Life risk and superannuation roundtable

The upcoming FOFA reforms will see the removal of commissions on life risk products in super. Money Management conducted a roundtable discussion with leading industry players about the likely impact of the changes, along with the problems of underinsurance and churn.

Mike Taylor, Money Management editor (MT):  Welcome gentlemen. The topic is risk and life and the state of the market. But I think the biggest thing to affect the market so far this year was the left field play by the minister in terms of having commissions banned on all life risk products within super. And I thought I might kick off by going straight to Brett and asking: how do you think that’s going to affect the market, as well as the business structures of individual advisers?

Brett Yardley, TAL head of retail life (BY):  Well I certainly think it’s going to create a whole lot of extra complexity. There’s still a lot of uncertainty remaining in terms of how it will work and how things will be structured inside and outside of super. It creates a whole lot of new complexity in terms of potential differential pricing or differential funding of fees inside and outside of super. 

How that then marries up with the best advice requirement is going to be especially complicated, particularly if you have a product that’s theoretically cheaper in super than it is outside of super. How advisers and how the market will make sure that customers’ needs are being met in the most appropriate way just introduces a whole lot of extra complexity. 

The other challenge is consumers’ willingness to pay that fee – albeit the overall cost to them may end up being exactly the same. But the perception of paying the fee for a product that is probably not as high on their own personal desire list as we’d like it may be one barrier too far, and I think that will cause some real challenges for the penetration and underinsurance issue.

MT: Simon what do you think? You’re coming at it from two angles: from the manufacturer’s background and now from the advisory background.

Simon Harris, Guardian Financial executive manager (SH): From the advice perspective it takes away consumers’ choice in how they pay for their insurance premiums, so we think that’s bad. Overall we think that particular bit of policy is poor policy, probably delivered on the fly for political reasons. It will probably lead to an exacerbation of the underinsurance problem in Australia. 

Combined with the best interest legislation that’s going to go through, it provides a possible conflict for advisers. On the one hand, best interest may dictate that they ask their clients to take insurance outside of superannuation or inside of superannuation, but then there’s the client’s willingness to pay for the insurance either inside or outside superannuation. So yes, we think it’s going to add complexity to advice businesses.

MT: Andrew?

Andrew McKee, Australian Unity financial planner (AM): I’d agree, it’s definitely going to add complexity. I really struggle with this one because part of the rationale for FOFA [the Future of Financial Advice] was to remove conflict – and here we are deliberately introducing a brand new conflict into the system. I really struggle to see what purpose it serves. 

I don’t understand who we’re trying to protect in this process. I think you’re right, it’s going to be really difficult for advisers and it’s going to place them in a difficult position. They’re going to have to make decisions about different pricing structures and different fee versus commission structures. It’s going to be challenging and it’s added a lot of complexity into the system for advisers.

BY:  Simon, I think your point is a good one. It basically removes choice. 

Col Fullagar, Risk Insurance RI national manager (CF):  I disagree.

BY:  That’s not unusual.

MT: Col what impact do you think the Government’s decision to ban commissions on life risk inside super is going to have? So given these three gentlemen have had their say, I’ll throw to you in the expectation that you have no opinion whatsoever.

CF: It depends whether or not you agree with what I’m about to say. I think the answer is it depends how we approach it. If we approach it in the traditional way I think it will be a bit of a mess. If we approach it in an imaginative way I think we can get a good result out of it. So it’s a bit like focusing on compliance, if you focus on compliance you’ll give lousy advice that complies; if you focus on good advice you’ll give advice and it will probably exceed compliance. 

FOFA is in a sense a bit of a furphy. The issue is do we have the remuneration structure for risk insurance right. And if the answer is yes, well then FOFA is probably a bit of a challenge. If the answer is no, let’s focus on getting the structure of risk insurance right then we’ll look back over our shoulder and probably find out that FOFA isn’t really a problem. That’s roughly where I come from.

BY:  One of the challenges there Col – and look I agree with a fair bit of what you’re saying – is that at the moment everything suggests that the current remuneration model for risk insurance is not flawed. It works for customers, it works for advisers, and it works for the industry as a whole. 

CF: Is it right?

BY: It works.

CF: And is it working? We’ve got printed rates here but we’ve got a churn rate that’s probably approaching 20 per cent, which is probably adding about 10 per cent to the premium rate. Life companies are paying on the basis of new premiums and retention of old premiums. Is that an appropriate way for you to be remunerated? Have we got advisers appropriately remunerated? I think the answer is no. It may be working, but so are tied agencies. 

