Insurance on a rollercoaster - or so it seems.....
Interesting article in the SST 29/06/14 - "Insurance on a rollercoaster" - which I couldn't let it pass without some comment seeking to extend the perspective of those reading the article.
Many have bewailed the fate of NZ consumers having to pay life insurance premiums loaded by the levels of commission paid by life insurance companies which rate as among the highest in the OECD countries.
Nevertheless, a broader picture needs to be painted to put this in perspective.
For some years now, financial advisers in NZ have been subjected to legislation and regulation - most of which has been overkill. Recently, the FMA declared that the scrutiny of the financial adviser industry would be stepped up. This is mystifying, as, apart from the Ross Asset Management scandal (which happened right under the nose of the regulator), the courts are hardly over-burdened with an excessive caseload of financial advisers being taken to task by aggrieved clients complaining about their adviser's behaviour. Even in the instance of the recent Finance Industry collapse, by far the majority of funds were invested directly without the presence of an adviser.
If the absence of litigation is the case with investment advisers - and it surely is - it's even more so with advisers on the risk side of the industry, namely those who are the subject of the 'rollercoaster' article.
Life insurance, as highlighted elsewhere in the sad case of Nicky Cockcroft and her family, is one of the essential aspects of responsible financial planning, and has been around for many years in various formats.
Contemporary products provide financial protection against a broad range of events which can happen to anyone, anytime, as you're making plans for the future.
So given the overwhelmingly sensible case for transferring financial risk away from the individual, the family, or the commercial entity, why doesn't everyone form an orderly queue at their nearest financial adviser's office and put this aspect of their financial affairs in order?
Well, it's an old and widely accepted adage that life insurance has to be sold, unlike say, motor vehicle insurance or house insurance, which many people purchase voluntarily. It's relatively easy to imagine the consequences of a car crash or a residential fire - it's much less appetising to contemplate your family or your business functioning without you, as you've turned your toes up or you're incapacitated through illness or injury.
The truth is many individuals think that it won't happen to them, sublimate the possibility, and avoid facing the possibility of their own death or serious illness/injury.
So if the product has to be sold, how can it be made available at a sustainable price to as many potential buyers as possible and avoid their survivors becoming wards of the state?
There are many channels through which product distribution is implemented - via banks, insurance companies, online, and other 'direct-to-the-consumer' methods. But by far the most significant 'retail' distribution channel in NZ is the financial adviser, all of whom have to be on the Financial Services Provider Register (FSPR) to be able to recommend class 2 financial products - broadly speaking life insurance products.
The sustainable price mentioned previously has to contain the expense of distributing via the financial adviser channel, and this has traditionally been provided by a commission percentage contained in the retail price (premium) paid by the purchaser. The loading contained in the premium depends on which product and which insurance company you're looking at, but the figure ranges from nil (where no commission is paid) to 30% at the top of the range.
Now, a word of warning here. Lower commission doesn't guarantee better value for money. If the product doesn't cover you at point of claim, the price becomes irrelevant. And there are a huge amount of variations in product structures, conditions, definitions, and exclusions - over 25,000 at last count, so the dominance of the financial adviser is hardly surprising.
But are advisers worth their money? Well, after over decades in the industry in three countries, I have never had surviving dependents complain about commission levels at the time when a claim is being settled.
There's also some other realities in the financial adviser's world to be kept in mind.
1. Not every client buys, and the costs of addressing consumer reluctance to face up to the possibility of early unexpected death or incapacity is spread across all clients.
2. Compliance costs are now a significant factor consuming time, energy, resources, and money.
3. The top figures for commission are not paid by every insurance companies on every product - 200% isn't even the average.
4. Charging fees for service as an alternative disadvantages a significant segment of the population who are unable or unwilling to pay fees for advice on life insurance.
5. Apart from persuading the consumer to face up to life's realities, there is a lot work to be done before the emergence of the commission payment - up until that point the earning achieved by the adviser is nil.
6. Clients can change their mind and again, the adviser receives no compensation. All that apart, the cries of outrage over 'churning' also needs to be put in perspective, as there are occasions when replacing a product is justified.
Insurers face constant competition to improve product features and benefits, and when this happens, not every existing client receives the improved policy cover.
Old generation products which some clients may be hanging on to, frequently represent poor value for money and updating to a new generation product is wholly justified.
Insurers cry foul when they are the victims of 'churn', but when they are the recipients of the replacement business, this is referred to as 'replacement', so advisers can find themselves both heroes and villains.
The provisions for replacement are now laid out in general legal and regulatory terms, as outlined in the article, to prohibit advisers indulging in misleading behavior, or similar activities designed to disadvantage the consumer.
While nobody in the industry condones illicit practices, the accusers need to produce specific evidence, throw the spotlight on those perpetrators, and bring the full weight of the regulator to bear upon those advisers bringing the industry into disrepute, and spoiling things for the vast majority of honest advisers who provide a cost-effective and efficient service for their clients.