I have been very heartened recently to hear from some superannuation trustees and managers that there is growing, unprompted interest from members in increasing their life insurance cover.
At present, these numbers remain modest, but it is still a pleasing change. It is pleasing because the underinsurance message appears to be getting through to the average Australian in some part. Consumers, which the industry has been saying are heavily underinsured, are beginning to recognise this and take action on their own behalf.
Topping up life cover through super is easy and convenient for these people. And if it helps reduce the national level of underinsurance it is a good outcome for everyone.
Making life insurance easy and convenient is therefore one of the key ways to encourage more people to take up cover.
There is an old industry adage that many now disagree with or even reject. That is, life insurance is traditionally a product that has to be sold. Historically, it is not something consumers go out and buy unprompted. That is, very few consumers in the past have woken up and decided they must buy life insurance. Traditionally, the independent financial adviser has had to point out the need for cover.
Life insurance has also been called a reluctant or grudge purchase made by people who know they should not take the risk of not having cover. The same could be said of car insurance and home insurance. There is a realisation that the risks outweigh the costs.
Therefore, to see a change in attitude emerging is very welcome, and we can only hope it is the start of a broader trend. We would like to see more super fund trustees asking for more cover and independent advisers having offices full of people wanting to buy.
But the truth remains, most people in Australia are highly underinsured. Therefore, what can the industry do to lift the level of acceptance for the need for life insurance — to make it less of a grudge purchase?
The industry faces several criticisms when it comes to encouraging more people to take life cover.
The first is the often-made comment that the life industry is always talking about underinsurance, but not providing easy access for consumers to the products.
This is not accurate. The industry has developed many new ways to obtain cover in recent years but, admittedly, these are only at modest volumes. We therefore can expect these improving points of access to expand.
Advice is an issue
At the core of the issue of access to life cover is the question of advice. Most potential life insurance buyers would benefit from having some good, sound advice. Yet advice is in short supply, and various factors have made advice even more difficult to obtain over the past two decades.
The 1980s saw the beginnings of the modern financial planning industry offering more modern products. These products began to replace the more traditional ones that often bundled investment and life insurance. Wealth protection and wealth accumulation were combined, but drifted apart.
Financial planning advice focused on wealth accumulation and management, and the industry grew accordingly.
Life insurance as an industry was seen as dated. The unbundled approach (risk products separated from investment products) was seen as the way of the future for planners and consumers. Accordingly, many financial planners did not address life insurance and the market lost momentum — the underinsurance gap widened.
The good news is that this is now changing steadily and consumer insurance needs are increasingly being addressed.
We all forgot one simple thing. Regardless of the changed shape of our industry, the consumer was and still is out there, with just the same needs around wealth protection and wealth accumulation.
However, there have been other changes that affect the advice equation:
~ there remain many who are not comfortable in offering life insurance advice;
~ there was the retirement of many life advisers prior to the final introduction of Financial Services Reform (FSR) in 2004;
~ there has been a greying of sections of the life adviser industry without sufficient recruitment or training for succession; and
~ FSR disclosure has impeded the productivity of advisers and thereby reduced access by consumers, especially those in what I call middle Australia.
Some groups, such as accountants, often have a strong awareness of the need for risk protection and, if they don’t advise on it themselves, will sometimes source partnerships with risk specialists to meet those client needs.
The big question is how those parts of the financial industry that don’t provide risk protection will meet existing and future client needs?
If a client needs full advice then we must do something about it if the underinsurance gap is to close. This is a challenge that can only be met by the industry and government taking steps to make advice more affordable.
No advice life cover
In Australia and around the world, consumers buy insurance without full advice and a detailed needs assessment. The danger of this is that the consumer ends up with cover not entirely suited to his or her individual needs. The good news is that they will, at least, have some cover. This trend looks set to continue growing in Australia, especially as the availability of advice remains constricted because of costs and complexity.
Therefore, the question remains, how does the industry fully meet consumer needs?
There are a number of approaches that companies are now looking at, including:
~ helping the traditional life risk advice sector revitalise so that it can achieve increased productivity and boost the number of advisers;
~ encouraging financial planners to assess a client’s needs in both wealth accumulation and wealth protection by providing full advice on life products;
~ urging employers and superannuation trustees to look to increase default levels of life cover in superannuation schemes;
~ assisting superannuation trustees in offering easy to access top-up cover for interested members;
~ allowing consumers to easily access and purchase life products through direct channels; and
~ looking to other client contact channels to offer life cover (e.g, non-bank savings organisations, health insurers, mortgage brokers, etc).
To some extent, all of these approaches are now being tested.
Is the gap closing?
The ageing population and consumer price index increases mean life cover has to grow at over 5 per cent a year just to stand still.
As incomes, mortgages and other financial commitments grow, so do the need for life cover. In short, the gap is not closing and has widened over the last 10 years despite industry growth of approximately 10 per cent in that time.
The future
Closing the underinsurance gap requires:
~products that are much simpler for all consumers to understand;
~a choice for consumers on ways to buy cover;
~easy to buy cover with transparent premiums that reflect risks either individually or as a group; and
~ technology to make underwriting faster, simpler, more transparent and easier to understand.
Dealing with the underinsurance gap is in its early stages and the whole financial services sector will become increasingly involved. The reason is very simple. Consumers have needs for insurance and Australia must see these needs addressed from a social policy perspective. The consumer will access this cover and this market will see exciting change in the next phase of its development, as it both leads and follows consumer needs.
Jim Minto is group managing director at Tower.