AM: But then is creating a conflict situation where you can pay advisers one way outside of super and another way inside of super necessarily the right step?

CF: That would be problematic if we accepted it as the final outcome. But if we don’t accept that as the final outcome, if we actually say ‘that’s going to be a bit of a fight’, can we get a fee structure to work for risk? And then if we say to advisers, ‘Look, if we can get a fee structure that is no greater admin burden and doesn’t adversely impact your bottom line would you be interested?’, I reckon the answer will be yes.

AM:  I think the answer will be yes as well, I just don’t know whether you’re going to get an answer. I admire the principle but people have been thinking about these issues for a long time. So I’m not sure that in the next 12 months we’re going to have a solution. That’s what worries me: the speed of this coming upon the industry.

SH: Can we go back to the outcomes that the Government hoped to achieve through its efforts to stop things like Storm occurring again (and I know Storm was a fee-for-service model and it didn’t include insurance commissions) via the Cooper Review and taking the conflicts out of the advice process. Do these reforms, particularly opt-in and taking commissions out of risk in super, achieve any of those outcomes? I think that’s the question we should ask, and the answer is clearly ‘no’ in my mind.

CF: With due respect to the Government, I think there’s not a heck of a lot that the Government does that achieves it, and I think that’s why we don’t focus on it. Art royalties were meant to achieve protection of indigenous art, and it has actually destroyed it to a certain extent. I think there is a fee-based model that can work and it’s very close to being tested, so I don’t accept we can’t get a fee-based model that would potentially work. 

Whether or not it would be wholeheartedly embraced by the industry is a different question.

BY: But then wouldn’t we be better off in the alternative where we give customers and advisers the choice between commission-based remuneration or fee-based remuneration?

CF: They’ve got a choice now – it’s just potentially very messy. ‘I’ll do your investment on a fee; I’ll do your risk in super on a fee; and I’ll do your risk outside of super on commission’ – that’s awful. Money Management rang us up a couple of days before FOFA and asked: ‘What are you going to be doing once you find out?’ I said we’ve pretty well already done the work. Do the work before it’s inflicted upon us. Let’s assume it’s going to be inflicted, and if it is inflicted the way it looks like it will be, can we turn it into a positive? I think we can – I think we have to.

AM: I don’t think it’s going to kill the financial advice industry, it’s just part of its evolution. I guess the only thing I would say is I can’t rationalise having two different structures inside and outside of super.

CF: I agree with you entirely. If that’s inflicted on us we are far better off to have assumed it will be and thought ahead. If we think we can avoid it that might be convenient, but that doesn’t necessarily give us the right outcome.

AM: I think there will be an ongoing evolution in this space anyway, because we’ve seen that evolution on the investment side from commissions through fee-for-service and now becoming embedded there. But on the risk side it’s a journey that’s really just started and I don’t know that this is the right first step in that journey.

CF: Self-regulation and moving calmly would always be nice.

AM: It creates a lot of complexities. And if you’re giving insurance under an advice fee as opposed to commission then you have to break that down because the tax deductibility of that advice fee is different based on different streams based on where the insurance is. 

So income protection is deductible, life and total and permanent disablement (TPD) outside of super is not deductible, trauma is not deductible, life and TPD inside of super is deductible to the super fund. So you get that complexity of having to break your invoice down, which is messy. And at the moment the commission system deals with it automatically.

SH: So we’re adding an extra level of complexity to an already complex advice business and combining that with the systemic contraction of trust around the advice industry. Add that to the apparent defamation of financial planners by others and you’ve got these financial planners who are really feeling like they’ve been hung out to dry, and that they’ve been made scapegoats for a whole lot of things that are outside of their control – whether it’s product failures or the GFC.

Now we’re adding more complexity, and it doesn’t make sense. But I guess out of the back of this process we’ll have a stronger industry and hopefully we’ll have more consumer trust in the advice process. And if that’s the only positive that we get out of it then that could be something that we can look forward to.

CF: I’m not saying that those who disagree with this shouldn’t fight tooth and nail to stop it. All I’m saying is if they fail in stopping it I would much rather have used some of that time to come up with a viable way forward, so that if they do fail to stop it we have a ‘Plan B’.

SH: And that’s exactly what we’re doing.

CF: And if they do stop it, the Plan B hasn’t been wasted. The advisers who say ‘even though I can do all of my risk on commission – even the stuff within super – I’ve still got all this investment stuff that I’d really like to have fully fee-based’. And so the time we’ve spent – even if we do stop it – enables those advisers who want to go fully fee-based to have a model that they can use to do that. I reckon that would be a pretty good outcome.

