Risk insurance defies gravity

The risk insurance industry has defied all odds and continued to experience strong growth amid economic uncertainty. However, that is not to say the sector has managed to put a dent in underinsurance levels, writes Benjamin Levy.

The risk insurance boom is continuing unabated.

Recent DEXX&R figures on risk insurance sales to September last year showed increases of more than 7 per cent for individual lump sum risk business, disability sales growth of 12.8 per cent, and a 15 per cent jump in new sales for group risk.

Risk insurance has been gunning it for two years. Plan for Life figures from last year showed that inflows into the total risk market leaped 13.4 per cent in the 12 months to September 2010.

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This stellar trajectory in risk insurance is coming at a time when financial advisers are under pressure elsewhere. 

The financial planning job market experienced its first year-on-year monthly falls according to recent figures from eJobs Recruitment.

The number of ads fell more than 10 per cent since January last year.

Regulatory changes, increasing compliance costs and the share market are inhibiting employment growth in financial planning, according to the eJobs survey.

“It is an industry which has gone – and is still going through – a lengthy and very difficult period of reduction, redevelopment and renewal,” said Trevor Punnett, eJobs managing director and financial planning recruitment manager.

The big four banks are also reducing their head count in retail banking. Thus far, ANZ plans to slice 130 roles, Westpac has cut 560 jobs, while NAB signalled 135 jobs will go.

Following the merger between Asteron Life and Suncorp Life and Superannuation, Suncorp Life decided it was too early to predict what might happen on the jobs front – amid continuing challenges in the market

While wealth management is so far untouched, the job cuts are leading to wider unease. The Finance Sector Union expects the sector to come under scrutiny because the ability to make money in wealth is harder than in the past, according to national secretary Leon Carter.

With job uncertainty in the wider wealth management space coming up against the two-year boom that risk insurance is experiencing, risk advice may once again become the centre and powerhouse of financial planning.

Kenyon Partners has seen an unprecedented amount of interest from potential buyers of risk insurance businesses.

A risk insurance business is almost recession-proof, because insurance premiums are usually the last thing to get dumped by a consumer, according to managing director Alan Kenyon.

It’s also much easier for a financial planner to service a risk client than a full wealth management client, making a risk practice even more attractive, he adds.

Risk practice Fife Financial Services has seen 100 per cent revenue growth every six months.

Despite the practice being only two years old, its growth had surpassed revenue projections, says director Nick Fife.

The growth in adviser risk insurance is being driven by a number of factors.

As accountants, lawyers and other professionals become more aware and educated about the need for insurance, they encourage their clients to meet with risk advisers.

Direct insurance companies in Australia have also begun playing a more aggressive role in order to snatch potential customers from the underinsured market.

They are attempting to match their overseas competitors, who hold up to 40 per cent of the risk market where the level of risk insurance is much higher.

The side-effect has been to trigger more people to consult financial planners about taking out insurance, leading to a corresponding rise in advice-driven risk, Fife says.

Greater technological support for financial advisers is also leading to increased business.

As more insurance applications are moved online, it becomes more efficient for customers, leading to more interest than risk practices would otherwise see.

The overall effect of all this growth has seen a positive attitude among risk advisers despite wider industry changes.

A Zurich Financial Services survey this month found that overall risk adviser sentiment was moderately positive when considering consumer demand, sales volume, regulation, future sales and long-term viability for their practices.

Colin Morgan, chief executive of Zurich’s Australian life and investments business, said it was reassuring that despite the underinsurance problem, risk planners remained enthusiastic and motivated about providing insurance.

Churn

The immense growth in risk is leading to charges from life insurance organisations that financial advisers are churning clients through new risk policies.

The Financial Services Council (FSC) announced last year during its annual conference that it would be acting to halt the churning of life insurance.

Using strong words that caused some consternation in the industry, FSC chief executive John Brogden said the Council would develop a binding standard to bring a stop to the “abhorrent practice” of churn.

