Two hands on the wheel: a guide to effective insurance management

Col Fullagar takes a look at compliance and administrative procedures and the way they can be effectively managed.

We are all aware that life is risky, and that we could end up becoming a statistic. Nowhere is this more apparent than in the life insurance industry.

For the client, statistical risks include the chance of suffering a injury or becoming sick, being unable to work (temporarily or permanently) and even the chance of dying. Protection is afforded by putting in place appropriate risk insurance.

For the adviser, the statistical risks include the chance of something going wrong within the advice process or the administrative procedures of the adviser’s business.

Protection is afforded by putting appropriate compliance processes and sound administration practices into place.

Even this doesn’t provide total protection againsyt something going wrong, but it puts standards and audit checks in place so that risks can either be avoided completely, detected sufficiently early so that problems can be minimised, or solved by other means.

Although they are often maligned, compliance and sound administrative procedures are valuable business assets. A recent real-life situation highlights this.

Background

Several years ago Mr B and his adviser established a financial plan incorporating various investment options and appropriate amounts of risk insurance. The insurance was set up on a yearly, level premium basis via credit card deductions.

In 2008, Mr B notified the adviser of a change of address and asked that all relevant organisations be advised. However, due to an isolated human error, the life insurer was not informed. The error remained undetected.

In 2009, an unexpected, one-off business expense was taken from Mr B’s credit card. Co-incidentally this occurred within a few days of the yearly insurance premium deduction being made. As a result, the premium deduction was not honoured.

The insurance company sent a premium overdue letter to Mr B but it went to his old address.

A copy of the overdue letter was also sent to the adviser but he was on annual leave and therefore was unaware of the unpaid premium and pending lapse of Mr B’s insurance. The policy eventually lapsed.

Two days later, Mr B was found to be suffering from a malignant cancer that would have entitled him to a claim payment.

So just when the insurance funds were desperately needed, the adviser and Mr B realised the insurance was not in force. Mr B was appropriately focusing on his health and certainly did not need the additional stress associated with the loss of his insurance.

Handling the problem

In addition to feeling terrible about what had happened, the adviser was concerned about the possible legal exposure arising as a result of the error — and also the financial impact on his business associated with reputation damage and the subsequent loss of clients.

The licensee was facing a professional indemnity claim, which might have affected the renewal premium the following year.

The adviser contacted the insurer to see if the policy could be reinstated, but the insurer insisted a declaration of good health be completed — which meant reinstatement would be declined.

The options for the adviser were:

• try to influence the insurer by pointing out how much insurance premium was placed with them during the last 12 months;
• threaten to withdraw support for the insurer if they don’t do the right thing by the client (not that the insurer had technically done anything wrong by the client);
• advise the insurer about the situation and hope for the best; or
• contact the professional indemnity insurer and let them handle it.

In this case, the right thing to do is to approach the insurer and tell them what has occurred.

To achieve the best result, a strict path must be followed. The facts must be presented so that a compelling case is made for the client. Naturally, the more the facts can be supported by documentary evidence the better.

In order to get as much background information as possible the insurer asked the adviser several questions:

• how long had the insurance been in force?
• on what basis and for what purpose was it set up?
• had that purpose changed?
• when was the insurance last reviewed?
• what was recommended at the review, and what were the client’s instructions?
• what led to the policy lapsing?

The key point that needed to be made was that it was the client’s intention to maintain the policy in force and the lapse was a result of a genuine human error.

The fact-finding mission showed that:

• the policy was set up on a level premium basis because the need for cover was seen to be long-term;
• the policy was set up to provide debt protection and this need still existed;
• copies of credit card statements clearly showed the business expense was a one-off, and it was co-incidental that it occurred when the premium deduction was due;
• the Statement of Advice (SOA) produced at the insurance review a few months before the policy lapsed showed the recommendation was to retain the insurance in force;
• Mr and Mrs B had confirmed by email their acceptance of the recommendation.

Because the adviser adhered to designated compliance procedures and had sound administrative procedures in place, all the above facts could be objectively supported with source documents including the SOA, credit card statements, client emails and file notes.

A comprehensive submission was written for the insurer.

It concluded with the logical argument that if a bank transfers funds to a client’s account in error, generally speaking, the client is not at liberty to keep those funds; the principle being that one party should not receive a financial windfall as a result of the genuine error of the other party.

In a similar way, if a policy has lapsed as a result of a client error or the error of the client’s representative (the adviser) the insurer should not receive a financial windfall in good faith as a result (ie, by way of the avoidance of an otherwise valid claim).

Once all the submission was drafted, the insurer was contacted and an informal meeting arranged. An explanation of the background was provided and then the submission and attachments, including all relevant medical reports, were handed over.

The insurer was not pushed for immediate feedback, because it would naturally need time to consider the submission.

The result

Quite simply, the insurer came back a little over a week later and advised they would admit the claim. A good result had been achieved.

• the claim was being paid;
• delays and stress had been minimised;
• adviser and licensee risk exposure had been removed;
• the insurer had been allowed to make its decision without any direct or indirect pressure; and
• all parties had retained their dignity.

Lessons learned

There were a number of indirect lessons learned:

• an apparently hopeless situation may not be hopeless;
• taking the time to develop a strategy incorporating a compelling submission has merit; and
• open and respectful communication has merit.

The main lesson learned was that without the presence of compliance standards and sound administrative procedures, the proofs necessary to make the compelling case would not have been available.

Compliance and administrative procedures can result in additional work, but the financial rewards and peace of mind more than justify the effort both directly (by avoiding the problem) and indirectly (through optimal business valuation).

Col Fullagar is the national manager of RI Advice.