Insurance ratings trap

Advisers who predominantly use ratings as the basis for recommending insurance products run the risk of encouraging their clients to purchase inappropriate cover due to the inconsistent and simplistic methodology employed by the industry raters.

In most cases, insurance product raters currently only take into account the generosity of a particular product, that is the number of features it offers to consumers, without considering if all the features are necessary, if the product represents value for money, if the features are sustainable, and if the insurance company actually has the ability to pay the claim should the need arise.

Genesys risk adviser Col Fullagar believes people have already taken out inappropriate policies in the market as a result of the present ratings regime.

“I have no doubt this is the case. When you say ‘the best’, that’s immediately interpreted as the most generous, but you may be very comfortable with certain restrictions on your contract. If you have a product that’s overly generous and you’re paying too high a price, you may have received quite poor advice,” he said.

He added that advisers might not be aware of the flaw in the ratings process because he did not know “if the current ratings systems lend themselves to any one being overly aware of the methodology behind them”.

However, Fullagar was confident most financial planners recommending these products were not using the ratings process as the sole basis for the advice.

“I’m sure the vast majority go through quite a robust fact finding process. I guess the problem is everyone’s been led to believe that the more generous it is, the more ancillary benefits and so on, the better it is for the client,” he said.

And concern over the situation surrounding reliance on ratings in general has not gone unnoticed by the Financial Planning Association (FPA).

The professional body said it had actually considered the subject of reliance on ratings in general when devising Principle Two in its Principles to Manage Conflicts of Interest, which deals with product suitability.

“When formulating Principle Two, there was a view among members of the Professional Standards and Ethics Committee that it might be useful to have some guidance on how approved product lists were put together, and how much emphasis is put on ratings when you are constructing such a list. It’s something we’re looking at, but it is yet to be decided if we will go to members with guidance on the subject,” an FPA spokesperson said.