Risk insurance stakes its claim

Risk insurance has had the image of a product that most planners know something about but those who actively sell it are the diehards of the industry who will slowly fall away under the Financial Services Reform Act (FSRA) and Policy Statement (PS) 146.

Of course this should and can never happen because risk insurance will always remain an integral part of any financial plan. However as Royal & SunAlliance head of distribution Peter Jowett says, the risk insurance market grows by an average of 17 per cent per annum, so any rumours of its demise are wrong.

So why has risk taken a back seat to managed funds and superannuation?

According to Jowett, the interest in managed funds and the behaviour of some less reputable representatives of the risk advice industry in the 1980s has pushed the focus away from insurance and towards financial planning.

“It is basically more attractive to call yourself a financial planner instead of a life insurance adviser. Large numbers of risk advisers have been doing that for some time and still hold strong books of insurance business,” Jowett says.

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“The easiest way to understand why is to imagine these people saying out loud at a dinner party what they do. Calling themselves a financial planner is much preferable to life insurance adviser. However these people remain focused on providing advice on risk products and most are quite proud to do it.”

Jowett also says that interest in insurance is tied to the performance of the stock market and when markets perform badly, investors tend to concentrate on protecting what they have instead of seeking higher returns.

Association of Financial Advisers (AFA) president Joe Nowak says planners who have focused more on the investment side of the industry have been distracted by investment markets.

He says the last few years have been a goldmine for planners driven by the big money coming to them from clients, which has been much easier to advise upon compared to risk insurance, which must be sold to the client.

“Many advisers don’t have the skills to advise on life insurance because they have not been trained to do so. This will have a backlash from clients in the future who will question why their adviser did not sell them a product to ensure the protection of their income or accumulated wealth,” Nowak says.

He says the industry has focused too much on compliance and not the quality of financial plans and the full needs of clients. He blames dealer groups for not understanding this shift and being too focused on regulation.

At the same time, he says dealer groups and life companies hold the solution by offering mentoring and training support in the provision of risk insurance to clients.

This provision of service though will not happen with one planner supplying all a client’s needs, but rather planners specialising in an area such as risk, superannuation or investments.

Jowett says the reason for this, and why risk appears to have moved backwards, is the level of complexity involved in being competent to provide insurance advice.

“There is a significant level of knowledge needed to be able to provide advice in this area and anyone who claims to know it all and still provide advice on investments and superannuation is kidding themselves,” he says.

“But planners are totally negligent if they provide advice on wealth accumulation and don’t provide some form of risk protection to clients. Given the level of knowledge is complex, the smart arrangement is to have a referral system with a risk insurance adviser.”

However, both Nowak and Jowett believe the circle will turn back to risk insurance, driven by the core issues of compliance, negligence and the need to provide a full service to clients.

“Regardless of what we call ourselves some things need to remain and risk insurance is one of them, to protect the interests of clients and to look after all their needs,” Jowett says.

“This is also about developing the competencies to deliver a full range of services because public awareness has reached the point where if clients are not being told how they are protected they will leave the financial planner thinking they are incompetent.”