10 minute read
PRACTICE MANAGEMENT
from ASSET Spring 2022
by ASSET
One heck of an opportunity in 2023
Russell Hutchison dishes out a dose of optimism: there’s room for the advice sector to double, if not triple, in size, so get out there and grab your share.
After three bruising years, the life insurance sector is not producing anything like the levels of new business it once was.
While some of that business may not have been the picture of excellent personalised advice that we want to see, there is plainly a huge gap in provision - and that gap has got bigger.
A return to growth is due. Let’s make that a priority for 2023.
There are some obstacles, and they are hard to work on, but, unlike many of the challenges of the last couple of years, these challenges are within our control. That should give us cause for optimism.
Advisers are the bloodied champions of the channels: although production is down across the board, advisers have proven to be the most resilient of all channels.
Unlike the others, they are best positioned to grow rapidly. Provided the new conduct of financial institutions law does not clobber them further, advisers could lead the recovery in new business levels.
Take a dose of optimism
Assuming you have sorted your full licence, this little dose of optimism is for you.
If you haven’t got your full license application in yet, then please, stop reading and go do that! Having got your full licence, there are two big reasons why you should feel optimistic about the next few years:
1 There are lots of people that need your help 2 Reaching them is mainly a task within your control The impact of the protection gap is loss: it is a story told in homes that have to be sold, kids moved from their schools and their friends, cramped accommodation (moving back in with Mum and Dad while a parent recovers from a disability) and the long tail of problems arising from that disruption.
How big is that gap? There have been many attempts to estimate it.
The Financial Services Council’s work of 2011, in conjunction with academics at Massey University, was the leading example in terms of the robustness of method.
But set aside, even, the issue of those with some cover but not quite enough - in other words, underinsurance - and consider just those people who have no insurance whatsoever.
If they all had as much as just the market average, which is well below what is ‘ideal’, the protection gap costs New Zealanders more than $2.5 billion a year in claims that would have been paid.
The sum of claims foregone by the uninsured exceeds $600million annually for life cover, more than $695 million annually for trauma cover, and about $1.45 billion for income/mortgage cover.
One heck of a large opportunity
There are some significant measurement challenges with all surveys of the protection gap, but we are confident that this number represents a low end of the estimate range.
There is, in effect, room for the sector to be at least double, if not triple, its current size. That is one heck of a large opportunity for advisers. There is plenty of insurance business to be done!
So why aren’t we better at reaching these people? Sure, it is not just about advisers. About 10-15% of the market is probably group business - and about the same again is probably direct (depending a lot on how you define ‘direct’).
Insurance sold, advised, or referred from banks may make up about 15% to 20% these days.
The rest is advised. That’s the biggest and most robust segment.
Although there should be growth in the other segments, too, as the sector returns to growth, I want to argue that you can go and get your share. And provided you have your full license, the sooner, the better.
In addition to the protection gap, there’s an advice gap. This is not your fault, but if you believe in advice, it is definitely an area that needs your attention.
The problem is that people aren’t very good at taking advice. Marketing commentator Seth Godin wrote recently about this problem: why advice is not taken.
He wonders why more people don’t take the advice that’s on offer – instead they ignore it, deny there’s a problem, or flail around with their own DIY efforts.
In essence, they try all the things that don’t work first, before finally giving up and doing the right thing.
Why people resist advice
To summarise Godin’s excellent post (and you should check it out yourself; simply google Seth Godin), the reasons people do not take advice are roughly:
1 They don’t really trust that it is valid or good 2 They think their case is ‘special’ 3 They just want reassurance – not to actually change anything On a personal note, I have learned – slowly, I admit – that there are plenty of things I am not very good at, and many things are more complicated than they first appear.
Even fairly humble home-maintenance tasks, such as plastering and painting, are usually best done by someone other than me. Even in the age of excellent YouTube tutorials. Most people do not yet accept that they need financial advice; they think it can be obtained free online; they think they are doing as best they can right now.
This is the real problem: taking lots of people on a journey from denying the need for advice to accepting advice and taking action.
The roadblocks are usually procrastination, fear, self-deception, or just being a bit too cheap: penny-wise yet pound-foolish.
These must be the targets of our creativity, and marketing. Our job is to convince people that their lives would be better off if they spent a bit of time and money – often not very much – to work on improving their financial management generally and their insurance programmes specifically. A
Russell Hutchinson is director of Chatswood Consulting and Quality Product Research, which operates Quotemonster.
Long-term value over price – striking the balance
Partners Life managing director Naomi Ballantyne discusses the important questions advisers need to be asking to get the right outcome at claim time.
