In part one of a two-part article, Col Fullagar will consider an alternative way to achieve Trowbridge's suggested reforms for life insurance companies, and in so doing similarly achieve a compelling flow on advantage for the risk insurance advice process.
The relative merit of perception over reality is a discussion topic not dissimilar to a merry-go-round at an amusement park; fun to be involved in but the risk is it takes you nowhere.
Questions such as "Is it better to be something or be perceived to be that something?" and "Does it matter because perception drive reality anyway?" would no doubt have kept Socrates and Aristotle going well into the night; except for one small detail, the former died 15 years before the latter was born.
But bringing the issue back from ancient Greek philosophy to 21st Century Australian financial services, the crucial question becomes, is the industry reasonably represented by the relatively poor perception it has laboured under for many years and then even worse press it has been receiving of late or is there a brilliant reality hiding under a bushel craving the light of day?
Of course, there is a third alternative i.e. the conduct of insurers differs and whereas the reality of some may be prejudiced by the perception, for others this is less the case.
The Trowbridge Report (March 2015) made various recommendations designed to influence the future direction of the life insurance industry in Australia, one of which was the development of a life insurance industry Code of Practice which would have, in part, the following objectives:
- Promote better, more informed relations between insurers and their customers;
- Improve customer confidence in the industry;
- Provide complaint and dispute resolution mechanisms; and
- Commit insurers and other insurance professionals to high standards of customer service, including in relation to claims practices (Trowbridge, page 60).
Lofty, yet worthy ideals, with the first two being about perception and the last two, reality.
Code of Ethics and Code of Conduct
Now, whilst a Code of Practice may sound like a great way to "improve trust and confidence in the industry" (Trowbridge, page 15), a healthy skepticism may be warranted bearing in mind the existence of the Financial Services Council's (FSC's) Standard 1, set up in November 1999 and revised in 2001 and 2007.
Standard 1 is headed up as a "Code of Ethics and Code of Conduct", which might reasonably be mistaken for a Code of Practice equivalent, that its member organisations including life insurance companies are required to follow.
Standard 1 states in part:
2.1 FSC members will conduct themselves with integrity and in a manner consistent with fostering and maintaining the good reputation of their industry and refrain from any conduct that may discredit their industry.
2.3 FSC members must be fair and not allow conflicts of interest or bias to influence their actions. That is, to ensure that:
- Client and investor interests are paramount in all decisions and transactions;
- The execution of client requirements come before those of the member; and
- Their conduct contributes to markets operating in an efficient and informed manner.
2.4 FSC members must carry out business with due care, competence, and diligence.
2.5 FSC members will strive to ensure people acting on their behalf are properly trained and perform their duties and obligations to a high standard of professionalism.
Standard 1 certainly promotes similar ideals to Trowbridge but forgiveness might be necessary if some felt its existence has had little effect over the last 16 years in achieving the Trowbridge ideals.
Effectiveness of a new code of practice
Following on from this, the same some might ask "Why would a new Code of Practice be any more effective?" and "Do we have the time to wait for a Code to bring about the requisite change in practices and perception?"
If Trowbridge's ideals are deemed worthy, what is required is a way to quickly, effectively and comprehensively move life insurers in that direction and, it is respectively suggested, that will only occur when there is a much increased imperative for the insurers to so move.
Enter the attack on traditional wisdom which will start by way of a flanking manoeuvre.
Consider for the moment risk insurance product development over the last 25 years; ponder on the number of people and quantum of financial resources that insurers have enthusiastically thrown at this matter and ask whether the driver for this has been a purist customer focus or a zealot-like desire to capture adviser hearts and minds and, in the process, new business production.
For the sake of expediency, let's go with favouring the latter over the former.
The desired road to new business production by compulsion begins with the insurer's products being available for adviser recommendation i.e. by entry onto licensee approved product lists. If financial incentives are removed from the equation, entry to these lists is predicated on the perceived merit or otherwise of the risk products on offer, with merit being measured by way of risk insurance research ratings.
The point is that material levels of insurer attention are gained when, and generally only when, there is a financial incentive coming out of new business production. This statement, whilst possibly over-simplistic yet not overly incorrect, should not be read as a criticism.
The reality of business in large part is rightly that there needs to be an alignment of corporate attention and new business driven profit potential.
Thus, the strategy of the flanking manoeuvre mooted above is to recognise the importance to a life insurance company's imperative-barometer of having its products available for adviser recommendation.
Therefore, if Mr. T wants to achieve the ideals set out on page 60 of his report, the fastest, most effective and comprehensive way of doing this may not be via a Code of Practice but by having the achieving of these intrinsically and directly linked to new business driven profit potential. Or to put it more simply, if an insurer is to have its products available for adviser recommendation, it must behave in a way that will further the ideals trumpeted by Trowbridge.
The first break with traditional wisdom, therefore, is that it is the rating of the insurer that opens the gate to the approved list, rather than the rating of the insurer's products.
The second break with traditional wisdom follows immediately on; having earned the right to be included on the approved list, all the risk insurance products of that insurer become available to the adviser for the purposes of making a recommendation.
Whether or not an adviser recommends a particular product of a listed insurer will be dictated by the fact-finding and analysis process leading up to the recommendation being made; which, strangely enough, seems appallingly reasonable, logical and appropriate.
