The Truth Behind the S$4 million Insurance Agency Director Case

Financial Services Directors receive large payouts, which they have to use to fund a fully-staffed agency.

The case of an insurance agent being awarded S$4 million in damages has gained a lot of attention. But it also occurs to us that this is, by far, one of the most poorly understood and misrepresented cases in recent memory.

In this article, we dispel some rumours and myths that have sprung up around this.

The “Insurance Agent” in Question Was Really a Business Owner

We have no idea why the newspapers would refer to a high level director as an “insurance agent”. This is akin to referring to the CEO of, say, Comfort del Gro as a “taxi driver”.

The person at the centre of the case, Mr. Ramesh Krishnan, certainly did not make S$4 million in commissions by selling a few endowment policies every week. Commissions in the insurance industry may be high, but they’re not that high.

Individuals like Mr. Krishnan run entire agencies, which in this case may consist of over a hundred insurance agents plus other employees for all we know.

The S$4 million better reflects the total revenue of this agency, rather than the commissions of an individual.

Financial Services Directors Have to Pay the Costs of Running an Agency

Some people are under the impression that directors can pocket the entire commission from their agency, and start buying mansions. It doesn’t work like that.

If you run an agency, and you generate S$4 million in a year, that’s not all going into your pocket.

You may need to pay S$7,000 a month in rent for a fancy upmarket office, anywhere from S$30,000 to S$200,000 each for five to six separate marketing campaigns (those ads on taxis and MRTs are not free), the entire staff payroll from your IT department to the front desk secretary.

There is also the cost of compliance expertise, training and leadership courses for your employees. The list goes on. 

That money is effectively for running a whole company. The pay a director can pocket is still high, as you’d expect from any one with that title; but it’s not half as much as this case has made people imagine.

People Seem Confused About AXA’s Motives

Contrary to several misconceptions, this case was never about issues like embezzlement. The issue was that AXA refused to wrote a strongly negative referral letter, pointing out a “low persistency rate”.

A low persistency rate means that many policyholders don’t keep said policies for long. They may be holding them for just a year, for example, before letting them lapse.

Insurers really hate this sort of thing, because it wreaks havoc with their finances. As much as 50 per cent of the first year’s premiums may already be paid to the insurance agent as a commission, so there isn’t much left over for the insurer if the policyholder quits after a year.

It is often assumed - correctly or otherwise - that a low persistency rate means the insurance agents are selling the wrong policies (we’re in no position to comment on whether that was true in this situation).

This was the source and issue of the legal battle: Prudential wouldn’t take on the agent in question, because AXA raised the issue of the low persistency rate. It wasn’t about anything as dramatic as theft.

We Don’t Know the Terms of Prudential’s Offer

Prudential’s offer was an eye-opener to some readers:

“Starting from April 2011, this included a commencement allowance of $675,000, and an initial monthly salary of $65,625 for the first 12 months and $43,750 for the following months till July last year.”

Most directors, while highly paid, can’t expect to pocket that full amount; their agency is not going to fund itself. That said, remember we don’t know the terms at which Mr. Krishnan was effectively “bought over” from AXA.

Here’s why it’s important:

Say you’re a salesperson, who closes about 12 deals a month. You’re already working like crazy, and handling a six day work week. You make S$6,000 a month from the sales.

We then decide your work is great, and offer you a chance to work for us instead. We’ll give you $60,000 at the very start, and even offer you a salary of S$8,000 a month. Sound sweet?

Let’s add a clincher: as part of that deal, you’ll close 36 sales a week from the first year, or else you’ll pay us back the initial S$60,000, and we halve the salary.

If that seems rough, that’s exactly the sort of deal a director might get, when agreeing to move from one insurer to another.

Remember that successful, multi-national insurers didn’t get to be that way by being naive. They’re not going to make a generous offer, without being certain they can get back more than they give.

Anyone with a leg in the insurance industry will know this sort of compensation isn’t straightforward - the attached terms and conditions really determine how generous it is.

Becoming an Insurance Agent Isn’t a Get-Rich-Quick Scheme

The bottom line is: the eye-popping numbers bandied about in this case don't accurately reflect reality.

We don’t know how long it will take you to end up running an agency of your own, but we’re pretty certain you won't start seeing millions of dollars in revenue overnight.

Even if you do make it all the way up to the top of the pile, it may not be as easy as you think. Maybe this case has you seeing dollar signs, but lest you be tempted to quit your day job, there's more than meets the eye in this case. 

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