Jumping the gap

Finding a solution to the risk underinsurance gap in Australia, as with determining the precise size of the existing gap, would not seem to be forthcoming any time soon.

A plethora of potential solutions suggested by industry sources to encourage a greater take-up of risk insurance suggests closing the gap will be a long-term process of trial and error.

Genesys Wealth Advisers risk manager Col Fullagar is typical of the sources who contributed to this report in saying it’s “pointless to look for any one solution to closing the gap”.

“At the end of the day, there might be 20 or more solutions to the underinsurance gap, of which we as an industry are currently probably aware of about five”.

Fullagar suggests reducing the gap “calls for a meeting of minds between advisers, insurers, underwriters and re-insurers”.

VIEW ALL

View all

“Perish the thought we can one day actually have a national forum for these parties to thrash out ideas on finding a solution.”

Another potential solution to closing the gap lies in realising a “convergence of customer and risk research in the development of risk products”, Fullagar says.

“As an industry, we’re currently focusing on risk research rather than customer research, which means our eyes are on the wrong ball in trying to redress underinsurance.”

He says risk research is currently driven by the “comprehensive nature of the product, so that the more comprehensive a product is, the more points it gets”.

“However, many customers, particularly when they get over 50 years of age, don’t necessarily need all these ancillary product benefits that are now being included as a trend.”

Calling for “more innovative” risk products across the industry, he suggests “one of the factors lacking in current product design is a lack of high level flexibility”.

“Clients should be able to start off with a basic product, build it up and then, as they get older and need to cut the price back, be able to strip some of the benefits out.”

He adds that there are “all sorts of opportunities to closing the underinsurance gap going begging because insurance companies are still driven by winning awards for product inclusions”.

Another potential underinsurance solution, according to Fullagar, lies in “simplifying the advice process for the lower end of the advice market”.

“We need to make it more financially viable for advisers to give good advice to the lower end of the market, meaning some mandatory compliance requirements need to be relaxed (see article below).

“Advisers simply can’t afford to give advice to this market because the commission they’ll make or the fee they could charge just won’t be in the ballpark.

“On the other hand, if they are not going to make a loss giving advice, then they are more likely to go looking for clients at that lower end.

He emphasises, however, that he is “not keen on abridged or ‘short form’ underwriting [as a way of simplifying the advice process] unless it is a very basic product”.

“Most insurance companies believe advisers are screaming out for shorter applications, when what they actually want is a safer and simpler advice process.”

He is “concerned that abridged underwriting is not matched by abridged claims management by the insurance companies”.

“Instead, they go full-bore over the claim, and if they find anything that has not been disclosed by the client they will appropriately deny the claim.”

He believes underinsurance “exists and has to be closed at the lower end and also the upper end, where the underwriters get a bit gun shy at the higher benefit amounts”.

“It happens that an adviser will put in an application for $5 million, and the underwriter will knock them back to $3 million.”

There are two issues here for underinsurance, he says, one being that it is the responsibility of the adviser to make a “compelling case” for the higher amount.

“On the other hand, it’s the responsibility of underwriters to be fair and reasonable in reviewing the claim.”

A key challenge in reducing the gap is to get people to understand the valuable role financial advisers can play in their financial affairs, says MLC Insurance general manager Greg Enfield.

“Generally, people don’t seek enough financial advice, a situation which will require a concerted effort by the industry to address,” he says.

“It’s an extraordinary fact that many Australians still prefer to get their financial advice from their taxi driver or next door neighbour, or off a friend over a barbeque.”

Another key challenge to overcome in closing the gap is that products developed by the industry in some cases “don’t meet the needs of what people want to take out cover against”.

“Most critical illness products on the market for example currently cover for some types of cancers, but not prostate and breast cancer.

“However, the reality is the two most common causes of male and female cancer by 2011 are projected to be prostate and breast cancer respectively.”

Enfield says the “existing mismatch” prompted MLC to introduce 26 new conditions into their critical illness product, effective from November 6 this year.

“These inclusions cover for the types of conditions people are concerned about and what people want to be covered for,” he says.

In keeping with an industry trend to bundling and packaging insurance, Enfield says NAB recently launched a product, Loan Cover, which is sold in conjunction with mortgages, requires no underwriting at all, and, as such, will go a long way to closing the gap.

The client is able to cover their mortgage (primary and investment property) up to a maximum of $400,000, which Enfield says is double the average mortgage of $230,000.

Enfield says the product, which covers clients for “death, sickness and an inability to work”, has become “so popular among clients we are now developing a similar product”.

Launched only in the past few weeks, the new product is aimed at mortgage brokers, who will be able to use the product for all mortgage loans, including those of NAB, without underwriting.

“The mortgage broking channel is a new and evolving channel, and we have identified that there are a lot of new loans being sold there,” he says.

MLC is also currently developing a new life insurance product — due for launch in the first quarter of next year — that will be sold directly to customers of NAB, according to Enfield.

In addition, he says next month MLC will introduce an “interactive insurance gap calculator” on the MLC.com website.

It will tell consumers if they have enough insurance or not, how much they ought to have, and what their underinsurance gap is.

ING executive director, life risk, Helen Troup believes it will take a “good two to three years of sustained promotional activity and education by the industry to start to turn around the gap”.

“Research suggests consumers don’t understand risk insurance and don’t necessarily see the need for it, which is not something that is going to take 12 months to fix.”

