Direct life insurance – a friend or foe of financial advisers?

25 February 2013

We can buy everything online – clothes, shoes, cars, holidays – so it is only natural that the direct life insurance channel is becoming part of the online tsunami. How threatened should financial advisers feel?

No 20-year-old student living in the first world can imagine going through university without Google or Wikipedia.

People are so used to all the information they desire being one click away that they cannot remember how the world functioned without computers and internet.

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Email has replaced letters, iTunes replaced CDs, paperless offices are here thanks to cloud computing, retailers are entering a state of panic because of online shopping, while our phones have become our personal assistants.

Because we’ve moved our lives online where all the information is at our finger tips, recent years have also seen people adopt a do-it-yourself attitude to many things previously deemed too complicated for DIY, including personal finance and investing.

It is no accident that self-managed superannuation funds, for example, are the fastest growing segment in the superannuation industry; neither is the fact that the direct life insurance channel has been growing at a rapid pace.

In fact, a recent report published by Plan for Life predicted continued rapid growth in the direct life insurance channel, with the sector to account for 40 per cent of new insurance business (or $2 billion annually) by 2021.

Direct business already represented a quarter of life insurance sales in 2010-11.

“The reality is that life insurance remains largely sold rather than bought and successful players are using sophisticated marketing techniques to reach their clients,” said Brad Clarke, head of insurance strategy at Oliver Wyman – a Sydney-based consulting firm which commissioned the Plan for Life report.

“Digital adoption and technology advances as well as scaled and remote forms have assisted and will continue to present opportunities.”

The direct life insurance sales boom has even caught the attention of the Australian Prudential Regulation Authority (APRA), which used its annual report to express concern about directly marketed products.

“These involve marketing of life insurance products directly to the public through call centres, the internet and television advertising, often at high prices,” the report said.

“Many of the concepts in this area are unproven and the market is becoming crowded, which will put pressure on profitability,” it said.

“APRA has also been in discussions with the Australian Securities and Investments Commission (ASIC) over directly marketed business to ensure consistent understanding and coordination of scrutiny in this area.”

Despite customers doing their research when it comes to insurance, many are not equipped to determine how much is enough.

Is this where the risk adviser’s value lies?

A KPMG and Financial Services Council study looked at average sums insured for all types of policy across different channels, and found that customers taking out insurance through an adviser had the highest average sum insured, and therefore likely claims, with the lowest sums insured coming from customers taking out insurance direct.

“This epitomises the value of advice,” said CommInsure general manager for advice, Tim Brown in a recent column published in Money Management.

But most of the industry sees direct life insurance as complementary to the advice channel rather than something which might threaten it in the future.

The direct market is operating in a different client segment to the advice space, according to Sean McCormack, head of advice product at MLC Insurance.

“The bottom line is that a lot of the customers that come direct don’t want to see an adviser and many of them are not the customers advisers want to deal with either,” McCormack said, adding the insurance industry needs to recognise that the customer decides how they will buy cover.

“Some customers want to go direct, others would like to go through their bank branch, while others go through an adviser.”

It is worth noting, though, that all big four banks – as well as Zurich and TAL – offer life insurance products directly marketed to consumers.

But many would argue that, by using marketing tools, financial advisers could piggy-back off huge TV advertising created around direct insurance and promote the value of their own services.

They see this channel as a potential “trigger” for advice – an opportunity to articulate the value and the benefit of obtaining an insurance product through financial advice.

“In the longer term, many of these customers will seek the advice of a financial planner as their needs change and transition from the direct insurance products to the products and solutions available by retail insurers,” said Michael Rogers, director of retail wealth protection at AMP.

For Craig Meldrum, head of financial advice at Australian Unity Personal Financial Services, direct insurance is a challenge, but it is getting the message about risk into people’s minds.

“But it is much more expensive and the value of dealing with a face-to-face specialist or a financial planner in that regard needs to be promoted,” Meldrum said, adding that knowing insurance products inside-out is a risk adviser’s greatest asset.

“If there’s one message we need to get out there, it is that if you are after a risk solution then go and see a qualified person, don’t just pick up a phone and go direct.”

Due to the direct market and superannuation, more Australians today are aware of life insurance than at any other time in our history.

“That is a good thing for everyone, including advisers,” said Brett Clark, chief executive officer of retail life at TAL.

Clark said the role the insurance companies play involves creating products and meeting clients’ needs on all fronts – group, retail and direct.

Joint effort to combat underinsurance

Slowly but surely, it seems, life insurance industry channels are making progress as far as underinsurance is concerned.

In fact, the underinsurance gap is seen as narrowing, according to Rice Warner’s Underinsurance in Australia Report 2012, which estimated the size of this problem at $2166 billion as of June 2012.

