Understanding risk insurance

The risk insurance industry is fraught with complexities. Angela Faherty takes a look at the challenges facing the sector, and how it can work to better educate consumers about the need for insurance.

Understanding the risk insurance market is not as easy as it seems.

The sector is fraught with complexities, is often portrayed negatively and those outside its inner sanctum find the industry somewhat perplexing.

Yet the risk market offers a wealth of untapped potential for financial planners looking for extra revenue streams, and the changing face of the market — along with the shifting demographics of Australia — suggests that the risk market has real potential to thrive over the next decade.

One of the key challenges facing the market has been the negative perception of insurance companies, with bad stories regarding non-payouts proving more popular in the mainstream than the cases when insurers do pay out.

However, if there is something to be learnt from the global financial crisis (GFC) it is the fact that risk is always present and that wealth protection is paramount at all stages of life, says Jim Taggart, adviser at Taggart Nominees and national president of the Association of Financial Advisers.

He says: “If we have learnt anything from the GFC, it is that it has had a significant impact on the lives of many people overseas and it has reminded people that risk is always present.

"However, people don’t comprehend the severity of risk unless it befalls them, and if they don’t have a structure in place to defend themselves against the potential fallout then the consequences can be fatal.”

Getting this message across to consumers and clients, however, remains the major obstacle to substantial growth in the risk insurance market.

Many consumers adopt a ‘nice-to-have’ rather than a ‘need-to-have’ approach to risk insurance, and it is often the first financial commitment to be culled when hard times hit.

According to research carried out by ING Australia last year, many Australians opted to cancel their life cover in response to increased financial constraints following the fallout from the GFC, with most citing unemployment, increased financial hardship and the prospect of a recession as the main reasons for dropping life cover.

Ironically, it is during times like these when life cover and other types of risk insurance are most needed, and promoting this message to clients is essential, albeit challenging, says Gerard Kerr, head of marketing and retail product, insurance, at ING Australia.

“Despite it being an exciting time in the risk insurance market in terms of opportunity, the problem with the risk insurance industry is that it is difficult to create something that people find exciting.

"Risk products are not tangible and therefore many people struggle to grasp how they can benefit them if they have never had to make a claim,” he says.

Indeed, the intangibility of risk products as well as a lack of understanding among consumers has been cited as one of the reasons for the underinsurance problem facing the majority of Australians.

Unlike some general insurance products such as motor insurance, risk insurance in its various guises is not compulsory. Therefore, the ‘nice-to-have’ mentality is likely to remain unless consumers are better educated about its benefits.

Challenges

Advisers working in the industry say one of the problems with risk insurance is the complexity and lack of understanding among consumers.

Adviser criticism has also been levelled at insurers’ attempts at product innovation and development, because it has been focused on merely staying in the game rather than serving the end client.

“In terms of product innovation and development, it has been a case of everyone chasing everyone else’s tail and not addressing the needs of the adviser, and therefore, the needs of the client,” says Col Fullagar, national manager for risk insurance at RI Advice.

“Risk advice should have reasonable, clear-cut tools that can help the adviser determine the best solution for the client. But products are becoming increasingly complex with ancillary benefit after ancillary benefit being added by insurers to try and gain an advantage over competitors.

"What I would love to see emerge in the risk insurance market is a new product that is clear cut and precise and for insurers to stop wasting time chasing research points with ancillary benefits,” he adds.

Troy Edmondson, partner at Business & Estate Planning Specialists, says the industry has moved forward over the last decade, but agrees with Fullagar when it comes to research houses driving product development.

He says: “The industry has gone through a stage of rapid product innovation over the past 10 years, but personally I would like to see a period of consolidation. Most of the innovation and product changes are being driven by research houses and each insurer chasing the other to stay in the top quartile or ratings.”

While there has been no significant product development over the last few years, Marcello Bertasso, head of underwriting at AMP, says the changes that have occurred to products have helped to open up the level of coverage available to clients.

He says: “There has not been any revolutionary change in the industry over the last 10 years but there has been evolutionary change. As an industry we have seen the most change in critical illness or trauma cover.

"The eight standard definitions have been added to and there are now 20 to 30 conditions covered as well as the introduction of a partial benefit, which is a significant step forward.”

Changing demographics

Bertasso adds that there are also a number of growing trends in global demographics that should prompt a change in the way in which the risk insurance market operates.

He says: “The population globally is ageing and as a result we are seeing this have an impact on general finance, with older people working longer and living more vibrant and healthy lives as they age.

"We are also seeing different diseases coming into play, and going forward the assessment of these is likely to alter as insurers look at the impact these can have on people.”

One of the changes being implemented by AMP, says Bertasso, is the assessment of mental illness. He says the old viewpoint that “depression is depression is depression” has been proven to be untrue and that the insurer is taking what it considers to be a fresh approach to underwriting the condition.

“Medical advances have meant that there are now more discreet diagnosis of many diseases, and mental illness and depression is one of them.

"Now we have a better understanding of mental illness we can see that there is a continuum of mental states with anxiety sitting at the low end of the spectrum and schizoprehenia sitting at the high end.

"As an insurance company we are in a position to identify the different classifications by making evidence-based clinical decisions,” he says.

Although Kerr admits that the risk insurance sector has perhaps not advanced at the same speed as other industries across the globe, he says that the Australian risk market is still in its infancy so it has an advantage in being able to learn from international players.

One lesson the risk sector is following is the introduction of wellness benefits and loyalty schemes by European companies as a means of keeping premiums low.

