed to transparency. The conflicts of interests that the ASIP talks about quite simply don't exist. The market regulates itself. Look, the client is going to notice sooner or later if I recommend a pension fund to an SME just because I can pocket a higher commission. And if that happens, I’m out of the picture. The broker that doesn’t work for his or her client stands no chance in the market. The competition is brutal.

There are some jurisdictions that have banned commissions. What’s been the experience in those countries?
England is an example of what can happen when you get rid of commissions. There was chaos. Advisory guidance disappeared and premiums rose as a result. I really don’t think this is what we want in a liberal market.

You've said SIBA is committed to transparency. What’s the situation with those brokers not affiliated with your association?
There are bad actors in all professions unfortunately. The insurance industry is no exception. SIBA brokers are subject to strict trading conditions. This is why we want to strengthen the SIBA seal of approval and why we recommend that insurers and pension funds work primarily with brokers that belong to our Association. Fly-by-night brokers damage the reputation of the whole industry.

There's a study that says brokers in the occupational pension industry earn an annual CHF 300 million in commissions. Can SIBA confirm these statistics?
According to published statistics, approximately CHF 160 million is paid out to brokers in the form of commissions, CHF 90 million to insurance company agents and CHF 40 million to pension funds that have their own sales force and therefore incur acquisition expenses. If commissions were to be forbidden, insurance companies and pension funds would need to establish their own sales infrastructures. 300 million would in no way be sufficient to cover these costs, so the additional expenditure would be passed on to the insured.

 

Why is there a call for banning commissions only in respect to pension funds and not, for example, regarding household insurance?
Because with these kinds of insurance products, brokers receive fixed commissions from all companies affiliated to the insurance association, whether it’s household, business liability or machinery insurance.

Could this system also be applied to the pension fund industry?
Yes it could. This, for example, would be a job for the ASIP instead of calling for a ban on commissions. I should point out here that the ASIP itself does not speak with one voice when it comes to getting rid of broker commissions. In my view, this is rather an ill-conceived, go-it-alone initiative just on the part of the ASIP leadership.

The passing of the pension system tax legislation (Staf) provides Switzerland’s retirement system with a CHF 2 billion cash injection, however the structural problems remain unsolved. Where do you set the priorities in respect to further reforms of the pension system?
The fundamental problems here are related to demographics and funding. Regarding the passing of the pension system tax legislation, the employers' federation recently concluded that the effectiveness of the cash injection won't last 10 years before the next funding package becomes necessary. If to fund the AHV (Federal Old Age and Survivors’ Insurance) we want to avoid raising value-added tax by 5 or 6%, we need to scale back benefits. No one wants that just as no one wants to raise the retirement age. This is why all efforts at reform have failed in recent years.

The second pillar, too, needs reform. Where do the major challenges lie for the BVG?
With the conversion rate and the retirement age. We need to create incentives so that everybody that's willing and able, can work longer. And we also have to ease investment restrictions to ensure reasonable returns can be achieved again. If, in the longer term, we want to maintain a conversion rate of 5%, then investments have to generate healthier returns.

Should retirees also have to contribute to recapitalising the old-age provisioning system?
In principle, those drawing a pension have already paid for their benefits and the promise that underlies these benefits. In my personal view, to cut these would be taboo.

Where are you on a pensionable age of 65 for women?
This should be intoduced immediately. In my opinion, retirement age for men and women should be raised to 67. Naturally this would only apply to those who are healthy and also be calibrated according to the individual professions with their differing stress levels. I know countless people who still work full days even at 70. The flexibilisation of the retirement age is a key issue here.

Where do you see the retirement age in 10 years?
Sooner or later, everbody will agree that we can't go on like this. To keep benefits at their current levels, a retirement age of 67 for all is inevitable.

Should the government do more to support the the third pillar in order to ease pressure on the first and second pillars?
The government is already doing this. That said, I can well imagine that one could raise the tax-free allowances in order to make the third pillar more attractive. As a matter of principle, I believe that every individual should make their own provisions for old age, using every vehicle available.

If you could give the pension funds some advice, would it be?
They should devise flexible pension plans, keep costs down and work more closely with the SIBA brokers.

^{Please note: the statements made here reflect the views of the person interviewed and do not represent the opinion of elipsLife.}