Relying on ratings a risky business

With more and more financial planners offering risk insurance to their clients, the role of the gatekeepers in the risk insurance market — the risk researchers — is becoming crucial.

But if Money Management’s second annual Rate the Risk Raters survey reveals anything, it’s that opinions on the country’s risk researchers are mixed — at least according to the risk insurance companies whose products they rate.

In what amounts to a turning of the tables, the survey involved leading life insurance providers passing judgement on the capabilities of 11 industry researchers — which are usually the ones passing the judgement.

For the purposes of this survey, risk researchers include both companies that actually rate risk product offerings and comparators that bring together this data in an accessible format, as both types are used by licensees and dealer groups.

Ten life insurers, holding around $2 billion in premiums in force, responded to the survey.

As with the 2003 survey, no researcher received a resounding endorsement this year, although some, in particular PlanTech, were considered much more highly than others.

When asked about the objectivity of the different research groups, only one group, PlanTech, was judged by a good proportion of respondents to be ‘totally objective’.

On the question of the transparency of ratings, again it was a mixed bag, with more than half of respondents labelling PlanTech ‘excellent’, while other research groups were mostly labelled ‘good’, ‘average’ or ‘below average’.

But regardless of the opinions held on the different researchers, there is no doubt they can have an influence on advisers.

According to the survey, most insurers believed the majority of researchers could have some level of influence on the inflow and outflow of funds from their products.

Some researchers, including Smart Comparitor director Bill Coudounellis, appear to be acutely aware of their ability to influence the success, or otherwise, of risk insurance groups.

“Some insurers employ people on good dollars simply to find out how they can get upgraded from a ‘B’ ranking to an ‘A’ ranking or a ‘C’ ranking to a ‘B’ ranking,” Coudounellis says.

He backs up his opinion by claiming updating of benefit definitions by life insurers “used to be a once-a-year affair, but it is now happening much more frequently”.

“We know of one life insurer that has upgraded three times since March this year just to get a better rating, for example, and a second company will have done the same by September.”

The major test for risk researchers, Coudounellis says, is that they have to “pre-empt not only how good they think a definition is, but how it is going to be treated by the claims people”.

“At the end of the day, it’s no good me saying that company A has got the most liberal definitions in the marketplace if they put clients through the hoops when and if it comes time to paying out.”

However, other researchers, like Dexx&r director Mark Kachor, have played down the role they play in influencing advisers’ decisions on risk insurance, claiming other factors play a bigger role.

Firstly, according to Kachor, most dealer groups have a list of approved products, and not all companies are usually on that list, which limits the range of products advisers can sell.

“If you’re an insurer with a highly rated product and you’re not on the approved list, it’s not going to do your sales much good.”

Secondly, he says, there are cheap and highly rated products available that never make significant inroads in terms of market share because they do not pay market competitive commissions.

“Some people in the industry seem to think the industry is driven by ratings research, but I say there are no examples of low commission products making high sales,” Kachor says.

“Having said that, however, obviously ratings play a role between products offering similar levels of adviser remuneration.”

Thirdly, according to Kachor, there is a small but growing trend by dealer groups that are owned by life companies to take a much lower dealer split on the business written by their advisers for the parent company’s life products.

“Instead of seeding the standard 10 or 15 per cent of my commission to the dealer, I might have an incentive that if I write the owning company’s life products then I’ll only give away five or even one per cent,” Kachor says.

Kachor also claims that in some circumstances, insurers could be seen to be influencing researchers, rather than the other way around. This could be particularly the case with researchers, unlike Dexx&r, who charge insurers to rate them.

“I’m not saying it happens, but when you’re paying for ratings from a researcher you’re probably going to have greater influence on the outcome,” he says.

Such concerns have prompted warnings to advisers that they need to rely on more than just the word of a researcher when picking risk products, particularly under the Financial Services Reform Act (FSRA), which puts the legal liability on advisers for providing consumers with appropriate advice.

ING national life risk distribution manager Phil Anderson, the author of a new report entitled ‘Risk Research Software: What Role Should it Play in your Advice?’, is one of the people prepared to caution advisers.

Anderson is concerned that a “lot of advisers gravitate towards the top three products on any given piece of research without understanding how methodologies impact on the research outcome”.

Ratings are a valuable tool in the complex risk recommendation process, he says, but they should certainly not be the sole basis for recommending a product to a client.

He said most advisers are “reluctant to go in and change the standard default settings sitting within risk research software, largely because they don’t understand how to apply the research methodology to their client requirements”.

“There are a lot of new advisers entering the risk space who should be aware that relying on the research for a recommendation is a pretty dangerous legal position to be in under the FSR’s definition of ‘appropriate’ advice.”