These two breaks with tradition would in turn break the nexus that has developed over the last 25 years whereby advisers, in large part, have been led to believe that only the "best" products i.e. those with the highest risk research rating, are worthy of being recommended for, to do otherwise, would expose the adviser to the risk of litigation if, at the time of a claim, the client discovered a more "generous" product had been available.
Whilst the above may often be the case, it is far from always the case; ask any pending insured who is unable to gain access by virtue of insurability issues to the "best" products.
The recommendation is, and always has been, contingent on appropriateness, not bestness!
If the above traditional wisdom breaks are accepted for now, the question follows: "If an Approved Insurer List is based on the behaviour of insurers, surely there will be an unacceptable time lag while an insurer behaves and that behaviour is assessed?"
The point is a fair one but there is a highly practicable alternative to waiting and assessing, and that is to enable insurers to make commitments to behaving in a particular way with these commitments either being ahead of the behaviour or, potentially, in line with behaviour already occurring.
Behavioural commitments would be drafted by the licensee and, on the basis of the commitments the insurer is able and/or prepared to make, entry to an approved list can be granted.
To ensure the industry is not flooded with a chameleon of commitments, there might be merit in adviser representative bodies or groups of licensees developing and agreeing to shared commitments.
The sting-in-the-tail for the insurer is, of course, if they flippantly or unthinkingly agree to commitments but subsequently fail to live up to them and these breaches are of sufficient severity, entry to the approved list can be suspended or ended.
Now it gets exciting because suddenly there are serious insurer imperatives:
Firstly there is the loss of new business production coming out of a suspension or termination from the Approved Insurer List, and not just for one licensee but for all licensees sharing the same criteria; and
Additionally, the potentially greater issue of the flow-on brand damage as advisers, clients and possibly media become aware of the suspension or termination.
If Trowbridge was looking for increased imperatives to encourage insurers to move in a particular direction, he may just have found them.
The strategy so far and next steps
Pulling the strategy so far together:
- An Approved Product List becomes an Approved Insurer List;
- Entry to a list is driven by the behavioural commitments of the insurer;
- All products of listed insurers are available for adviser recommendations; and
- Recommendation of a particular product of a listed insurer flows out of the advice process.
The next step is to establish the basis of the behavioural commitments.
Fortuitously, this has been provided on page 60 of the Trowbridge Report, and set out at the start of this article.
Were these customer-centric ideals to become the reality and recognised as such, it would be difficult to imagine that the popular perception of the life insurance industry would not enjoy a rapid rise in a northerly direction.
The last step, apart from certain housekeeping matters, is to decide on the behavioural commitments that would need to be made and adhered to such that Trowbridge's ideals would become that reality.
Space will dictate that the suggesting of actual commitments will be held over for part 2 of this article but moving past this for the moment, housekeeping questions can be considered.
How will commitments be decided upon?
The ones to be suggested arise out of real life situations that have been accounted, generally on multiple and often on frequent occasions.
In all cases, customer dissatisfaction and disadvantage has resulted with "the customer" in this context being the life insured/policy owner and/or their financial adviser or otherwise representative.
In general terms, two crucial criteria would be:
- The commitments should be designed to "stretch" the insurer; yet
- If reviewed by the ubiquitous "reasonable person", the response would be that the commitments are in fact more than reasonable.
How should commitments be drafted?
The commitments have been written in the form of conduct criteria with background commentary included.
How many commitments should there be?
In theory, there can be any number but 20 will be suggested.
Is there merit in having tiered levels in the Approved Insurer List?
Bearing in mind the number of commitments, having tiered levels holds some merit.
Once again, in theory, there can be any number of tiers; two are suggested but three might work just as well.
The two suggested are:
- Approved status — insurer agreement to the first 10 commitments is necessary for entry onto the Approved Insurer List; and
- Priority status — insurer agreement to all 20 commitments results in the insurer gaining a priority listing.
If three tiers were used, bronze, silver and gold status might be used with commitments divided up in an appropriate way.
Can flexibility be provided for?
Yes. An insurer can, at any time choose to drop back or even drop out, if meeting the commitments is proving onerous.
Alternatively, an insurer at an approved level can at any time apply to upgrade their listing by committing to the additional criteria. Similarly, bronze could move to silver and/or gold.
Also, commitment criteria can be amended or added to if circumstances warrant a change.
How would monitoring of insurer performance occur?
Creating administration monoliths should be avoided at all costs.
A simple, yet effective way to monitor performance would be adviser feedback through a central source e.g. someone within the licensee or an external organisation.
As soon as trends or sufficiently serious isolated events occur, the central source would report to the relevant licensee(s) and remedial action would ensure.
In this way, monitoring is in dynamic real-time rather than on a regular basis; further simplifying the administration process.
The scene is set and the spectre of breaking with traditional wisdom has been raised.
The questions remain, can Trowbridge's ideals become a reality and can this happen sooner than many would expect and, picking up on the second issue detailed at the start of this article, in so doing, will there be a compelling flow on benefit to the risk insurance advice process and, if so, how will this occur.
In order to respond to all these questions, part two of this article will follow in the next issue of Money Management.
Col Fullagar is the principal at Integrity Resolutions Pty Ltd.