That is a 30 per cent reduction from June 2010 ($3073 billion), while disability and income protection products have also made progress.

However, although the underinsurance gap is reducing in size, the median level of life insurance still meets only 66 per cent of customers’ basic needs and covers around 40 per cent of what is considered an adequate amount, the report states.

Rice Warner predicts both insurers and superannuation funds need to switch to making tailored insurance offers to customers.

“Apart from individual detriment, underinsurance also comes at a substantial cost to the government,” said Rice Warner principal Richard Weatherhead.

“Currently the total cost to the Government of life underinsurance across Australia is calculated to be $76 million per year, as publicly-funded social security benefits fill the gap.

“Meanwhile, the situation regarding disability underinsurance is even more serious, costing the Government nearly $1.5 billion per year,” Weatherhead added.

This problem is one of the biggest challenges facing the industry because insurance is sold, not bought.

Michael Rogers from AMP agrees, adding underinsurance has been a topic for too many years.

To solve this issue, he says, the financial services industry needs to unite, build consumer awareness and offer education about the need and relevance of personal insurance.

“This needs to be communicated as part of the broader message around the importance of Australians taking an active role in their financial future,” Rogers said.

“The advent of scaled advice will help to address underinsurance by providing Australians with affordable, relevant and targeted insurance advice.”

One of the biggest initiatives aimed at educating consumers about the value of adequate life cover is LifeWise – a campaign launched by the Financial Services Council and funded by insurance companies.

Its website contains educational material about insurance, the risks Australians face in everyday life and the consequences of not protecting themselves financially, in addition to cover calculators and how to access cover.

However, the industry is also very aware that insurance is sold – not bought – which makes life that much harder for risk advisers.

“With investment advice it’s easy to talk about how much tax a planner saved, or calculated this much wealth that’s going to be created using this asset allocation after this many years,” Meldrum said.

“But risk is one of those emotional topics and requires a completely different skill-set,” he said.

Is “selling” a dirty word?

The skill-set Meldrum is talking about revolves around selling. Before the so-called insurance agents evolved into what we now call risk advisers, salesmanship was one of the key requirements, but also something which gave the industry a bad name.

With increased focus on education and professionalism in the industry as a whole, the bad image slowly started to fade.

The CoreData financial planning shadow shop exercise from 2012 found that poor perception wasn’t the main barrier to clients taking up advice anymore; it was cost.

Meldrum said focus on education is solving many problems in the advice industry, but so-called soft skills are still key.

“Underinsurance is rampant and I find that the ability to communicate with clients and gain that commitment is not a skill-set that many younger financial planners come across easily,” he said.

CoreData head of advice, wealth and super, Kristen Turnbull, said advisers with the ability to “enthuse the clients” were much more successful in getting client commitment during the shadow shop exercise, than those who focused solely on ticking the boxes.

“Planners who were not able to [sign a client] had come across as more mechanistic and focused too much on the compliance side; they tend to struggle to engage the client,” Turnbull said.

“So while those compliance elements are important to tick off, it can’t be too much of a focus, otherwise the client feels that they won’t actually be able to build a relationship with a planner.”

Younger financial advisers particularly avoid being associated with the term “sale”, according to Synchron director Don Trapnell, who claims this particular group lacks in soft-skills.

Synchron is now providing training in sales skills through its NextGen program aimed at new planners.

MLC’s McCormack said the best advisers he knows are exceptional at sales disciplines and techniques.

“The days of door-knocking are long gone,” he said.

“However, at the end of the day they are selling their advice services and in order to be successful at doing that, you need an element of sale as well.”

McCormack’s colleague – executive general manager of advice and marketing at MLC, Richard Nunn – said engaging inactive clients would be one of the biggest challenges facing advisers in the post-FOFA world.

Nunn told recently Money Management MLC had been focusing heavily on helping advisers engage some of the clients they may not have spoken to more recently, particularly those interested in transactional advice, rather than holistic.

MLC has launched a program called MLC Engage to help its advisers tackle this issue.

Specialising in risk

For most of the financial planning industry, life insurance advice is part of a broader offering, complementing investment advice, estate planning, tax services, superannuation and so on.

Many financial planning businesses and dealer groups have in-house accountants and lawyers, creating one-stop shops for their clients.

So how smart are those businesses which focus solely on risk advice?

According to John Birt – who consults and values financial planning businesses through Radar Results – specialisation is a very smart move, though it might be tough thing to do.

“If you’re giving broad advice to everyone, then suddenly turn around and specialise – it can cut into your income,” he said. 

“For the first two, three or four years you might find it really hard because you’re knocking back investment clients because you’re focusing on risk clients.”

