Risk insurance: understanding underinsurance

The recent natural disasters have highlighted the importance of insurance but, as Janine Mace discovers, the industry has a lot to do to tackle the underinsurance issue.

Floods, cyclones, earthquakes and tsunamis have become the mainstays of TV news reports in recent months. While the general insurance business has borne the brunt of the disasters in terms of the bottom line, the life side of the business has not been immune.

The intense interest in insurance is having a subtle influence on the life business, according to MLC head of advice products for insurance, Sean McCormack.

“We have seen a number of risk events materialise and this has stressed the insurance industry and Australians are questioning whether they have enough protection – and the right protection – in place,” he explains.

“The floods have led to stress on the general insurance business, but it has also led to increased interest by consumers on the advised insurance side. We have seen more openness to risk protection.”

This is a welcome development in the face of Australia’s continuing underinsurance problem.

According to the 2010 Lifewise/ NATSEM Underinsurance Report conducted for the Financial Services Council (FSC), 95 per cent of Australian families do not have adequate levels of insurance cover – a problem that is expected to cost the Australian Government $1.3 billion over the next 10 years.

Although the life insurance sector has been working hard to raise awareness of the underinsurance issue, progress has been sluggish.

OnePath insurance head of product and marketing, Gerard Kerr, sums up the general view on underinsurance: “It is a slow process. This will need to keep being worked on for many years.”

McCormack agrees the problem will not be solved easily. “There is no silver bullet. The industry is making progress but there is plenty of work still to be done. I am definitely optimistic, but there is no short-term solution. It will be solved by a whole range of solutions.”

However, CommInsure general manager retail advice, Tim Browne, is more upbeat in his assessment.

“There has been very strong industry-wide advocacy of the underinsurance problem, and we have successfully articulated to Treasury and the Government the critical role the insurance industry plays in addressing underinsurance,” he says.

“The challenge now is to take that message and help consumers understand underinsurance and its importance.”

Fixing the problem

While progress has been slow, the growth of group cover is seen as a significant step in the right direction.

Deloitte partner, Paul Swinhoe, believes that despite its limitations, group insurance is a key strategy for solving the underinsurance problem.

“The growth of group has done a lot. It is probably still not enough, but at least people have something,” he says.

McCormack agrees: “Progress is being made, even just within the group market and although it is just a basic level of cover, at least it is some cover.”

Kerr believes the life industry needs to keep working on other strategies to achieve its goal.

“Underinsurance will only be resolved by lots of little things being done to solve it, such as increased advertising, higher default cover in industry funds, increased access through technology and creating tailored solutions for different ways to interact with insurers,” he says.

“We need to keep educating people and explaining the benefits of insurance. The worse thing we could do is stop talking about the problem,” Kerr says.

The proposal to ban insurance commissions under the Future of Financial Advice reforms is seen as a major threat to progress, and life insurers believe it has the potential to derail future success.

“The life business works on commissions at the moment. If people were asked to pay a fee up front, they probably would not pay it,” Swinhoe says.

Colin Morgan, chief executive officer of Zurich Life Australia, believes banning commissions would create major problems for the industry. “Depending on the outcome, independent licensees and smaller practices could find it difficult to operate, and this could lead to consolidation and people exiting the industry. It will be a challenge for the Government if they get things wrong, given the underinsurance problem,” Morgan says.

Although Browne believes part of the solution to underinsurance is to clearly articulate the role insurance advisers play, he recognises that motivating consumers to take out cover is also important. “The industry has been concentrating on addressing and encouraging clients without existing adequate insurance to address those needs.”

McCormack agrees education and motivating consumers outside the advised market is important. “I believe an opportunity exists to educate people, and we need to broaden out from advisers to have education from other sources.”

Despite its obvious appeal, he believes reducing prices is not the solution to underinsurance.

“Price is one of the lower order issues for people once they are in front of an adviser, and it alone will not solve the underinsurance problem. We need solutions that include default channels – such as group cover – and we also need to improve our offers to customers,” says McCormack.

Product enhancements are also important. “The industry needs products to be simpler and easier to understand and the technology to make it easier for consumers to get access to them,” Morgan notes.

In Browne’s opinion, the life industry has been focusing its attention in the wrong place. “Too much time has been spent concentrating on clients with cover for their insurance needs in place and competing for that business.”

Browne believes life insurers need to focus on finding new customers rather than fighting over those clients who already have some level of cover.

Lifewise leads the way

Lifewise, the Financial Services Council’s long-term public awareness campaign about the importance of life cover, is a major tool in the industry’s battle against underinsurance.

The Lifewise campaign includes a dedicated website and insurance calculator to help consumers assess their insurance needs. Last year it launched a social media campaign to encourage some of Australia’s top consumer bloggers to spread the word about underinsurance.

“Lifewise has been terrifically successful in reaching out to the media, and especially other parts of the media not usually connected to the insurance industry,” MLC’s Sean McCormack says.

OnePath’s Gerard Kerr worked on the original concept for Lifewise, and he agrees it has been important in pushing the issue up the agenda.

“Lifewise has been fantastic as an independent point of reference to help people find out more about insurance. It is channel agnostic, and about information. It is not a direction to buy,” he says.