The financial advice sector has seen considerable change over the last few years, with many financial advisers regarding it as an existential crisis not of their making.
Increased regulation and education requirements have added considerable costs and complexity to advice businesses and led to a significant decline in the number of financial advisers. This has put increasing pressure on advisers, leading to advice gaps for less wealthy Australians.
This has only been exacerbated by significant increases in income protection pricing, reducing the affordability of the products and increasingly limiting access to those clients who have greater capacity to cover increasing premiums. This is bad for the advice industry and it’s bad for consumer access to affordable income protection cover.
The Australian Prudential Regulation Authority (APRA) acted to address this affordability and sustainability concern, creating the necessary ‘circuit-breaker’ to over-ride inherent market mechanisms which were deterring individual insurers from rationalising products, while both the Actuaries Institute and Financial Services Council (FSC) have also played a role in enabling meaningful change.
Accordingly, insurers undertook to re-design and re-engineer more affordable and sustainable products, an unprecedented industry-wide undertaking and a positive step towards ensuring better outcomes and more affordable cover for customers over the long-term.
The role this plays in also preserving the ongoing viability of the financial advice sector can’t be underestimated, ensuring the important support, guidance and expertise offered by advisers remains accessible to more Australians, not simply those who can afford to pay higher prices.
However, more suitable and sustainable product solutions will only support the betterment of the financial advice sector if the life insurance industry also works closely to support advisers, enabling their vital role in this transition to new product constructs by helping clients identify and select the right levels of cover for themselves and their families.
It is insurers’ responsibility to design the right products, but it is financial advisers who will ensure that the products are being well understood by clients, and recognised for the sustainable, long-term value proposition that they are designed to provide.
FAIRNESS AND BALANCE IN PRODUCT DESIGN
We think the sustainability of products comes down to the basic principle of fairness. Fairness firstly for those on claim, through a product that meets their core need to replace a portion of income while on claim. And fairness also in terms of balancing that against what all Australians need and deserve from their income protection, even if they are fortunate in not needing to claim on that policy: affordable cover that’s with them for the long-term.
What we have seen in market over several years is not balance. A minority of customers who claim have received benefits that pay in excess of their need over the longer term. As a result, the majority of customers in the risk pool have seen their premiums continue to increase.
Fairness for all those in the risk pool is achieved when products are designed to meet customer needs in a measured way so that it does not continually put upward pressure on affordability.
DRIVERS OF PRODUCT SUSTAINABILITY
It is important that all stakeholders, including financial advisers, understand what really drives sustainability in income protection products.
To support and enable better product design and more sustainable outcomes, the Disability Insurance Taskforce of the Actuaries Institute (Taskforce) developed clear principles for the redesign of these individual disability income insurance (IDII) products in the reports, ‘Provisional Findings and Recommended Actions for Individual Disability Income Insurance' and 'Reference Product Individual Disability Income Insurance’. It also recommended that insurers strengthen their product governance by conducting sustainability assessments against the reference product.
And while these products will continue to evolve over time, insurers have taken those first steps towards more long-term sustainable products, albeit with varying degrees of adherence to those sustainability principles and the taskforce reference product.
It is now essential that advisers grasp the opportunity to understand these new income protection products, in the interests of ensuring their clients are protected and their needs are met.
With new products in market, it’s challenging to compare and too early to accurately predict the long-term price certainty of these products. So how can financial advisers compare and assess the sustainability of one product against another? One way for advisers to consider this is to learn from the taskforce’s approach to sustainability.
The taskforce identified that certain product features, more than others, have contributed to the unsustainable position the industry found itself in. In summary, the taskforce identified these product features as key drivers of sustainability likely to put upward pressure on pricing:
- Income replacement ratios – the taskforce identified higher income replacement ratios had been a driver of high claims experience. TAL’s internal research following an in-depth review of past claims indicated 92% of claimants were back at work within two years of claim.
- Products with higher replacement ratios over the long term may introduce sustainability risk and therefore pricing uncertainty;
- Total disability definitions – to design for more sustainable outcomes, definitions should be clear and objective to support claimants when they have no capacity to work;
- Long-term controls – for loss minimisation are important when looking at long benefit periods. The taskforce included multiple design features in the reference product across disability definitions and income replacement ratios to manage sustainability risk of longer-term benefit periods. It is critical advisers understand the need to consider these long-term controls when comparing products, otherwise without strength of these controls, sustainability risk heightens;
- Benefits that support return to work – partial disability benefits are common amongst income protection products in market, to help claimants on their journey back to the workforce. The taskforce highlighted the importance of these benefits in supporting the return to work, without the design incentivising the customer to remain on claim when they are well enough to work.
These sustainability considerations, alongside existing product research practices, will help financial advisers identify how to assess the new range of income protection products. It’s critical that advisers consider whether their client really needs the many features and benefits of a given product versus the greater certainty on price in the long term which may be offered by another product.
THE ROLE OF ADVISER EDUCATION
Almost 90% of those surveyed agreed advisers need help to better understand insurance pooling, and the importance of considering the needs of those on claim, but also those in the risk pool paying premiums.
Life insurers have an important role to play in supporting financial advisers through education, including what to look out for in products if they are considering long-term affordability and fairness of products for their clients.
The TAL Risk Academy is seeking to play a central role in this education journey for advisers by providing product-agnostic classes to help them navigate this transition.
An adviser’s best interests duty requires the advice they provide be likely to put the client in a better position. A key question advisers will naturally ask themselves, therefore, is what are the client’s objectives around risk management.
Is the client cautious and safe, and wanting the product that gives them the greatest protection in any given situation? Or are they happy to accept a level of risk in their strategy, understanding that there will be circumstances where they may not have cover but perhaps a lower and more sustainable price?
There has been a view over time that best interest equals best product, but ‘best’ is subjective to the author, and opinions can vary greatly from adviser to adviser, even when using similar research. In reality, ‘best interests’ focuses on the advice – does the advice meet the client’s objective, and from there it can be considered, does the product facilitate that advice?
Understanding the new products will mean advisers can better fulfill their role of meeting a client’s core need and providing better advice, while at the same time contributing to a more accessible financial advice sector for more Australians over the long-term.
STRONGER TOGETHER, FOR A BETTER FUTURE
Life insurance is a competitive industry, but our industry as a collective also needs to ensure that product design aligns within the clear parameters and guidelines that have now been set. Otherwise, we risk the same problem occurring again.
Advisers also have an important role to play here, by making sure their clients are aware of future pricing risks that come with products heavily laden with features and benefits that move away from their core need and the guidance issued by the taskforce.
Together, insurers and advisers should seek to ensure those customers in the risk pool who are fortunate enough not to ultimately claim can be confident that the product they are paying for supports long-term, affordable price stability; just as those who do ultimately claim should be confident that they will receive appropriate benefits that meet their needs and support them.
Constant price increases are good for no one – certainly not customers – and it will take a collective effort between insurers and the advice sector to ensure financial advice – and quality products – remain attainable for a larger portion of the community through these changes and the changes to come.
Aaron Newman is general manager, individual life product at TAL.