"Buying on first year premiums instead of on long-term insurer value can be fraught with danger” say Naomi Ballantyne, Managing Director of Partners Life.
And in current times, let’s be honest, almost every client is price sensitive. Kiwis are feeling the pinch in their back pockets from every which way, and there is no sign of this easing anytime soon”.
So how do you tackle the tricky conversation about striking the balance between weighing up long-term value against your client’s dwindling budget?
Unlike yearly renewable insurance policies, like car insurance, life and health insurance policies should be thought of as a long-term relationship between the client and insurer.
As you know, the application and medical underwriting process are important, and as soon as something happens to your client’s health it becomes difficult, sometimes impossible, to move from one insurer to another.
So it’s important to do this once and do it right for your client for the long-term!
Affordability is important, as the recommended insurance package needs to meet your client’s budget, however matching your client to an insurance company that is going to best meet your client’s needs over the long-term is arguably more crucial.
It’s a discussion that’s been on the top of some Advisers minds lately, so we took the time to do some research to understand how Advisers are approaching this discussion with their clients.
An Adviser we spoke to said, when recommending an insurance company, narrowing it down to focus on one important question makes it easier.
And that one question is – “Who do I trust the most to deliver the right outcome for my client at claim time? I want to feel assured that the insurer I recommend offers top quality products that fit to my client’s individual requirements, and that they have benefits that have been thoughtfully designed around claim-ability”.
After all, an insurers track record around paying claims is the very proof point of how good the insurers products are.
Knowing that at the time when your client is potentially navigating a life changing event, that their insurer will not only assess and process their claim promptly and thoroughly, but will also apply a fair and reasonable approach, is a very important factor.
As mentioned earlier, a client’s budget needs to be taken into consideration. However, it’s just as important when discussing affordability to talk about pricing impacts over the long-term.
Insurers review and change their underlying pricing based on their emerging claims experience and because insurance is a competitive market, pricing trends tend to align across companies.
Looking back at research over the past 10 years shows us that insurers tend to adjust their pricing within months of each other. This indicates that pricing can move around a lot - and the cheapest insurer on any given day, has the potential to become the most expensive insurer on another day.
So buying on price competitiveness on day one instead of insurer value could well be a mistake when it comes to claim time.
When insurers review their pricing, increases are often a reflection of the share of the premium being paid out in claims.
Typically, this can be 50-60% of a premium. Some products can be even more than this, such as medical which can be higher than 60%.
The other components include commission payments, expenses such as business operating costs, and the smallest part – profitability for the insurer.
Making sure that insurers are charging a fair price to clients is of course important, but so is the insurers ability to maintain profitability and therefore be sustainable over the long-term.
Having certainty about an insurers approach to pricing should also play a part when considering who you recommend to your clients. Incorrect pricing means that undercharging for certain pockets – certain demographics or even certain products lines – can occur, and as an insurer starts to get more business through these product lines, the claim costs will start to increase creating a ‘claims spiral’ - which means overtime, pricing will have to be adjusted and can lead to unpredictable pricing over the long-term.
Other things that impact pricing, such as external environmental factors, will impact the whole industry and therefore all insurers.
Nonetheless, it’s the approach of the insurer around treating their clients fairly, along with the insurers maturity to analyse and identify ‘pockets’ of claims where the experience is significantly higher and adjusting pricing where this occurs – rather than a ‘one size fits all’ approach - that plays an important part.
We’ve seen Australia experience a negative claims experience with their disability income book over the past ten years and no-one wants to see this happen in New Zealand.
Another factor to discuss is discounting. Some insurers offer premium discounts for loyal clients – meaning their pricing competitiveness changes for the better the longer a client remains with them. This can help to offset premium increases that occur at the policy anniversary.
Other insurers discount first year premiums in an attempt to win new clients – this can lead to a temporary short term premium advantage at the time of issue, however in the long run, the client could end up experiencing substantial increases as the years go by.
Then there are some insurers who may offer discounts that are not guaranteed and can be removed at any time – meaning they cannot be relied upon into the future.
Flexibility is in your client’s policy is also important. As we get older premiums typically increase, however a client’s insurance requirements can also change over time – perhaps the mortgage has been paid off and the kids have left home.
As your client’s family and debt profile changes, it is common for their insurance needs to reduce. Therefore, it’s important that the insurer you recommend has great options for changing or converting your client’s policies over time to match their changing needs.
So, as you can see, first year premium comparisons are not a reflection of pricing competitiveness certainty in the long-term.
Which is why the proven value an insurer provides to its clients at claims time should be the most important criteria for you, as the Adviser, when talking to your client about the overall value proposition; it’s important your client doesn’t miss out on the long-term value of an insurer for price differences today. A
