Practical ways to build a sustainable risk advice proposition in a post-QAR world

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While welcoming the clarity, many advisers are now refocusing their attention on how to make risk advice sustainable in a 60/20 framework.

Commissions retained but the challenge remains

The long-awaited final report for the Quality of Advice Review – authored by Michelle Levy – was publicly released at the start of February 2023[1]. While the Government is yet to formally respond to the report (other than announcing a round of further public consultations), the report contained few, if any, surprises, with the substance of most recommendations made public some months earlier via the release of Proposals paper[2], and as a result, most observers expect Levy’s recommendations will be largely accepted unchanged.

Amongst the 22 recommendations in the final report was the proposed retention of life insurance commissions at the current rates (60% up-front and 20% renewal). But while the clarity around the retention of commissions will be welcomed in most quarters (some consumer advocacy groups excepted), fixing the rate of commissions at their current levels (first introduced as part of the Life Insurance Framework reforms) means providing life insurance advice via traditional models can still be economically challenging.

Happily, an increasing number of advisers are recognising the ways risk advice can be made more sustainable, shifting their perspectives on areas such as:

  • remuneration
  • the risk advice value chain
  • the use of technology
  • referrals, and
  • the design of advice processes,

to create a more optimal model. Such a model can create an uplift in both the financial viability of life insurance advice and the client experience.

In this article, we will explore the practical ways financial advisers can deliver life insurance advice on a more sustainable basis, within the context of recommendations contained within the QAR report.

QAR on life insurance

In the final QAR Report[3], Michelle Levy recommended the government retain the exception to the ban on conflicted remuneration for benefits given in connection with the issue or sale of a life risk insurance product.

“Commission and clawback rates should be maintained at the current levels”, Ms Levy said.

Expanding on this recommendation, Ms Levy expressed the view that life insurance advice would be beyond the reach of many people if commissions were scrapped. This view is certainly consistent with a great deal of research showing the disconnect between what people are prepared to pay for life insurance advice, and how much that advice could be delivered for. A 2019 study by Zurich, for example, found that around 55% of consumers are not willing to pay more than $250 for life insurance advice, and 27% are unwilling to pay a fee at all[4].

Levy also had views on the extent to which the current system created genuine conflicts of interest causing consumer harm:

“Nothing we have seen suggests that life insurance advice is of poorer quality than advice on other topics and nothing we have seen suggests that financial advisers are recommending life insurance in circumstances where the client will not benefit from holding life insurance. The LIF [Life Insurance Framework] reforms also mean all life insurers pay the same rate of commission and so there is less incentive for an adviser to recommend a policy issued by one insurer over another. This is helpful,” Levy noted.

Levy did stipulate one condition around her recommendation:

“The condition to this is that the provider of personal advice to a retail client about a life risk insurance product must explain to their client that they will be paid a commission if the client decides to buy the product recommended by the adviser and they must ask for the client’s consent to accept the commission,” Ms Levy said.

In response to previous suggestions that this process could add extra complexity and therefore cost to the risk advice process, Levy clarified that:

  • the consent shouldn’t be onerous and wasn’t intended to involve the same formality as an annual fee consent (the consent could be recorded via email if appropriate)
  • the consent should specify the percentage rates of commission, not the dollar amounts
  • consent could be obtained before or after advice is provided, but before the issue of a product
  • no further consent is needed around trail commissions, and
  • no new consents are needed when client portfolios are sold to another practice or transferred to a new adviser[5]

Revisiting the cost to provide life insurance advice

In the same way consumer attitudes towards risk commissions have been the subject of numerous studies, so too has the cost of providing risk advice.

The same Zurich study referenced above found that even the simplest of risk advice could take around 8 hours to provide, and two-thirds of advisers would need to charge at least $2,000 to cover their costs when providing such advice[6].

At a 60% commission rate, and a $2,000 cost, the advice is a break-even proposition (in simple terms) at annual premiums of $3333 (around $278 per month). While such premium levels are becoming increasingly common for clients in their late 30s and older with Sydney and Melbourne-size mortgages, and/or those taking out income protection coverage, they go hand in hand with increased consumer resistance, and as such do not mitigate the need to design a more efficient, sustainable model for providing risk advice.

