Risk master trusts made to measure

Investment master trusts have been around for about 15 years and today there are approximately 100 platforms vying for the investment and superannuation dollars of Australians.

Comparatively, the life insurance equivalent has developed over this same time period at glacier-like speed, only resurrected in recent months through discussions in this newspaper.

So why are financial adviser brochure shelves devoid of master risk products? Before attempting to answer the question, it’s important to clear up the issue of a name for these vehicles.

The name ‘risk master trust’ is a misnomer, as a number of the possible models do not necessarily need a trust vehicle to be established. These vehicles will be referred to as Master Risk Portfolios (MRP).

Investment master trusts exist for a number of reasons and it is useful to see if some of the same reasons apply to the MRP concepts.

From the consumer’s point of view, master trusts provide a number of benefits. They include convenience, a one-stop application to access multiple managers, as well as consolidated investment reporting, one tax statement and the ability to track investment results via one web site.

From the adviser’s point of view, the benefits of investment master trusts are convenience, control and consolidated reporting, as well as consolidated brokerage/commission.

In many cases, there is some form of ownership of the investment vehicle, as well as goodwill associated with that ownership. This ability of a distribution group to build an asset is clearly the biggest, single driving force in the emergence of master trusts, IDPS vehicles and platforms.

From a business quality point of view, ownership is the ideal arrangement. The distributor’s exposure to the underwriting and expense experience of the business placed through the MRP means that their fortunes are aligned with those of the participating insurers.

There are a few models of an MRP and these are described briefly below.

Model 1—Use of group life policies

The pioneer of this model is Associated Planners with its Solar Risk concept and it has some similarities to broker pools. The concept is highly innovative and well before its time.

Unlike traditional broker pools, Solar captures the features and flexibility offered by modern retail risk products. There is one Customer Information Brochure, three risk products and currently two insurers (Citicorp Life and PrefSure Life).

The risk products are not off-the-shelf designs — the product features, service standards and brokerage terms were designed and developed by Associated Planners.

The non-superannuation risks are arranged through group life policies that are owned by Solar Risk Services. Solar Risk Services outsources the administration of these insurance risks to PrefSure Business Solutions.

The key points with this model are that it was initiated by the advisers, not the manufacturers, and that the reasons for its development are the same as those set out above as the key reasons for the establishment of multi-investment vehicles.

Although launched over two years ago, there have been no followers as yet. The model is very simple and could cope with additional insurers.

Many investment and superannuation master trusts offer insurance benefits under the trust vehicle. It is puzzling why these vehicles have not increased the number of insurers and provide insurance choice to complement the investment choice. Although there are issues with automatic acceptance terms, the industry should be more than capable of addressing them.

Model 2—Centralised administrationof retail risk products

The example of this model is the MLC Gateway concept. The concept was never launched and proposed a single administration entity to maintain policy records on behalf of participating insurers.

No doubt, MLC would have had to overcome significant challenges in getting insurer support as all broker and agent details of participating insurers would have been accessible by the MLC-owned administration entity.

This model meets most of the reasons to exist outlined earlier, although there were no announced initiatives to provide some form of ownership to advisers.

Also, the concept was developed by a manufacturer and would not have been readily embraced by insurer competitors.

Model 3—Needs based

This is a theoretical model only and involves an adviser group choosing their preferred products and features and having these products specifically built for them by an insurer (or reinsurer). For insurers that do not tap into the traditional retail distribution channels, this strategy may be attractive.

This model does not have an equivalent on the investment side. It is not possible for a fund manager to duplicate the investment style and decision-making processes of a number of other fund managers.

For an insurer, the key limits are system flexibility and access to specialist skills such as underwriters and claims staff.

Again, this model may be designed to meet the key reasons to exist outlined earlier.

The key negative, however, is that the insurers whose products are copied will probably be very reluctant to have their brand associated with the product. If an adviser group does not find this model attractive, an Amway, Telstra or Aldi may.

Obviously, a distributor and not a manufacturer would find this model attractive.

Model 4—Co-insurance

This model allows for retail product features of participating insurers to be incorporated so that the options within the MRP mirror those in the insurers’ retail product range.

Under this model, a facilitator insurer acts as lead insurer for all the insurance options under the MRP and reinsures the major part or all of the risk to the other participating insurers.

It is this model that is attracting some attention at the moment, with initiatives being driven by adviser groups. This model also meets the reasons to exist referred to earlier and, by retaining some portion of each risk in a pool, the distributor is able to participate in the build up in the value of the business placed through the MRP.

The key ingredients to the successful implementation of an MRP are many and varied and there are numerous technical and strategic issues that need to be addressed.

The central issues are:

nAdviser groups must be the initiators.A manufacturer-owned MRP is only likely to get off the ground if access is limited to the advisers within that group. For example, a bank may be able to develop a MRP concept for sale by its salaried adviser force.

nChannel conflict.This is significantly overplayed and does not justify the fear and loathing that usually gets trotted out when such concepts are raised.

The growth of investment master trusts and IDPS vehicles only impacted on those fund managers that chose to ignore them, hoping they would go away.

Fortunately, master trusts are still with us and have created the opportunity for investors to access a whole new group of managers that were not accessible to retail investors before.

MRPs may also provide consumers with access to insurers that do not currently market their wares through retail channels.

nSystems.Most life insurance systems are not designed to address MRP administration.

The ability to handle multiple products, multiple general ledgers and reporting provide the necessary flexibility to administer MRP concepts.

MRP concepts will surface on a regular basis over the next few years because advisers will drive the agenda.

Like its investment counterpart, the MRP will provide the rich diversity and choice that advisers and consumers value. To get there, however, requires change, something the industry is not renowned for.

Allan Betts is the general manager foroperations at PrefSure Life.