FSR adds to under insurance headache

Commission disclosure under Financial Services Reform (FSR) is contributing to Australia’s chronic underinsurance problem rather than alleviating it and driving churning between products, according to one of the industry’s bigger institutions.

“Advisers believe they’re not adequately rewarded for servicing existing clients under FSR, and are therefore more inclined to churn business - which is actually resulting in less policy retention among consumers,” MLC general manager life insurance solutions Greg Einfeld said.

According to Einfeld disclosure was expected to result in “more level commissions and therefore better retention, but what we are actually seeing is the reverse”.

He said new data suggested underinsurance among Australians is getting worse despite various industry campaigns to try and redress the situation.

This data, Einfeld said, indicated those with life insurance had fallen from 23 per cent in 2002 to 19 per cent in 2003, while income protection cover fell from 10 per cent to 7 per cent.

Speaking at the Financial Planning Association Convention and Expo last Friday, he said the data also revealed 28 per cent of financial plans don’t have a risk component despite it being mandatory under FSR.

In addition, Einfeld said the research found many Australians with group insurance erroneously believe that cover is adequate for their needs in terms of death cover, income protection, total and permanent disability and critical illness.

“In some cases their group insurance is as low as $50,000, compared to the 10 times salary or more that is generally recommended as an appropriate level of cover,” Einfeld said.

The level of underinsurance represents both a challenge and an opportunity for financial planners, he said, especially with the advent of funds choice legislation from July next year.

“While the legislation is not yet finalised, the likely outcome is that all members of default funds will have to be provided with a base level of insurance cover.”