Discussions with the regulators permitting, some of the key reforms will include banning the relaxing of standard underwriting processes for a policy transferred between insurers, and the establishment of a financial adviser responsibility period, with the clawing-back of all commissions if a policy lapses within one year.

The policy isn’t without support. Suncorp Life chief executive Geoff Summerhayes recently suggested that the number of new applications that are churn-driven may be as high as one in three.

Such a model sent a negative signal to consumers and was unsustainable, Summerhayes warned at the FSC conference.

“Surely the viability of our sector rests in making our products and services appealing to the 45 per cent of Australians with no life cover, rather than churning and cannibalising our existing customer base,” he said.

But the FSC’s approach has ruffled some feathers.

Patron Financial Advice general manager Robert McCann said trying to introduce a binding standard for insurance would push advisers to the brink and restrict consumer choice, labelling it “excessive third party micro-management”.

“To red-flag the issue of retention, label it as churn and then blame it on financial advisers is irresponsible and ill-informed,” he said.

Both Patron and risk licensee Synchron said the proposal would put onerous pressure on the income generation of the financial adviser.

There was a perception that financial advisers were being penalised because of the churners but the issues weren’t being resolved, according to Asteron executive manager of national sales Mark Vilo.

Financial advisers churning their client books aren’t doing the right thing by the client, Fife argues.

“As an industry, we should be stamping out those advisers straight away,” he says.

There is always a certain number of clients changing products for different reasons, but if that is any more than 10 per cent of a client book on a yearly basis, then those financial planners are not doing it for the client, Fife says.

Brogden says the policy would improve trust in the life insurance industry, improve the affordability of premiums and help financial advisers meet the statutory requirement to act in the best interests of their clients.

However, Brogden also admitted that there was a very small number of financial advisers involved in the practice.

Aaron Zelman, associate partner at risk insurance advice group Priority Life, says that heated arguments around churn are illusory.

"It’s not really polarised because it’s not even such a debate, because everyone says churn is bad,” he says.

Where the problem lies is deciding exactly how bad it is.

Managing director of DEXX&R Mark Kachor agrees that churn is partly responsible for recycled new risk business, but says it has always been a part of the life insurance business.

“A lot of the products are broadly similar now, so the only main significant incentive is that the adviser gets new business commission all over again,” Kachor says.

Tellingly, the majority of advisers still select upfront commissions, even though the option is there to choose level commissions.

“But that’s been the case for 30 years,” Kachor says.

Chief distribution and marketing officer for AIA Australia Damien Mu says churn is not a big issue for the company.

“The vast majority of advisers that we deal with do the right thing,” he says.

Part of the problem fighting churn is the ability to identify it. Many clients are moved from one insurance provider to another all the time, because of a change in their circumstances, or an improved risk product.

So deciding what constitutes churn is difficult, while gathering a consensus around it is near to impossible.

John Ashton, AMP head of product on sale, retail wealth protection, says the constant and consistent upgrades to high-calibre products is what is really behind financial advisers moving clients.

“If they don’t maintain contemporary products, and they allow themselves to slip behind the market too far or for too long, we almost compel an adviser to go out there and compare what’s in the market and what’s appropriate for their client,” he says.

The Association of Financial Advisers (AFA) also believes that product switching in response to upgrades is being falsely labelled as churn.

The AFA might have a better idea than most how much switching is going on because of product development.

“Some of the conversations and some of the percentages being spoken around the marketplace over the last 12 to 18 months are speculative, and one person’s churn is another person’s better advice,” says AFA chief executive Richard Klipin.

Financial adviser support

With so many similar products and features on the market and constant upgrades producing a glut of choice for life risk customers, financial adviser support has become increasingly important for insurance companies to try to differentiate themselves from their rivals.

OnePath launched an online application at the end of January, allowing financial advisers to see client and policy information for in-force policies in real time.

The extension of their application tracking system was in response to increasing financial adviser demand for faster technology solutions.

Suncorp Life announced last month the creation of an “engine room” for product, service development, and delivery. The unit will help Suncorp support the independent financial advisers (IFA) sector, the company stated.

