With comparison websites like iSelect pocketing bigger commissions from directing consumers to more expensive health insurance policies, Australia’s peak medical body says an investigation is necessary to ensure consumers aren’t being ripped off.
Revelations that comparison websites were being paid up to 50 per cent of the cost of some insurance policies has triggered a call from the Australian Medical Association for regulators to examine whether such payments are distorting the private health insurance market.
“It’s an area that requires further scrutiny from government and the regulators,” AMA president Professor Brian Owler told The New Daily.
When consumers buy a health insurance policy through comparison websites such as iSelect, the company collects commissions from insurers.
The commissions received by iSelect can be upfront, in which case they are levied at up to 50 per cent of the annual premium paid by customers.
That means iSelect can collect up to $2500 on family health policies that fetch average premiums of around $5000.
However, iSelect’s arrangements with insurers can be even more lucrative if insurance providers agree to pay the company so-called “trail commissions” each time consumers renew their policies.
Under these trail commission deals, iSelect gets paid up to 6.5 per cent of the value of the premiums when customers renew health policies each year.
The dollar value of these trail commissions increases every year as health insurers increase their premiums.
iSelect’s customers end up paying for the commissions because insurers include their distribution costs in the premiums they levy.
How trail commissions create conflicts
iSelect revealed in its latest financial accounts lodged with the Australian Securities Exchange that the revenue it expects to receive through trail commissions over the next 10 years is one of its most valuable assets.
According to the company’s balance sheet, the value of trail commissions related to health and life insurance policies sold through the site stood at more than $101 million at the end of December.
This accounts for more than a third of the company’s total asset base.
By demanding commissions from insurers, iSelect ends up operating a conflicted business model.
On the one hand it has a fiduciary duty to maximise returns to shareholders, but it also has a responsibility to deliver the best value health policies to its customers.
If the company does the right thing by customers it has an interest in transferring customers to lower-cost health insurance products.
However, giving a high priority to customers’ interests would probably come at a cost to shareholders who are best served when profits and dividends are maximised.
While iSelect does not appear to explain this conflict of interest on its website, it illustrates the dilemma for shareholders in its financial accounts.
The bottom line is that if customers’ premiums go up, the company’s revenue from trail commissions is boosted.
“A combined premium price decrease of 1 per cent and termination rate increase of 1 per cent would have the effect of reducing the carrying value by $10,490,000 (June 2015: $9,269,000),” the company states in its most recent accounts.
Conversely, if health insurance premiums paid by customers falls, then revenue from trail commissions takes a hit: “A combined premium price increase of 1 per cent and termination rate decrease of 1 per cent would have the effect of increasing the carrying value by $11,451,071 (June 2015: $11,303,000).”
AMA report to raise questions about commissions
It is not clear how Australian regulators are dealing with the conflicts of interest created by commission-based business models operated by intermediaries such as iSelect.
Unlike most other retail financial products and services, the marketing of health insurance is not regulated by the Australian Securities and Investments Commission.
Instead, the responsibility rests with the Australian Competition and Consumer Commission.
In a soon-to-be-released report on the state of Australia’s health insurance industry, the Australian Medical Association will call on the government and regulators to examine whether incentives such as commissions are undermining transparency in the sale of policies.
The AMA is concerned that commissions may be distorting the market for private health insurance.
CHOICE’s warning on comparative shopping sites
Australia’s peak consumer advocate CHOICE warns that not all comparison sites are the same and that the prevalence of commissions might be limiting the types of policies being recommended to customers.
“For example, iSelect.com.au and CompareTheMarket.com.au only compare a fraction of policies on the market and cannot be considered independent due to the potential influence commissions have on the policies they feature and recommend,” said CHOICE spokesman Tom Godfrey.
“On the other hand, a site like privatehealth.gov.au enables consumers to compare all available policies free from often murky commercial interests.”
CHOICE recommends that consumers demand information about commission deals from comparison shopping sites before buying health insurance.
Their tips are:
• Preferably seek out and compare policies through independent, unbiased sources;
• If tempted by a commercial comparison site, ask them to disclose any commissions they receive to help you make a more informed choice; and
• Be wary of sites that provide limited or no disclosure about the commissions they receive.