Rethinking the advice value chain and remuneration options

Although recommending commissions be retained, Michelle Levy did express the view that “it is preferable for consumers to pay a fee for advice about life insurance like they must for other financial products”[7]. But with consumer resistance to out-of-pocket fees for risk advice well documented – via research and actual market experience – many advisers dismiss out of hand the idea of charging a fee for service at any point of the life insurance journey.

Some advisers, however, have started to introduce fees to their insurance advice process, with numerous scenarios where consumers are likely to be willing – and able – to pay fees that fairly reflect the work done by the adviser. Examples of these scenarios include:

  • Charging an initial one-off fee, payable regardless of whether the application is accepted or declined. Several years ago, one well-known risk specialist was charging a $500 up-front fee for risk-only advice. The fee was not refundable in the event that the client was declined at underwriting (mitigating the risk of doing work for no outcome), but was subject to a partial commission rebate if a policy was issued. Variations on this approach include not giving any rebate at all, or only rebating when the commission exceeded the adviser’s recommended fee.
  • Switching to a fee-for-service approach for business insurance clients, or for cases involving very large premiums (and thus where the dollar value of premium discounts is more substantial). While not always the case, clients in a position to pay such large premiums will generally be in a better position to pay an out-of-pocket fee for advice.

Arguably the biggest opportunity comes however when we reconsider where in the risk advice value chain clients actually derive value.

The intangible nature of life insurance creates a disconnect between where a client sees value (for which they are willing to pay) and where traditional risk advice models assume value.

Traditional models assume the value to be at the start of the chain when the SOA is produced, and a policy is applied for. But from the client’s perspective, while there is work here, but no value to them. The client sees the most value – in both the adviser and the insurance itself – at claim time.

This perception of value helps explain the growth and popularity of no-win, no-fee law firms in the life insurance claims arena. Clients appreciate that claims can involve hard work and negotiation, and are clearly happy to pay someone to advocate on their behalf (in some cases, up to 40% of the claim amount)[8]. The appeal of this model is that claimants don’t actually pay out of pocket, they only pay out of the proceeds of a successful claim.

While traditional thinking has been that renewal commissions are in effect payment in advance for claims management, the reality is clients don’t see it this way. Indeed, one Australian survey of retail policyholders found many “expect to go direct to their insurance company in the event of a claim, irrespective of the channel through which they took out their policy”[9].

Further providing impetus for a change is benchmarking[10] which revealed how time-consuming claims could be:

  • 34% of claims took 11-20 hours to manage
  • 22% took between 20 and 30 hours
  • 19% took more than 30 hours.

In other words, there is a very real chance that the cost of the adviser’s time in providing a high-quality claims service will often far exceed the remuneration they receive by way of commissions.

By charging a fee not just upfront, but also for claims management (with the fee to be paid from claims proceeds) advisers have the opportunity to ensure life insurance advice is not a loss-making exercise. Rather, it is a service for which they are appropriately remunerated, allowing them to deliver that service at the highest level possible, and in turn improving their client satisfaction.

Efficiency through technology

On the flip side of the sustainability coin is the cost to serve, and for many advisers, finding cost efficiencies in the risk advice process will be critical to ongoing sustainability.

One rich source of potential efficiency is in the technology that can be applied at 4 key stages of the risk advice journey:

  1. Gathering key client information prior to the first meeting.
  2. Conducting a comprehensive, compliant, and efficient Risk Needs Analysis.
  3. Undertaking product research to find the best value-for-money policies.
  4. Generating a compliant Risk SOA quickly.

Breaking down these 4 steps into further sub-steps, and matching them with freely available current technology solutions, we can see the scope to dramatically streamline the risk advice process, and at the same time improve compliance (by reducing the scope for human error), minimising duplication, and improve the client experience.

Process opportunities

In addition to technology, efficiencies can also be driven by investing in pre-work, in the form of field underwriting and pre-assessments, which can minimise surprises and thus minimise the rework that often accompanies unexpected underwriting outcomes.

In simple terms, field underwriting is gathering enough information about the life insured to be able to determine their insurability before they actually apply for cover. This generally means understanding whether there are elements of their health, occupation, family history, or other circumstances that could impact the willingness of an insurer to offer cover on standard terms.

