In many market cycles, as the investment market goes down, risk insurance sales go up, and this market cycle is proving no different. In an environment of volatile markets and unstable asset values, risk insurance sales just keep climbing.

Depending on who you talk to, the rise in risk sales can be a result of financial planners turning to risk to diversify their revenue streams, investors looking to insure their jobs and themselves, or both. Either way, everybody wins.

But is the surge in risk insurance sales problem-free? What are the issues coming to the fore as a result of the risk boom?

Risk sales on the up

Research compiled by CoreData on the life insurance industry late last year showed that nearly 48 per cent of financial advisers experienced an increase in insurance sales over other sources of income. And there is consensus among life insurance companies that sales of risk insurance have been climbing steeply since last year.

“In a broader industry sense, we’ve seen that risk sales are strong, and for the calendar year 2008, we saw $383 million in sales,” said Jordan Hawke, the general manager at Asteron.

Asteron’s sales have risen by 43 per cent compared to last year’s numbers, Hawke said.

“We’ve seen an average growth rate for lump sum business at around 23 per cent, and income protection tracking [at] 25 per cent. So it’s pretty reasonable growth.”

Life insurance sales at ING are also booming.

Gerard Kerr, ING head of marketing, retail products and reinsurance, said first quarter sales for the company had grown by approximately 25 per cent in the retail space compared to first quarter growth in 2008.

Research from Dexx&r reflects the rise in written insurance. In-force annual premiums increased by 11.47 per cent to $4.81 billion in 12 months to the end of last year, while new annual premiums for lump sum businesses had increased to more than $815 million by the end of last year.

New annual premiums for disability income businesses also increased by more than 14 per cent to $303 million.

Col Fullagar, head of life risk at Genesys Wealth Advisers, said the rise was likely to be a reflection of more insurance policies staying in force for longer, as well as more policies being written.

It is unclear who is behind the boom. There is an accepted view among many in the financial services and insurance industries that in times of market cycles, financial advisers turn to writing life insurance to diversify their revenue streams.

“Not surprisingly, with the gloves going off the investment market, there’s been an increased focus on risk, and that certainly seems to be coming through on the business written figures,” Fullagar said.

“It’s happened before, gloves go off investments, some advisers focus more on risk as a result.”

“Proportionately it’s pretty low,” Hawke said. “But what we’ve just started to see is a trend in dealer groups like Financial Wisdom [and] Financial Services Partners, which are more traditional financial planning houses, just starting to pick up on their risk sales.”

The best explanation for the rise in risk sales is a combination of investors worried about protecting their wealth, and advisers moving into the insurance space.

Brett Clarke, chief executive, retail life, at Tower Australia, said wealth protection was front of mind for many people as the financial crisis hits their balance sheets, in addition to advisers needing to boost revenue.

“On the demand side, I see two things happening. One is I think consumers, as a result of their own personal circumstances being affected by the financial crisis, are looking for more wealth protection products. And I also see advisers, who are finding it more difficult to advise on investment products, are looking for other revenue streams as well and they’re looking to provide more risk products to customers.”

Kerr said that even as recently as one year ago, people were more focused on growing their assets and their portfolios, and were perhaps using their portfolios as an alternative to insurance. Investors were now realising that asset values fluctuated and would take a long time to realise, and would not provide the certainty that insurance offered.

“I think it’s that mindset [of] ‘we’re about protecting our jobs’, ‘we’re about protecting our savings’, ‘[our] pay’ … ‘protecting my family’ …

“I think those factors are perhaps influencing the good sales or the goods production levels on the risk side,” Kerr said.

However, Russell Hannah, Aviva distribution development manager, protection, said advisers are using insurance to fund a shortfall in their clients’ asset values since the market downturn, and not as an alternative revenue stream.

“Where portfolio values declined as a result of the market downturn, it’s obviously created a gap around the client’s asset base and [advisers are] using insurance as a means to fund the gap between their current asset value and what their pre-downturn level of assets looked like,” he said.

The growth in risk sales during the downturn was both a combination of risk advisers who remained focused on risk and are writing more as a result of growing demand from consumers to get their affairs in order, and from advisers who were realising that wealth protection was an inseparable part of financial advice, Hannah said.

A risky business

With rising numbers of financial advisers writing risk, insurance companies will have to work at improving their communication and relationships with planners, according to Hawke.

“We need to make sure that we continue to work with financial planners that are now writing risk on maintaining the value of what that advice is for, and underpinning financial plans.”

But it’s not just up to the insurance company to make the effort. Clarke said planners also need to be cautious when they move into the risk space and get appropriate training and research in risk insurance.

“[Risk insurance] is not an exercise which should be taken lightly. Planners who haven’t been exposed to it need to be cautious and need to do the appropriate amount of research, get the appropriate amount of training, get the appropriate advice from the life company business development managers, underwriters, [get] the training, the resources that the life companies make available to the planners,” he said.

“As a planner, I’d certainly be making good use of those resources.”

Aviva is enhancing its training and support for dealer groups and individual advisers who are looking to write more risk, according to Hannah.

