Fixing insurance flaws

While plenty of attention has been directed towards advisers and the sale of life/risk products, Mike Taylor writes that a recent ASIC Review of general insurance has revealed another set of problems. 

Australia's under-insurance problem is not confined to the life/risk arena. An Australian Securities and Investments Commission analysis has made clear that a problem also exists with respect to general insurance, particularly residential home insurance. 

What ASIC has also made clear is that the accessibility of advice sits at the centre of overcoming that under-insurance problem. 

Of course, in the minds of many in the financial services industry the differences between the life/risk and general insurance sectors are manifest. However, what should have become clear as a result of ASIC's recent reports is that, putting aside the activities and remuneration of life/risk advisers, the underlying commercial realities are very much the same. 

The importance of viewing ASIC's Review of the Sale of Home Insurance in the context of the broader debate about the life/risk arena is that it deals in detail with the shortcomings of a sector heavily weighted towards unadvised sales. Simply put, the vast majority of general insurance sales are made direct between product manufacturers and consumers. 

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And what does the ASIC review tell us about how that model is working? It tells us that significant problems exist with insurers seeking to minimise their regulatory exposures while consumers are very often finding themselves under-insured or mis-insured. 

It should say something about the current dynamic prevailing in the general insurance arena that the ASIC review used the following words to describe what it had found: 

"At a high level, we found that online and telephone sales processes are generally designed around insurers' need to understand certain risk or underwriting criteria about consumers so that they can sell home insurance quickly and efficiently to a consumer, rather than as a way to improve a consumer's understanding of the home insurance they are inquiring about or purchasing. Instead, this is seen as the role of the PDS and other important policy documents, such as the certificate of insurance." 

However the regulator's analysis then goes on to say: "While we acknowledge that all insurers currently provide consumers with comprehensive information and disclosure for home insurance products (mainly through their websites and within PDSs), we are aware that most consumers do not read these disclosures and, even when they do, they may not always attain a complete and accurate understanding of the scope of the insurance". 

Importantly, the review also pointed out that when consumers went direct by phone to insurers to achieve greater clarity they were often referred back to the PDS and it noted that some telephone sales scripts appeared to adopt a no advice or factual information model despite the insurer in most cases being licensed to provide general or personal advice.  

"Feedback from insurers is that they do this to minimise the risk that any advice provided will trigger regulatory requirements associated with personal advice," it said. 

What can be gleaned from the ASIC review is that an insurance arena which entails the use of few intermediaries (advisers/planners) has its own share of issues with respect to consumers actually obtaining appropriate insurance cover. 

The difference in the life/risk area is that while ASIC clearly sees remuneration-related "churn" as an issue where some planners/advisers are concerned, the overall industry data suggests that under-insurance is becoming less of an issue. 

Indeed, the salient points contained in the ASIC Review of Life Insurance Sales is that of the 202 files in its review sample it found that where the adviser was paid under an upfront commission model, the pass rate was 55 per cent with a 45 per cent fail rate while, where the adviser was paid under another commission structure, the pass rate was 93 per cent with a seven per cent fail rate. 

The issue to be addressed by the financial planning and insurance sectors is therefore that of finding an appropriate and sustainable remuneration model. 

In the meantime we are left to contemplate the obvious flaws in the models currently prevailing in the general insurance arena and the manner in which they might have been overcome via the provision of appropriate advice.