Successful field underwriting therefore relies on an understanding of the client’s circumstances and the underwriting approach of the insurer, bridged by a base level of understanding of medical terminology and medical conditions. Having this understanding enables you to make a judgement of your client’s insurability before they even apply, which can help you narrow down your selection of suitable insurers.

Knowing which health conditions are likely to attract a loading or exclusion is also important, as it will help you set client expectations from the outset. Understanding how loadings and exclusions work, and in the circumstances in which their removal can be requested, it also important. 

Pre-assessments go hand in hand with field underwriting and involve getting an indicative sense of how a client is likely to be underwritten by an insurer. This can allow you to narrow down your choice of insurers as well as indicate those aspects of your client’s situation which may require more clarification and information gathering. Pre-assessments can therefore improve your efficiency as well as manage your client expectations.

Essential to a smooth process is honesty and openness on the part of your client, and this means your pre-assessment information gathering needs to be rigorous. In this sense the level of detail sought by insurers in their personal statements and – where applicable – their supplementary questionnaires, is a good benchmark.

Newer, more powerful technologies are just around the corner

A number of projects are underway to develop all-encompassing, risk-specific technology solutions that bring together electronic and process-based efficiency opportunities. One such project is LifeBid, supported by a number of insurers including Zurich and MLC.

Innovations such as LifeBid and others are likely to include a one-stop solution for steps including:

  • client documentation
  • compliance
  • market analysis
  • advice recommendations
  • application
  • pre-assessment
  • underwriting
  • policy issue
  • renewals
  • policy amendments.

With LifeBid aiming to reduce risk advisers’ cost to serve by 90%[11], the potential for this and similar platforms to reshape the risk advice landscape – and make risk advice more accessible – is obviously significant.

Increasing volume drives learning and efficiencies

Increasing the volume of risk business, you write can drive scale benefits, and deliver an efficiency dividend as you repeat and become more familiar with the risk advice process.

Adviser Ratings estimates around three-quarters of advisers now write little or no risk[12], meaning now could be the perfect time to drive volume by taking more risk referrals from other advisers. Amongst your network of adviser peers, the statistics suggest many of them will want to refer out any risk cases, providing the opportunity to develop an ongoing and cost-effective source of new business.

Closing the loop – QAR efficiency opportunities

Having started this discussion referencing the launch of the QAR final report, it seems appropriate to finish by mentioning significant efficiency opportunities that Michelle Levy, and indeed the whole advice sector, hope will be realised if her recommendations are accepted.

Although when first commissioned the QAR was intended to examine the quality of advice, the tectonic shifts to the advice landscape that saw adviser numbers fall and the cost of advice soar, shifted the emphasis of her review more on the accessibility of advice.

Her final recommendations are therefore largely designed to strip away much of the expensive red tape inherent in current advice processes (including the need for SOAs). If implemented, the sustainability and accessibility of all types of advice – including life insurance advice – should improve dramatically.

 

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References:
[1] https://www.afr.com/companies/financial-services/overdue-blueprint-for-winding-back-regulatory-overreach-20230207-p5cijn
[2] https://www.ifa.com.au/news/31698-the-changes-need-to-be-substantial-treasury-releases-quality-of-advice-review-proposal-paper
[3] https://treasury.gov.au/sites/default/files/2023-01/p2023-358632.pdf
[4] https://advisers.zurich.com.au/resources/thought-leadership/risk-advice-disconnect.html
[5] https://www.ifa.com.au/news/32369-levy-s-life-insurance-recommendations-explained-what-is-required-for-consent
[6] https://www.personalriskprofessionals.com/2019/03/29/the-gap-cost-of-advice/v2-final_risk-advice-disconnect/
[7] https://treasury.gov.au/sites/default/files/2023-01/p2023-358632.pdf
[8] https://www.murphys-law.com.au/faq/how-no-win-no-fee-works/
[9] https://www.afa.asn.au/wp-content/uploads/The-Value-of-Protection.pdf
[10] https://riskinfo.com.au/news/2020/11/24/poll-results-the-value-of-claims-services/
[11] https://lifebid.com.au/
[12] https://www.adviserratings.com.au/news/the-incredible-shrinking-risk-universe/

 

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