Dealing with churn

MT: I’m going to move the conversation along a little because Col threw up that ugly word ‘churn’, and at a recent Financial Services Council forum on risk insurance it came up there as well. It was suggested that churn is an ongoing burden to the industry in terms of its credentials in the minds of consumers and its critics. So how do you stop the churn, and what’s the industry doing to stop it?

CF: It’s encouraging, each insurer has their churn terms. 

AM: Otherwise known as takeover terms.

CF: Correct.

SH: We’ve been approached by a couple of manufacturers recently to work with our advisers to lower the lapse rates for their portfolios, and they’ve got some innovative ideas about managing that situation – including change to remuneration terms to trail remuneration terms. 

Some are tiering up those trail commissions as an incentive for people to keep business on the books. There’s some conversations being held with certain advisers to make sure that they are acting in the best interests of clients, and maybe the best interests will always help that.

CF: We’ve been approaching insurance companies for the best part of eight years to try and get them to change the remuneration structure from purely premium based to focus on those aspects of writing business that is profitable. You would know from first-hand experience and they haven’t got the time, and they’re too busy tweaking products. 

But I agree with you the adviser needs to focus on those things that derive value to the business. If keeping the churn rate down under 12 per cent or 15 per cent and focusing resources within their business does nothing to the remuneration for their business, why would they focus on it?

BY: I’m not sure I quite agree with that. I think companies probably haven’t done enough. I think the rising lapse rates that the industry has seen over the last couple of years has probably focused people’s minds a whole lot more. And people are now thinking a whole lot more seriously about the kind of things that Simon spoke about, which is basically trying to bring greater alignment between remuneration models, so rewarding advisers based on the value they provide to the business rather than just top line premium sales. And I think that needs to continue. 

I suspect most insurers are paying a fair bit more attention to value than they probably were a couple of years ago when the GFC was giving us a mini boom for risk and everyone was writing and enjoying it. They’re now realising that ‘Hey, that can be a bit of a double-edged sword, we now need to think about making sure we write valuable business’.

CF: But if you ask pretty well any insurer of 100 per cent of the business you receive how much is ‘new’ new business and how much is ‘old’ new business, they probably won’t know. 

BY: I know.

CF: Well you’re an insurer. But that’s a pretty important figure.

BY: Yes, absolutely it’s crucial.

CF: And I wouldn’t be surprised if the number was 50/50.

BY: Yeah and it is roughly. 

AM: I would just throw a comment coming from a slightly different angle. I wouldn’t tar every adviser with this churn brush. Obviously lapse rates have increased and increased revenues, and clients were hurting, and some advisers might want to boost their revenue line through churn. But I think it’s a relatively small proportion, and I think most advisers aren’t actually operating in that space. But I just want to be cautious and say yes, I think there might be a problem, but I’m not sure it’s everybody.

CF: I don’t think I was tarring the adviser – I think I was tarring the insurer.

BY: In everyone’s reports and results we’ve seen the industry results lapse rate over the past two years essentially going up by about 1.5 per cent. But is that cyclical and will it come back down, or has it moved permanently? Because if it has moved permanently, people also need to think a whole lot harder around what the longer term implications actually are.

SH: And I’ll pick up Andrew’s point that it’s just a very small proportion of advisers who you would term churners. Most of the advisers I know act in the best interest of their client, and when they’re moving insurance it’s for valid reasons for the client. The second point is let’s focus the industry more on growing the pie and fixing the underinsurance problem. There’s still a huge opportunity to grow ‘new’ new business, in Col’s terms, so that the percentage of business that’s moving becomes a much smaller percentage of the overall risk business that’s written.

Addressing underinsurance

MT: Which brings me to the question of underinsurance. We’ve been writing about it, talking about it for the best part of a decade I guess, and on my estimate the industry has really not achieved a lot in that time. Underinsurance rates as I understand it are not all that dissimilar to what they were five years ago. So what does the industry have to do, what does the Government have to do?

CF: I’d say the advisers – they’re the ones I work with – I don’t think that the underinsurance problem is their problem. Their problem is to run their business and look after their clients and make sure their clients aren’t part of the underinsurance problem. If the advisers start running around trying to solve the underinsurance problem they’ll probably ruin their business.

AM: The clients of advisers are not the underinsured, it’s people who aren’t being advised where the underinsurance is the problem. And yes, I’m sure every adviser would say their doors are open for the underinsured, and if they want to knock on them they’ll help them. But not everyone will seek advice on insurance. It’s still a product that might be a reluctant purchase for some people, so it’s a challenge. People aren’t knocking down the door to get insurance.