But even with more financial advisers writing risk, Fullagar warned that the quality of the risk business written would not automatically improve, with a potential for inappropriate advice.

“If someone is, and has always been, focused on writing risk business, they’ll be good at it. However, if they only focus on risk when their mainstay on investment is not performing, then on average they won’t be as good at it.”

The industry must realise that more financial advisers turning to risk is a potential issue for the industry, Fullagar said. If any of the parties involved in writing insurance, such as the financial group or the insurer, realised that an adviser lacked expertise in writing risk, they must “be cognisant of their responsibility to the client” and identify training, or audit to mitigate any problems that may arise.

However, Kerr said the existing strong standards of advice and compliance requirements would prevent any problems arising from inexpert advisers turning to risk insurance.

E-technology

One of the ways insurance companies can help planners who are not well versed in writing risk insurance is to develop technological solutions for advisers that can smooth out the risk-writing process. Clarke said the industry has been progressing well in this area in recent years.

Tower’s Accelerated Protection life insurance product uses electronic technology for an adviser to progress through a risk insurance application, with each successive step dependent on the particular answer to the question before it.

“Something like that can be quite valuable for a planner because it can really provide that road map through the application process for the planner, particularly if they’re not used to going through that process,” Clarke said.

Hawke believes the best way to work with planners who are turning to risk, and to underpin financial plans, is to make it as easy as possible to write risk, using technology and electronic straight-through processing.

One of the ways to make it easier for advisers to write risk is by moving medical underwriting online and using tele-underwriting.

According to Kerr, life companies were working hard to streamline the underwriting process.

“People think [risk insurance] is complicated, and I do think that more use of electronic applications is certainly helping to make it a more efficient interaction between the insurer and the adviser.”

Moving underwriting online can speed up the process of getting clients insured, Kerr said, as well as helping lower costs for the industry.

“It’s in our interest to process things as quickly as possible.”

Clarke believes tele-underwriting can shortcut some of the more complicated issues and requirements that may arise during the insurance process, by talking to the client directly about an issue instead of going through further medical exams.

“For us it’s about utilising technology such as tele-underwriting to collect data and talk to the clients about their health issues rather than going through quite an onerous medical examination,” he said.

Fullager noted that moving to e-underwriting would reduce insurance companies’ own administrative costs by reducing the number of applications they had to manually underwrite, and the number of requirements that needed manual follow-up.

“Because each insurer has their own application design, it is far more likely that advisers will make errors in completing an application. If all applications were essentially the same, the chance of making an error would materially reduce,” he said.

However, while a generic application form has been developed and is available online, it’s not widely used, as each insurer sees their application as a strategic advantage. That view is a mistake, according to Fullagar.

“E-underwriting does streamline the process in certain situations,” he said. “It’s of little use for larger cases, which are going to have automatic requirements anyway, and for those cases the personalised touch of sitting down with clients may for some advisers be preferable to the impersonal approach.”

Profit concerns

It is clear that more risk insurance is being written, but, according to figures released by the Australian Prudential Regulation Authority (APRA), profits for the industry are dropping.

APRA’s Quarterly Life Insurance Performance Statistics, released at the beginning of April, showed profit for the industry in the quarter ending December 2008 had plunged more than 43 per cent from the previous quarter of $451 million. Profits were already down more than 58 per cent from the June quarter.

Kerr said the drop in industry profits was likely a result of market performance impacting investment returns.

“If you think about what happened around the fourth quarter of last year, the market got hammered, so you can’t help but think that [the drop] in investment returns could be contributing, because that’s a profit figure.”

Insurers need to constantly monitor their revenue streams in and out of the business, and ensure they are complying with their financial standards while combating the downturn, Kerr said.

Hannah also believes the industry needs to be more cost conscious and exert tighter controls in this environment.

Keeping clients

In the current economic environment, with an increasing number of clients coming under financial stress, insurance companies are introducing measures to ensure clients don’t ditch their policies as a way of cutting back on expenses.

Hannah said insurance companies must work with both the adviser and the client to find flexible solutions for clients who are suffering financial problems.

Aviva, for example, has recently introduced premium waivers for clients who have been made redundant, allowing them to suspend their premium payments for 12 months.

“We’ll be working with advisers to look for solutions around how they can maintain some level of cover that remains affordable for them, rather than discontinuing or cancelling their policies in entirety,” Hannah said.

Kerr believes insurance companies must constantly reinforce the value of long-term insurance to their clients. If people do have trouble paying their premiums, the industry needs to work with them to see if they can suspend or wind back their insurance cover and raise premiums when they become more secure, he said.

Taking out risk insurance is a long-term measure, Kerr said, and in typical circumstances where insurance is held for five years, the situations in which the client needs certain types of insurance are likely to have changed. Action can then be taken to reduce premiums through changing types of insurance cover.

Clarke added that aligning insurance billing dates to match customers’ pay cycles, and offering ‘premium holidays’ could offer increased flexibility for customers with financial problems.