Troup says the industry also needs to “lobby the Government to see whether there are things they can do on the tax side to make insurance more affordable for consumers”.

She says, for example, that “income protection in particular is one of the most highly taxed products, including payable stamp duty”.

The first priority for industry lobbying is to ensure the Government is fully aware of the impact of the taxes and the social costs of not having insurance.

“It is in their best interests to make insurance more attractive to consumers, because if they don’t take it out through the private industry, the Government has to foot the bill in social costs.”

Troup emphasises that any industry lobbying would “have to take place from the consumer angle, notwithstanding that getting anything changed by governments is a long process”.

“We have to prove to the Government that we are lobbying for change in the best interest of Australians, and not in the best interests of the insurance industry.

“Government would naturally be a bit sceptical of an industry body coming in and calling for tax cuts.”

From an ING perspective, Troup says the insurer is making ongoing changes to its product range that reflects customer feedback.

One of these new products is Living Expense, which she says has opened up a new market in the income protection segment.

The product can be taken out as a benefit under ING’s full life-risk offering, OneCare, or as a standalone product.

She says Living Expense is designed to provide income cover to those people who are ordinarily excluded from cover by not working full-time or being aged under-65, or who do not meet other criteria.

“We have found from our research that there is this whole range of people excluded from existing income protection products that need some sort of income protection or ‘living expense’, as we have named it.”

The product provides ‘living expense cover’ to those not working full-time, people over 65 and, finally, those in high-risk occupations (who are also generally excluded from IP cover).

Troup believes this trend towards “reacting to customer feedback” will be increasingly reflected across the industry.

“It will be reflected both in terms of new and re-engineered products and also in the bundling and packaging of risk insurance with other products.

“For example, a lot more industry attention will be paid in future to making sure you have insurance as part of your super, and also as part of your mortgage.”

The trend will be driven in part by the falling numbers of advisers over the past five years that are involved in selling insurance.

“As a result, we are looking to increase our adviser numbers at ING, but we are also linking in with mortgage brokers, accountants, and other professions to sell more insurance.”

AIG Life general manager, strategy and marketing, Ken Morgan, agrees “significant new opportunities to package insurance could help to reduce the underinsurance gap”.

“Superannuation, for example, is probably now the most attractive savings vehicle, and many funds are offering life insurance cover as part of the super offer.”

The abolition of reasonable benefit limits mooted in the Budget this year has opened up further opportunities for planners across the board in terms of addressing the underinsurance gap, he adds.

AIG is also looking at a number of affinity-style partnerships to package very simplified life insurance cover to target markets that aren’t reached by existing distribution channels, he says.

“If you look at many of the life insurance covers that are marketed directly, they tend to be more of the funeral style products targeted at 60 years and over — but we want to broaden this focus.”

AIG also has current “pilot programs to encourage advisers to do co-marketing with us to move into markets which they may not have thought were reachable or profitable”.

Morgan, who believes the underinsurance gap is getting bigger, says an “emerging trend to simplify products will help as well to reduce the gap”.

“Many of us [insurance companies] have PDS [product disclosure statements] that are up to 140 pages long, and what this effectively does is make it harder for people to understand the product and harder for people to buy it.”

Reducing the time and work taken to get risk cover on to the books could also potentially help reduce the gap, says AMP director of risk insurance Anne Fitzgerald.

She believes a greater take up of automated underwriting could help to achieve this by speeding up the process of writing risk both at the point of sale and at the underwriting.

Automated underwriting is “now quite common in the northern hemisphere, although much scarcer in the southern hemisphere”, she says.

AMP is currently piloting an automated risk insurance underwriting program, EasyWrite, for distribution later this year to both AMP planners and affiliated independent financial planners.

The process enables insurers to “give 40 per cent of clients a ‘yes’ reply automatically, while 60 per cent of applicants are referred on to an underwriter”, she says.

“It is again faster than the traditional way of writing risk when the underwriter receives the application, by taking the inconsistency of human underwriting out of the equation.

“It might be that something that has taken two or three weeks — requesting a medical report from a doctor and waiting for a response — can be shortened and completed within a week,” Fitzgerald says.

Automated underwriting also “makes for a more straight-forward approach for planners to top client insurance up — and in this way is also playing a role in closing the gap”.

“In the past, for example, a planner might have queried the effort involved just to get this extra bit of insurance, but this is not a factor with automated underwriting.”

She believes it will also pay dividends at claims time, as staff can “verify disclosure without any longer having to pull files and wade through hundreds of pads of notes”.

Asteron senior risk product manager Gerard Kerr says “keeping insurance on the books is equally as important for reducing underinsurance as getting insurance on the books”.

Kerr argues “more creative strategies are required from insurance companies to ensure existing clients don’t lapse on the policies”.

“We need to find ways to ensure people are consistently reminded of the importance of retaining this coverage, not only today, but also into the future.”

He illustrates his argument by pointing to current IFSA research within the income protection segment, where some lapsing of policies was found to occur (see box report above).

“The reasons given by some respondents for the lapses were that personal circumstances have changed or family circumstances have changed.

“That’s strange reasoning because income protection is about protecting your family’s income — but it does serve to emphasise the need to educate clients on retaining policies.”

Kerr adds that the industry needs to “avoid the temptation to suggest it is the end-consumer who needs to do more to close the gap”.

“In fact, it is the industry which needs to react differently today to meet the changing ways consumers are interacting with their insurance company.”