Chronic condition: the underinsurance crisis

It is a problem that everybody knows about, and some have solutions for, yet it will not go away. Australians are not buying risk insurance, and far too-few advisers are selling it.

Rising figures

There have been surveys looking at the issue of underinsurance — and they have all confirmed that it is a problem — and there are many observers who feel these surveys are just the tip of the iceberg. The Investment and Financial Services Association’s (IFSA) research discovered that the underinsurance of middle Australia is $1.3 billion. However, that study only looked at life cover, and not at how many people had specialist risk cover, such as income protection.

Tower Group chief executive officer Jim Minto believes the problem is larger than the surveys would have us believe, claiming that the underinsurance problem could actually be between $2 and $3 billion.

“I think currently there are a lot of people without insurance, and that has been the situation for some time,” he says. “It is an opportunity to do something about the underinsured. It should be a social policy issue for Australia.”

Minto says there is definitely a problem, and believes it is a subject that will come to dominate the financial services industry in the future.

Shortage of risk advisers

While consumers are not buying risk products, there is also the problem of fewer advisers selling risk products. Zurich strategic marketing manager, life risk, Marc Fabris says his company researched the adviser market last year to see who was selling risk. The results were startling.

“We knew less and less advisers were selling risk,” he says. “We researched the market as to who was selling and cross-selling risk.

“We also looked at what has happened to community growth, income and CPI [consumer price index] rises, and the changing distribution [of financial services] which has happened over the last 15 years.”

Back in 1990, there were about 16,000 advisers selling risk products. The picture in 2004 was one of dramatic change, with only 2,000 advisers purely selling risk products. There were 16,000 financial planners and, of those, between 4,000 and 5,000 advisers sold some risk products, generally in small amounts.

“It means there is about a quarter of the advisers today compared to the number 15 years ago selling risk,” Fabris says. “In the meantime, the population has grown to about 20 million, and we have also had growth in income, and a significant growth in debt.

“Which means more people, more debt, and more split families, but we have fewer people insuring against risk.”

Tower Australia chief executive officer David Callander says he can see from the claims they sign off that they are nothing like the levels they should be paying out.

Russell Collins of Collins and Associates, part of Genesys Wealth Advisers, says one problem is advisers today do not know how to sell risk insurance.

“It has become a problem because life insurance has to be sold,” he says. “The risk adviser is facing increasing regulation and people will not face up to reality, which is why we are 50 per cent underinsured,” he says.

A pro-active approach needed

Collins says nobody talks to risk insurers voluntarily. Life insurance — and, ultimately our death — is a subject we don’t want to talk about. We consider life insurance a product that we pay for but won’t see the return on. This is why risk insurance has to be sold proactively, Collins argues.

“There have been no specific risk insurance communications skills training programs by the risk companies for years,” he says. “We have a lot of financial planners who don’t sell risk because it is beneath their dignity.”

Certainly, ‘selling’ is not a word that financial planners want to be associated with due to adverse publicity from consumer associations. Genesys Wealth Advisers risk manager Col Fullager says the lack of selling skills is leading to the underinsurance of clients.

“Then there is the adviser who works out what insurance is needed and becomes nervous about the cost of the cover. They then reduce the amount covered so the cost will meet the client’s expectations,” he says.

“Also, dealer group compliance requirements are taking away the selling skills of the adviser. In the past we would have a chat and then do the paperwork. Now we are doing the compliance first, and the selling skills are being lost.”

Fullager says the good thing in the past was how the advisers became attached to the clients. “We have lost sight of the entertainment factor. The business of talking to clients was how we got through to them,” he says.

The compliance burden

MLC head of protection solutions Greg Einfeld says the crisis is the culmination of a number of events.

“I think a number of different things have come together, combined with behaviour changes,” he says. “The risk advisers are a lot older and are finding it difficult to deal with FSR [Financial Services Reform],” he says.

Typically, statements of advice (SOA) for some products are now 20 pages long, and this is one key area of the regulation that makes it harder for older advisers.

“So a lot of good people have left the industry, while the younger advisers prefer to deal with the ‘sexy’ part of the industry, such as investment and superannuation. As a result, client protection needs are not being met.”

