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There is a view that the life insurance market is growing very strongly today because some financial planners, who may have ignored it in the past, are now active and that it has somehow become trendy.
However, that is very simplistic. True, there is more interest in selling life insurance now, but there is also more interest in buying it.
The old adage that life insurance is sold and not bought no longer holds.
The drivers of change have been two-fold. The industry has modernised and it now recognises the key role of the end consumer.
Overall, the life market continues to evolve as a modern financial services business delivering strong value to customers at a time when they really need protection assurance.
Market share figures for 2008 show the market’s growth. Last year it posted a near to 14 per cent gain, and it now has just over $7 billion in annual premiums.
Further rejecting the view that it is all short term are the projections that while the market trebled in the 10 years to 2007, it is likely to treble again in the 10 years to 2017. It will become more than a $20 billion a year industry.
For consumers, the message is getting through. Australians are generally exposed to significant personal uninsured risks and very few working people have adequately protected their greatest asset, their ability to earn an income in future and pay the bills.
Australians are underinsured; very few, for example, have critical illness insurance that gives a lump sum payment in the event of major illness, and while death cover is probably the best understood product, most don’t have enough to look after dependants if the worst happens.
Underinsurance is a reality. This is highlighted by the Investment and Financial Service Association’s Lifewise program, which kicks off soon. This should further drive the market.
There is no reason why this rapid market growth could not continue, especially as the industry moves to meet consumer demand and finds ways for them to get protection.
The key drivers of growth continue to be:
- increasing consumer awareness and risk adversity;
- adviser recognition of the role of life insurance;
- improved adviser productivity as life shifts from being sold to being bought;
- new technologies as life insurers continue to invest in automating previously labour-intensive application and underwriting processes. More customers can be serviced and often smaller value policies can be implemented. This allows those financial planners who have written little life insurance previously to use modern processes to do so easily;
- in-super life insurance is now increasingly affordable while being very tax effective; and
- super trustees have, in most cases, significantly lifted member default protection levels. (This latter point should be considered a valuable and prudent decision by trustees in the interests of their members.)
Getting access to life insurance
Financial Services Reform (FSR) has created many problems here. Getting the right advice can be costly and difficult for an often complex issue under the existing FSR model.
At present, around 20 per cent of people have access to full advice and they often have their more complex needs delivered through advisers and more fully engineered products.
However, most employed people get life cover through their workplace scheme. This often provides a base level of protection, but generally not enough to cover their needs.
Others are buying some level of cover when they take out a mortgage, while a growth sector appears to be direct sales via toll-free phone numbers and/or Internet.
However, overall access still falls short of consumer needs, and the industry is working hard to address this.
We need to see more consumers gaining access to advice. This is a big issue for consumers who want to ask questions about the types and amounts of cover they need and how to build their life cover protection at different times in their lives.
Some FSR concessions are needed to bring advice to more Australians, and we need to see this in the next year or so.
Group life made up of superannuation and employers will gain in importance if people still can’t access advice. This area delivers a valuable benefit to members and employees.
Without advice, more people will continue to investigate getting life insurance protection directly and they will buy from the emerging direct to consumer channels.
The good news for consumers is that death insurance is likely to become cheaper as major improvements in medical research around heart-related disease and cancer improve life expectancy and lower life cover.
Looking ahead
People are living and working longer. Longer life expectancies mean people have to work longer to fund it. Designing new covers to help those people protect their incomes from illness in later working years will be important for the industry.
Long-term care has not taken off in Australia as it has in some overseas countries. This is cover where monthly payments are made when certain daily activities like dressing and showering can no longer be done without assistance.
Many people want to continue to live at home but require some help. As a person who launched this cover some years ago and believes in the value of it, I can see future product and market potential here.
One of the biggest risks facing people in retirement is running out of money because they are living longer than expected. Life insurance products to help manage this risk will become more common over the next few years. Most people will need to consider these.
Critical illness insurance (as mentioned) will become much more common. We can keep people alive but they need the financial means by which to rehabilitate after a major illness.
Those living longer are likely to have more managed health issues along the way — some from their early years. This will be expensive for the taxpayer and consumer. Life insurance and income protection, and critical illness in particular, will play a valuable part here.
Life insurance today delivers a very valuable social service for Australians and taxpayers by delivering benefits in times of illness and bereavement. These benefits will grow in the future.
Adviser remuneration for life insurance
I comment on this because the issue of commissions on investments is very much in the news at present. The commissions system has worked well for life insurance in the past and I personally have had very few complaints.
There is flexibility today around how advisers are remunerated, and dollar sum remuneration is required to be disclosed to the client in every case.
For example, an adviser may choose a front-end commission when a policy is put in place, a level commission that is paid annually while the policy is in force to support ongoing servicing of the client, a hybrid arrangement in between the two, the ability to reduce the commission to an agreed level with the client, or the ability to charge no commission but charge a fee instead.
This set of remuneration choices generally meets the needs of the adviser and client. If the amount is seen to be too high it can be reduced. If a fee is wanted it can be charged instead.
I expect there to be continuing flexibility in this remuneration area, with a trend towards more hybrid and level arrangements along with more fee arrangements reflecting a growing number of fee-based financial planners becoming involved in life insurance. The industry and consumer are best off if this flexibility is retained.
The life market has and will continue to evolve and develop. Expect more waves of technology investment to be made as the industry continues to invest to bring life solutions to customers in modern, highly productive, and consumer-friendly ways. Technology and the consumer will continue to drive industry growth.
Jim Minto is the managing director of Tower Australia.