Be that as it may, Synchron’s Don Trapnell, whose dealer group derives 80 per cent of revenue from risk, is seeing a resurgence in risk-focused practices.

“There is a flight to risk from financial planners or advisers who had a balanced portfolio of business in the past,” he said.

The flight to risk might be a direct result of FOFA and the global financial crisis. Traditionally, holistic financial planners dabbled in life insurance, but generally left it to the specialists.

The GFC, however, resulted in many planners having to diversify their income streams – and risk seemed like a logical solution. This trend saw many dealer groups increase the proportion of revenue they receive from life insurance, Trapnell said.

TAL has recently re-branded its financial advice arm Affinia, which Brett Clarke plans to make a number-one provider of risk advice in the country.

Apart from Affinia, TAL deals with a number of advisers in the market who run risk-focused practices which are successful in their own right, Clarke said.

“In some cases they deal with quite complex risk needs, which require a deep skill-set and a deep understanding of the industry,” Clarke said.

Therein lies the value of risk advisers, for they understand the products to a deeper degree of detail, have deeper relationships with insurance providers and know the industry back-to-front.

Sean McCormack said holistic financial planners provide adequate risk advice, but likened the two services to an Olympic event.

“You can have a decathlete who does their 10 events, one of which might be the long jump,” he said. “But the individual long-jump gold medallist will outperform the decathlete in that particular discipline every single time.”

Specialisation does bring advantages. John Birt said one of his clients will pay three times recurring revenue for a book of investment clients, while the value of risk client books sometimes went up to four times recurring annual revenue.

But advisers need to be able to explain their value.

“If your value proposition is that you’re a risk insurance specialist, than you have to be able to explain how you provide more value than a holistic financial planner that does risk as part of their offering, but not all of it,” McCormack said.

“It comes down to your value proposition, how you back it up and how you show it to your client; there is no point in being a risk specialist if you don’t add any more value than a holistic financial planner does.”

Profitability issue

The life insurance industry keeps achieving tremendous growth (see Table 1 and Graph 1), but there are pockets of it that are suffering and potentially facing profitability issues. One of those pockets is individual income protection.

The APRA Quarterly Life Insurance Performance Report (see Graph 2) points to consecutive losses in the space, which might explain why life insurance premiums were tipped to rise.

Problems arising in the income protection space might be a result of unsustainable premium pricing.

Some insurance companies set a price for one year, and increase premium rates in the future once they’ve got the policy holder on their book.

Over the past six quarters the industry lost around $374 million in income protection, and the industry is seeking to compensate for this loss, McCormack said.

“We’ve seen profitability in some lines of business come under extreme pressure in the insurance industry,” he said.

“We believe in setting premium rates that are fair and reasonable and sticking with them over the course of an economic cycle.”

The loss of profit is a result of years of added benefits and reduced premiums, according to Zurich’s Philip Kewin.

While Zurich took a similar approach to pricing as MLC, Kewin said it had never competed on price.

“We’re not the cheapest, we never will be – we’ve always maintained that you need a quality product and a sustainable premium that’s good value for money,” he added.

Making life easier

All insurance companies strive to make high-quality insurance products and they all claim theirs is the best.

Due to the very competitive market, recent years have seen tremendous innovation in terms of product design, so the focus has slowly shifted to creating efficiency for advisers.

BT Life developed a heightened focus on efficiency and service in the market.

“Areas where we’ve driven efficiencies are electronic underwriting engines and access to data by financial advisers,” said Scott Moffitt, national life insurance product manager at BT Life.

With the help of technology, the trend has seen insurance companies recently develop paperless applications and telephone claims services.

“There’s definitely a lot of development and activity that’s less around the terms and conditions of products, and more around trying to balance efficiency through the application process, and at the same time making sure there’s still a level of personalised service, particularly at claim time,” Moffitt added.

Zurich has also done quite a bit of work around trying to figure out how to make life easier for financial advisers.

Kewin said the company’s adviser sentiment surveys identified the fact that they’re still least positive about the regulatory environment, with most saying they will need to be more efficient.

Zurich identified technology – especially mobile technology – as a main driver of adviser efficiencies.

“Honing in on that, we’ve focused a lot of our efforts around not so much the bells and whistles that go into the product that aren’t going to make an adviser any more efficient, but we’ve focused on efficiencies around dealing with us,” Kewin said.

“We’ve seen a greater take-up of tele-underwriting, as most advisers realise they can not only cut the time they spend on an application in half, but also save time from a compliance perspective.”

Developing iPad applications for risk advisers seems to be the on-the-go solution for insurance companies, as well as providing flexibility around premium and commissions structures. 




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