Underinsurance: it’s time to get personal

A lot has been written about Australia’s underinsurance gap in the past couple of years, with the Investment and FinancialServices Association (IFSA) and the insurance industry starting to talk about it at great length.

Generally, the gap has been largely characterised in gross terms, that is, the life insurance gap (a lump sum payment following death) is now in excess of $1 trillion, while the income protection (replacement of income following illness or accident) underinsurance gap is in the order of several hundred billion dollars. These are very disturbing numbers.

But for the average person in the street, anything with more than five noughts attached to the end often appears unreal.

For most people, a number in excess of $200,000 is something that they are not familiar with and can’t relate to. To many, the best financial measure they have is a comparison to their mortgage.

While IFSA and the industry have done a great job in raising awareness of the issue through research and case studies, it would appear we still have a long way to go before consumer awareness increases.

This is why we should continue to talk about the issue and perhaps put the underinsurance gap in more ‘realistic terms’ and at a more personal level, perhaps using a different style case study.

The facts and figures

Early last month the Australian Finance Group (AFG) released new national monthly mortgage numbers. These highlight an issue many of us are aware of, but tend to generally overlook.

According to AFG, the average mortgage in NSW is now over $350,000 and, believe it or not, this is down nearly $25,000 on the previous survey. In fact, it was the lowest average monthly mortgage figure for New South Wales since 2005.

Across the other side of the country, the average mortgage in Western Australia has gone up nearly $12,000 and is approaching $340,000.

In other states, the average mortgage in Queensland is around $285,000, in Victoria over $275,000 and more than $250,000 in South Australia.

As an aside, this shows Australia really is a two-speed economy at the moment.

But the main point of all this is that Australia is a country with a mounting level of individual and family debt, both through mortgages and other financial commitments.

Luckily, unemployment has steadily fallen to below 5 per cent, although wages have been relatively constrained.

The average annual male wage is now a bit more than $50,000 per annum, and the average female wage, a bit less.

The sum take-out of all of that is that one average wage, without tax and without loan interest, is fully committed for five to six years to paying off the average mortgage in most states. That leaves absolutely nothing for living.

According to an online mortgage calculator — for a loan of $300,000 over 25 years at today’s interest rates, a monthly payment of around $2,200 is required.

On an annual basis, this represents around half of a single average wage earner’s gross annual salary. These figures can differ slightly based on the calculator used, but the story remains generally the same.

Clearly, the average family can probably only manage to meet the growing mortgage and other debt commitments, plus keep the family fed, educated and clothed, and run a car or two, and have a few dollars for other things, with two incomes.

Getting personal

That is where the underinsurance gap really becomes personal.

Take out one income through death, injury or major illness, and the ability of the family to make ends meet becomes highly problematic.

The underinsurance gap is not just the difference between liabilities and the amount of cover arranged, it is mostly about the personal ability of a family to live comfortably in times of adversity.

Unfortunately, some — especially those who accuse the insurance industry of talking up the problem to sell more policies — have overlooked this issue.

Yes, there are advantages to the industry in closing the gap, but there are also major social benefits in protecting families from hardship, and there are economic benefits in not having the Government needing to use welfare as a last remedy.

As you move around the industry, one of the most common stories you will hear is the warmth that flows to an adviser when he/she pays out a claim to a family in need.

Last year, a Sydney newspaper ran a series of stories headlined, “The cost of living is bankruptcy”.

The story was not that the seriously ill were being denied medical treatment, but that they were having to sell their homes and run up debt just to continue to maintain a much reduced lifestyle.

Closing the underinsurance gap is not just about yelling loudly that something must be done.

The industry must identify the causes of the problem, deal with those and also segment the market to ensure all of Australia has ready access to life cover if they want it.

First and foremost, the industry must show all Australians why they need it.

‘It’ll never happen to me’

Research done last year for IFSA by TNS Research highlighted some of the key problems in raising awareness.

Basically, many people do not see the need for life insurance, they don’t know about it, they don’t appreciate the possible risks/consequences of not having it, and they don’t necessarily trust the industry. They are also worried about the cost.

In particular, those under 40 who, because of family commitments, are probably the most in need, are often those who feel ‘invulnerable’ and therefore believe they don’t need it.

The challenge for all in the industry is to address all these key points, along with what IFSA and TNS have identified as the common path — recognition, information, advice, purchase and post-purchase support.

Increasingly, and as the nation’s demographics change, the industry must also change if it is to deal with the issues raised in this research.

Clearly, the independent financial adviser (IFA) will remain the backbone of the industry. There is the need for advice, and there is the need for third-party counsel.

But the IFA can only cover part of the market.

With the costs of doing business these days, the independent adviser is often not able to provide a service to ‘middle Australia’, where the amount of cover required is relatively small.

The cost of compliance in this situation can often be substantial.

The IFA will continue to meet the specific needs of a segment of the market — traditionally small business operators and those at the higher end of the income/debt scale.

Unfortunately, the IFA sector has often not been successful at penetrating new markets — those under the age of 30 and members of the ‘D’ or digital generation, who tend to ‘hunt and gather’ on their own.

The industry will continue to support the IFA channel, and this will always be at its core.

But the industry must also work out how to hit other sectors of the market and, in time, see them migrate to the IFA channel for added specialised advice and support.

Where to start?

The first segment of the market to consider is those who have relatively small requirements.

Thankfully, this is already being done in many instances through direct communication channels (that is, by television and over the phone), and so far it has proved to be one of the fastest growing sectors of the industry.

The second segment that presents a challenge to all is a compile of the under 35 and ‘D’ generation.

This is a combined group who often do not see the need for life protection and, if they do, generally want to do it quickly and easily over the Internet.

This, like the first segment, is very much a no-advice group. They want a cheap, easy solution that can be done quickly via computer.

Everyone in the industry is looking at how best to service this group.

Online applications with minimum underwriting is the key objective.

But, life insurance is not simple, so developing the ultimate high-tech system is a major challenge.

It has been tried overseas with various levels of success, but no one system has been found to be immediately transferable to the Australian market. It will take time.

Again, solving the underinsurance issue at this end of the tree requires customers getting what they want from the industry — speed, availability and a reasonable price.

Fortunately, part of the underinsurance gap is covered by in-super coverage, and it is pleasing to see that many trustees are looking to offer higher levels of cover to their members.

Perhaps the underinsurance message is getting through to some degree, as there are reports of trustees being approached by members for increased protection.

Clearly, the underinsurance gap exists and appears to be growing each year as the level of personal indebtedness rises and mortgages grow.

If the industry wants to close that gap, then everyone involved is going to have to change to meet both established market perceptions and future market needs. It is good to see in the industry united on the issue.

David Callander is the chief executive of retail life at TowerAustralia.