While one channel will focus on direct distribution, the other channel, to be headed by former Asteron executive manager Jordan Hawke, will focus solely on financial adviser distribution and support.

“The IFA market remains critical to Suncorp Life’s business as we continue to build and sustain relationships with IFAs through our Asteron Life brand,” Summerhayes said.

Mu makes it clear that its support for financial planners is what is creating a positive result for the company.

AIA is trying to focus on creating a seamless, speedy insurance application to encourage its financial advisers to stay with the company.

AIA needs to make sure it makes it as easy as possible for its partners to do business with it, Mu says.

Investment Trends’ 2011 planner risk report found that financial adviser satisfaction is critical to retaining business.

More than 75 per cent of financial planners rated their insurance provider good or very good, yet 57 per cent of planner respondents said they either switched insurance providers in the last 12 months or were looking to switch within the next 12 months.

Insurers have also moved beyond simply supporting the selling of a product, and now help financial advisers move into different markets as well.

Business insurance is one key area that some advisers have moved into, supported by the life companies wanting to broaden their hold on the market.

CommInsure recently introduced a range of new courses into its Risk Sales Academy to increase adviser insurance sales.

It also implemented a new financial planner support website, increasing the amount of data and marketing material online.

Ashton believes the last 18 months have been more about providing services to financial advisers rather than making product upgrades.

"The issue isn’t on working on everything independently of each other.

"We’ve determined that all of those things combined are the offer that we make, so we are working really hard on making sure that the relationship component makes it easy for advisers to work with us,” he says.

Good support of a financial adviser can make or break an insurance relationship.

With risk comprising 60 to 70 per cent of the revenue of a practice, financial advisers must be satisfied with the level of support and understanding they get from insurance companies.

The right support allows an increased level of training for junior planners in a business, and an increased level of compliance, which translates to an increased level of business all round.

“Having the right licensee with the right relationship with the adviser is everything,” Fife says.

Who is to blame for underinsurance?

Despite the close relationship between advisers and the insurance companies, they are failing to make a significant dent in the level of underinsurance in this country. 

The gap in life insurance in Australia expanded from $540 billion to $927 billion between 2000 and 2010, according to a recent report by global reinsurer Swiss Re. It was the fifth largest increase in the world.

According to Rice Warner figures, the total population is underinsured by $3.1 billion.

The industry cannot rely on the attractiveness of products to eat into underinsurance. There has been a renaissance in insurance products over the last five or six years to answer client needs, but take-up rates addressing underinsurance are still woefully small.

The number of consumers who are adequately insured is under 10 per cent, according to some figures.

The fact that underinsurance has continued to rise despite efforts to stem the problem has led to questions of whether the issue is also a failure of communication.

Research conducted for the AFA last year has found that advisers and life insurance companies are failing to demonstrate the value of life cover to the majority of Australians.

Past research has shown that financial advisers who communicate well on financial planning generally become indispensable to their clients. What advisers need to focus on now is transferring those communication abilities to risk insurance.

Speaking at a roadshow last year, CommInsure general manager of retail advice Tim Browne warned that talking about the issue of underinsurance was becoming a lost art.

Financial planners need to arm themselves with facts to dispel myths that insurance companies never pay out, and that insurance is too expensive, Browne said.

The Swiss Re report found that more than 50 per cent of respondents expected to pay more for life insurance, according to head of life and client markets Neil Sprackling.

“This is an opportunity for the life insurance sector to reach out and provide greater clarity to consumers on the relative cost and value of pure life insurance,” he said.

Writing in Money Management, CommInsure’s Browne said that numerous statistics made it clear that the industry must do more to educate the nation on the importance and value of appropriate insurance cover.

The problem of underinsurance is a particularly cultural one. Financial advisers are fighting against the happy-go-lucky nature of Australians, who believe they will never get injured or fall ill.

That attitude is reflected in the figures. Trauma protection has a penetration rate of less than 3 per cent in this country.

There are always going to be people who think they don’t need advice, according to Ashton from AMP. “We can’t change everyone’s minds, but we can try to change enough of them.”