Einfeld says there are a lot of opportunities to sell risk while showing clients their needs and earning some extra revenue for the practice. But he says the advisers have to overcome the ‘she’ll be right’ attitude on risk insurance. “The big issue is why young people are not being insured, as it is easy for them to pass the medical test,” he says.

“They can take out a policy with no loading. A level-premium policy can be a long-term solution, and they will pay a lot less.”

Callander says that risk advisers do a good job, but the issue is getting more advisers to sell risk and deal with the compliance issues.

“There is a big market in getting people who are underinsured to talk to advisers, and these people are generally the under-35s,” he says. “Younger people take on massive debt without cover, and the issue is to sell risk and comply with all the regulations.”

Risk as a platform product

Minto says most advisers do not want to go into risk because of the compliance. “One answer to the underinsurance problem is to get more financial planners involved in insurance, and for that we need a simple product that goes on a platform,” he says. “And the platform needs to provide choice for the adviser.”

“Yes, you can make that type of product available, but the adviser still has to sell them,” Collins says. Risk takes hours of selling, and the processing can take months — and this deters many young advisers, he says.

“If the adviser hasn’t been exposed to spending three or four months handling the processing, they won’t be too interested in starting,” he says.

“Compliance regimes makes risk too onerous, so planners won’t do it, which raises questions about how financial planners manage to get around the ‘know your client’ rule.”

Collins says when he joined the industry in 1971 risk was an integral part of an investment strategy. “How many margin lending strategies today are covered with risk and disability insurance if something goes wrong?” he asks. “Everybody has a need, it is just that they don’t know they have a need, and they don’t know anybody they can trust to talk about that need.

“It is a very personal business that cannot be done using templates.”

The role of insurance providers

Russell says a lot of the problems in encouraging young advisers to sell risk are the responsibility of the insurance companies. He says the life agent recruitment programs that were run by the old life companies have now gone, so there is no new blood coming in. Today, the same advisers are being recycled between the dealer groups.

“Life companies have been handing the issues over to the dealer groups and, as a result, there are lots of advisers who don’t know about risk,” he says.

Fabris says compliance has meant the adviser is spending less time in front of the client.

“The advisers needs to conduct themselves more efficiently,” he says. “The modern day adviser doesn’t have time to go cold calling, they need people to find leads to have a more efficient process.

“This means empowering the adviser to be more efficient, to provide a better level of service, and spend more time with clients.”

Fabris says Zurich is helping to educate the adviser to do the job better. “Form processing means less time prospecting, and people won’t talk about insurance,” he says. “The adviser is part of the fact-find, the analysis of deciding which policy to use and SOA before implementation.

“We looked at all aspects of the process — prospecting, gaining information, the advice analysis, recommendation, implementation and service.”

Improved processing

Fabris says some parts of the process can be made faster or by-passed, and one option is “low-doc” policies. “But no one process will deal with all issues, and to say low-doc policies will solve everything will be wrong when you are trying to meet the demands of middle-Australia,” he says.

“For example, young, affluent singles might not be attracted by something like a low-doc policy.”

Fabris says Zurich has looked at the various segments of the risk market and tried to create strategies that will work in each segment, in an effort to make the adviser’s life more efficient.

“We found call centres will work in some segments,” he says. “Zurich is working on contacting clients through tele-underwriting to help with the paperwork.

“It means we are able to fill in the gaps in the information and get a faster decision, as we have more information.”

For the adviser, this means they have outsourced the implementation to the call-centre. But speeding-up the processing is only useful if the adviser can sell the policy.

“There is less risk-selling because there is no risk-training,” says Fabris. “Our company is trying to help in training advisers to sell risk. We have got skilled people putting together training resources because unless we do that, we won’t have people selling risk.”

Aviva chief operating officer Grant Salmon says his company works with advisers to provide education on risk insurance. “We do focus on education, and a lot of attention is spent on the adviser,” he says.

“We are trying to get advisers, who don’t sell risk, to do so as there is lots of opportunity. “Eight out of 10 people are underinsured, and those are eight missed opportunities.”