BY: There’s two key points here. Firstly, how do you continually raise awareness and make people understand the importance of insurance? Secondly, how do people then look to financial advisers to get help meeting this need? You have to make sure that financial advisers are able to meet the needs of as many people as possible in a cost-effective manner. We need to think smartly about the solutions we can provide, how we can operate businesses as efficiently as possible and how we can basically service everyone.

AM: And not wanting to backtrack, but some of the FOFA reforms don’t help in managing a practice cost-effectively, so it will potentially cost some clients from getting advice, it will be too expensive for them to get advice on insurance.

CF: I think people like Guardian and Real are doing a pretty good job picking up that proportion of the market. I’d hate to think what their advertising budget is.

AM:  The direct insurer’s interest is obviously in direct written business, and that’s covering off insurance for a part of the population who are not going to see advisers. People get their information in different ways. Some people with complex needs use advisers and are happy to see them and pay for them; some people – maybe with simpler needs – are happy to use the direct tools. 

As an industry we just need to make sure that the tools that are available stand up and those clients aren’t getting underinsured, the ones that are going direct. And websites like the Financial Services Council’s Lifewise is a step in the right direction. But it is about broader promotion of life insurance and the benefits of life insurance out in the community.

SH: And more broadly we know that evidence shows us that people who are advised are better insured, so it’s the articulation of the whole value of advice that’s very important, and that’s probably where we let ourselves down as an industry. We haven’t articulated the value of advice. People with advisers like their advisers and accept the value. 

It’s the people without advisers who we need to influence to go and see an adviser, because the outcomes for them – not only from the insurance perspective but also from their savings perspective – are much better.

CF: My concern is for those who bypass advice not so much at the front-end but the back-end, and my heart goes out to them. And the risk we run is that we’re going to have a whole lot of people there who are not represented at the point of claim, and the potential there for the claims to go pear-shaped is significant – and the reputation of the industry suffers even more. That’s where my concern lies, particularly when you start analysing some of the contracts on platforms and direct and seeing some of the clauses that can be used – and how I know they will be used.

BY: There’s two tiers of action; there’s promoting awareness of the need, and then promoting awareness of the value of advice and the value of the service around that need. And they’re actually two slightly different problems. The awareness of the need has been the challenging one that’s endured for years and years. I think the fact that there’s now much more promotion of insurance on TV and radio and on the Internet can only be a good thing in terms of actually getting people to think about this type of stuff. 

Even if people essentially dip their toes in the water in a simple product to start off with a) it’s better than nothing, but b) it gets them also thinking about their more holistic needs. It also feeds into the adviser pipeline as they progress too. So I think things are moving in the right direction, but it’s probably just not fast enough.

AM: I imagine in five years time we’ll still be having this conversation. It’s a slow boat to turn around, but you’ve got to just keep pushing it in the right direction.

CF: I don’t know that you’ll ever turn it.We have come a long way. If you go back through the 1970s, insurance was expensive, and I would think the level of underinsurance was appalling – but we’ve now got insurance that people can generally afford. I think we are making progress. I don’t know that you have to beat yourself up for going wrong.

AM: We’ve all met people who think they’re bulletproof and don’t see the need for insurance. But we all know that things can go pear-shaped, and most people who have insurance are okay when that happens. And that’s the challenge of getting that out to people, the really small cost to pay for making sure their lives aren’t totally derailed.

BY: We do have a great influence and I think strides have been made over the last four or five years. But we have to make that process as hassle-free as possible. For too long it basically took forever to get insurance. 

That’s not a great consumer process. You can’t think of too many industries where someone decides they want to buy something and then two months later someone tells them whether they can or can’t buy it, that’s just not acceptable. We need to be breaking that down, and I think we’ve come a long way, but we’re still not there.

CF: Part of the reason we’re not there is life offices aren’t prepared to buy into a process that will speed that up. They still keep running around with their own unique documentation, which means that it is very difficult for the adviser to actually get that part of the advice process the right way round. 

They should be going in getting generic documentation, finding out if they can get the insurance, give the advice and then pop the forms in and away you go. You’ve saved two to three weeks.

BY: I have a different way of dealing with it Col. I’d be streamlining it and automating the process, so you’re able to tell everyone within a matter of days whether they’ve got cover or not.

CF: I know, but each insurer wants to do that in their own unique way rather than having a consistent way.

SH: I think that’s where we’ve probably made the biggest progress over the last two to three years: the application process, and the efficiencies through leveraging technology. Where we haven’t perhaps made the steps is telling the stories and creating the need. We know that people actually need these products and insurances, and that’s probably where I think the industry could focus a lot of its attention. Yes the technology side and the business efficiency side has to keep making progress – and it is, thank goodness – but we also need to think about the behavioural side as well.