These work by rewarding policyholders who frequent the gym and lead a healthy lifestyle with a reduction in premiums — a tangible benefit for their loyalty.

Kerr says that any further developments in the risk insurance sector are likely to follow this route, or the direction taken by the general insurance industry, with the possibility of loyalty schemes being introduced to reward policyholders for their long-term business.

“On the insurance and disability side, the industry is in its infancy when it comes to ways to keep premiums low. South Africa, and indeed Europe, has been very good at introducing wellness schemes and loyalty programmes that reward clients for leading a healthy lifestyle after suffering an accident or injury, and we are looking at this with interest.

"It is certainly something to consider and the fact that it has worked in other markets is an excellent sign,” he says.

Tackling underinsurance

The introduction of insurance policies featuring wellness and lifestyle benefits have proven very popular overseas, but would they help to address the underinsurance problem in Australia?

Admittedly, lower premiums and the connection between healthy living and life cover could help people to gain a greater understanding of insurance and the concept of risk, but will it actually help to solve the problem?

Taggart isn’t sure. He believes the key to getting people to understand risk needs to be tackled differently. He says: “As advisers and as an industry we need to make people understand the significance of their income capacity over their lifetime.

"For example, two 30-year-old professionals with a combined income of $150,000, indexed at 5 per cent, will earn $9.4 million over a 35-year period.

"That is a significant amount of money, yet most people do not view their wealth in that way. We need to drive home that their future financial goals can be achieved through their current income.

"Protect that income and you can secure your financial future,” he says.

Taggart also stresses that the lack of education among consumers about how and why they need to protect their wealth is the key reason for underinsurance and the lack of interest in risk products.

“Engaging the consumer is vital,” he says.

“What we are really looking at when it comes to advice is education and training. As advisers we are helping clients make a decision about the area of loss, and once we build that fortress it is important to go through the portfolio and make them understand the impact a poorly designed plan can have on future goals.”

The ongoing saga surrounding the fee versus commission debate could also affect the underinsurance issue, says Edmondson. He says the industry-wide debate and the culling of commissions could serve as a further hindrance to the distribution of advice in the future.

He says: “The dark clouds looming from the Australia Securities and Investment Commission [ASIC] indicating they would like to stamp out commission on risk products will see a catastrophe loom.

"Consider the Black Saturday bushfires in Victoria: only $1 million was paid out in life insurance claims from nearly 200 Australians losing their lives. This is an appalling number and it is because insurance is sold as a commodity.

“Therefore, what Australia needs is more risk insurance specialists in the market advising clients on their issues and providing appropriate solutions, but I think the fee versus commission debate and the current push by ASIC will result in fewer risk specialists. This is not what Australia needs,” he concludes.

Although underinsurance is likely to remain a problem for Australia, and indeed internationally, Fullagar says advisers should adopt a more localised approach.

He says that advisers should not focus on addressing the underinsurance problem facing the country, but instead focus on running a profitable business.

“It is not the responsibility of the adviser to address the underinsurance issue facing Australia,” he says.

“If advisers do what they are supposed to do and worry about the risk insurance needs of their clients, then by definition they will start to chip away at the underinsurance problem.

"The concern of advisers needs to be recommending good products to clients and they should be getting support to do this from life offices.”

Another key challenge facing the industry is the global epidemic of obesity. Australia is now considered to be the most obese country in the world, and the health problems this will cause further down the line are largely unknown.

“Obesity is one area that impacts across a range of illnesses, not just heart health. It can also have an impact on mental health and can be the cause of some cancers, which is a big issue for this industry,” Bertasso says.

“It is an issue that we have to watch and ultimately address as an industry going forward, because being overweight impacts on the length of time people stay alive. But it is a highly emotive issue so we need to tread carefully and react to medical advice cautiously but effectively,” he adds.

Consolidation

Another great concern for the risk insurance industry is the lack of new entrants, says Fullagar. He says the amalgamation of 12 mainstream players and the stalemate that he currently perceives in the market is cause for concern, particularly in terms of a fresh approach to product development.

“The sector is crying out for new players to enter the market with a fresh new approach, rather than a case of the same. But I am not sure this will happen,” he says.

Fullagar is also critical of the current claims process and says that addressing this may go some way to helping to change consumer conception of insurance companies.

“Claims management itself really needs a metamorphosis,” he says.

“The whole claims management experience for clients is not as user friendly as most insurance companies would like to have us believe — particularly the resolution process.”

He says that many consumers do not trust insurance companies because there are too many bad stories in the press highlighting the times when an insurer has not paid a claim. A better claims management process could help to address this, he says.

“Client focus must come first. Many clients only go to the Financial Ombudsman Service because the insurance company has failed to explain why it won’t pay a claim.

"Instead there is a clause in the insurance contract outlining the formal complaints procedure if the client wishes to dispute non-payment.

"There needs to be a better system. It is the insurer’s duty to explain why the claim hasn’t been paid. Maybe then, the client will understand the way insurance works. The current system is shocking,” he says.

Whether a better system would instil faith in consumers or make them better understand the current system is unknown, but the fact remains that changes are needed in the risk insurance industry.

Underinsurance is rife, people fail to consider the importance of insurance as a means of protecting their life, wealth and possessions and the industry itself has an unfavourable reputation.

Tackling these challenges together as an industry is the key to tapping into the potential the market offers.

Consumers need to understand how the industry works, how risk insurance works and the benefits it can offer them. Working together to educate consumers about the advantages risk offers will help to grow the market in the long term.