Fullager says while there are new risk advisers coming through as part of succession planning, the industry is still not getting enough advisers.

“As professionals of the industry, the rewards are still good and, if the job is done properly, satisfaction is still there,” he says. “But if the adviser does all the training to cover their rear-end, there is still some smart lawyer looking for a loophole. However, we can reduce the concerns of the advisers.”

Fullager says adviser processing has to be safer and simpler, which means personal statements probably won’t be shorter. “Personal statements should not be a shopping list for the life companies,” he says. “But shorter statements do create the opportunity for risk to the adviser.”

Consumer education

MLC’s Einfeld says we also have to educate the public through the industry and schools. “People are working longer, people are living longer, and advisers need to find long-term solutions for them,” he says.

“There are many different ways to sell insurance. Younger advisers haven’t been taught how to sell insurance and how to get the client to understand what happens if they don’t have insurance.”

Einfeld says people will insure their home, their boat, their car, their paintings, but their income is more important. “If they don’t have an income, then they can’t repay the mortgage and the loan on the car or the boat,” he says. “We insure all these things before life cover.”

Einfeld also says there are often problems occurring in form filling, which is why processing can take longer. As such, MLC recently introduced Masterkey Protection Essentials, where the adviser uses a call centre to help the client’s form filling.

He says these are not low-doc policies, but are fully underwritten with cheaper premiums. “MLC is making it easier for advisers and customers to deal with the process. Low-doc policies are already here with credit card companies and mortgage lenders offering simple cover through low-doc application forms.

“Some policies are offered with mortgages, such as the NAB [National Australia Bank] offer for $400,000 of cover. It is a straightforward process.”

Cheap and cheerful cover

Callander says the UK experience with supermarkets selling low-doc policies is an interesting move that might not necessarily work here. “The risk industry has been good at building up the old adviser networks, but not brands that are trusted, whereas Tesco [a UK supermarket chain] can be seen as a very trustworthy and dependable brand,” he says.

“We need to do that here. We must have a trend of informing people in an uncomplicated way that meets their needs.”

Callander says a low level of paperwork, based on a ‘tick the box’ model, will lift awareness. “As an industry, we need a variety of ways to sell risk which is aimed at the different segments. We are quite immature in the lack of variety of places to shop for insurance.”

Minto says distribution of risk has become less and less effective as companies stopped adviser selling. “Companies started to stop advisers selling and stopped marketing to the customer because FSR has created a higher requirement of disclosure,” he says. “It has meant advisers have to spend more time doing the needs analysis. What that creates is a large application form.”

Minto says the industry sees the Australian Securities and Investments Commission (ASIC) taking advisers to court and that creates a standard, but it also creates a certain amount of paperwork, which puts advisers off selling risk products. “We have still got to get advisers out there selling risk products,” he says.

Product development

Fullager argues that while dealer groups have got to take the initiative to start selling risk, the life companies also have to create the products the advisers need. “There will be commodity products where $100,000 in TPD [total and permanent disability insurance] might not be seen as enough, but at least it gives the adviser something to work from.”

Salmon says Aviva is starting to put simple products on the Navigator platform. “We will move to low-doc policies. Already in the market are products where the consumer can get limited cover, and that will get people thinking about their levels of cover,” he says.

“We are looking at low-doc products. They will be a simple policy, and simple to sell.”

Salmon admits it is not the whole solution to the crisis, but a start. “I think we need a national push to get the question of insurance on peoples minds,” he says.

However, Einfeld says there is a danger with low-doc policies.

“A supermarket policy would be offering a lot less cover, and that will lull people into a false sense of security, which is not meeting the underlying need,” he says.

The underinsurance crisis is not going to go away, and it would seem that while the industry has ideas about how to tackle the problem, action is still lagging.

Certainly, the compliance issues and paperwork need to be looked at again, and risk may need to be looked at as a seperate issue to other investments by regulators.

The fundamental difference between providing investment advice and risk is the latter has to be sold, and the compliance regimes need to take that into account.

However, despite all the problems and opportunities, Russell Collins, who has been a risk adviser for 35 years, still believes it is a great industry.

“I cannot think of any occupation that makes such a difference to peoples lives,” he says.