CF: As far as I’m aware – and I’ve asked a number of insurers – only about on average half the business is going through online. The rest is following the same old process it was going through before. But irrespective of the industry, the insurers recognise that advisers need to place business potentially across more than one carrier. 

If they facilitated that process, whether it was online or paper-based or whatever, it would go more smoothly. But insurers fail to appreciate that.

BY: I think there are just different considerations Col. But I don’t think it’s an online or a paper-based issue, it’s a process efficiency issue. But I’ll talk to you later about the kind of rates you do get online.

CF: I know the rates, I’ve done the research, I’ve asked the questions, but I ask them of different insurers. But irrespective there should be a recognition of how advisers now process business. It’s across carriers, it’s not with one. Insurers fail to appreciate that opportunity.

Insurance within superannuation

MT: Let me move the conversation along just a little bit. Do you think at least a part of the problem is some confusion in the minds of consumers? Because just about everyone who works has got superannuation, and they’ve got some sort of insurance inside their superannuation – it could be as little as $200,000 or $100,000. 

We all know that if you’re living in Sydney $100,000 is not going to be enough to help anybody in the event that you shuffle off this mortal coil. But everybody thinks ‘I’ve got a good size insurance policy because of my super fund’. And I know that group insurance is good money for any insurance company, but are we misleading people about how comfortable they ought to feel about that?

SH: The answer is absolutely yes, and a great example of that was wherever you have catastrophic loss of life and property where you’ve got insurance companies that have both a general arm and a life arm, and you can compare. You can look at the number of properties damaged and the insurance rates, and then you can look at the loss of life and the insured amounts. 

The Canberra bushfires was a great example, where 75 per cent of the people who died were covered under a group policy and had inadequate life insurance. Those that had sought advice had, I think, three or four times the level of insurance cover, which was more closer to adequate for what their family needs were after that. 

There’s a real issue in our society of not only a ‘she’ll be right mate’ attitude, but feeling that ‘she’ll be right mate because I’m covered by my industry superannuation fund’. And industry funds, through their ‘compare the pair’ advertisements, do our industry a great disservice.

AM: I think having some cover in people’s super funds can lull them into a false sense of security. It’s very hard for people to really determine how much cover they need. And they look at their statement once a year, they see there’s some sort of cover there, it looks like a big number, and they go away thinking they’re covered. 

But usually they’re in that bracket of underinsured. So it lulls them into a false sense of security. I think the equation does change a lot when people have kids. I think that’s when people are prepared to actually sit down and make sure they’ve planned for their kids’ future. 

CF: That’s right it’s a 20-year horizon. 

BY: Yeah, there’s still a different dynamic to the old right through to 65. And you know I don’t know the answer but I’m not sure it’s as simple as everyone is underinsured.

AM: I don’t think everyone is underinsured. But I think there’s probably cases where people are overinsured as well. But there are a lot more underinsured than overinsured.

BF: I think there’s no doubt that people have some false perceptions around the level of cover they have and the adequacy of that level of compulsory cover. Is that a bad thing? I struggle to view a whole lot of people having some cover as a bad thing. 

It’s actually just the opportunity that we need to then leverage that to raise people’s awareness that they do need to think more holistically about making sure they get the right level of cover. 

And so I see it more as an opportunity. It’s a challenge around those perceptions at the moment. We just actually need to think more creatively about how we help that situation. 

CF: Nirvana would be getting advice that’s affordable for all people, and it was compulsory in a sense for all people, and they got the right numbers.

AM: I knew I’d agree with you on one thing, Col.

SH: Tax-deductible advice would certainly be a step in the right direction.

CF: Absolutely. I think there are some unique situations coming up, however the problem of second families and bequests of second families is the one that’s starting to worry me more than anything else. You can get the right amount of insurance and you think you’re okay, then there’s a family split up and then someone dies and the whole thing falls apart. I think that’s one of the modern and unique and under-appreciated challenges that we’re facing.

SH: And I guess that’s where the long-term relationship that advisers have with their clients comes through with that ongoing relationship. Opt-in doesn’t recognise the long-term relationship of an adviser and their client. They talk about these trail commissions being a bad thing, but at least trail commissions provide access to an adviser’s business. 

That is very important when there are changes in lifestyle and a phone calls needs to be made, or a review of insurances or superannuation needs to be taken care of because of a change in circumstances like a divorce.

CF: Yes, there’s tough stuff out there at the moment.