There is a transformation taking place in life insurance underwriting, and the potential implications for the customer experience and advice process are big.

Introduction

Underwriting is a foundational element of life insurance. By ensuring lives are admitted to the life insurance pool at the price and terms that accurately reflects their risk, life insurance can remain sustainable, ensuring it is there when most needed – claim time.

But underwriting has long been a friction point for clients and advisers alike, perceived as a complex, lengthy process designed to shut people out rather than let them in. In an era when consumers expect instant, real-time decisions and a streamlined digital environment, underwriting is seen to represent the very opposite of a contemporary experience – characterised as involving long paper-based forms, stringent medical requirements, and complex, judgemental questions. High drop-out rates at application stage – estimated by some experts to be around 80%^[1] – are a clear indicator of consumer sentiment on this topic.

But the good news is that life insurers have been listening, for quite some time in fact. And slowly but surely, the underwriting process has become more client-centric, with simpler questions, higher non-medical limits, and faster decision-making times helping reduce the friction and reduce the barriers to obtaining coverage.

The even better news is that this innovation is constant, and the future of life insurance underwriting is likely to be even more client-centric, as insurers leverage the power of AI, the big data and wellbeing revolutions, and behavioural science, to reshape the life underwriting process into one that offers positive, meaningful outcomes to clients beyond the simple issuance of a policy.

In this article, we will examine the megatrends being harnessed to transform not just underwriting processes, but the entire 21^st century life insurance client experience.

The wellbeing trend

The wellness industry is experiencing remarkable growth, as consumer interest in health and wellbeing continues to surge. This trend is evident through the popularity of fitness classes, wearable technology, and mindfulness apps, with wellness becoming an integral part of daily life for many.

The size of the wellbeing economy is staggering, with data released by the Global Wellness Institute (GWI) estimating annual global spend on health and wellbeing to be around $4.4 trillion^[2]. -Australia ranks as the 10^th largest wellbeing economy, with spending of $84 billion.  Accounting for 5.1 per cent of global GDP, roughly one in every $20 spent by consumers worldwide goes to wellness products and services according to GWI.

Experts generally categorise wellness into six dimensions: health, fitness, nutrition, appearance, mindfulness, and sleep.

Advancements in sleep science have reinforced the view that quality sleep is the foundation of good health and amplifies the benefits of regular exercise and a healthy diet. As a result, sleep is rapidly emerging as a significant wellness focus, with consumer demand for sleep-related products and solutions continuing to rise.

How sleep could shake up life underwriting

One outcome of this growing focus on sleep is the use of digital devices such as the Apple Watch, and wearables (like the Fitbit), to monitor sleep patterns. This in turn is making sleep data more widely available, representing a resource with the potential to reshape underwriting.

In 2022, South African Actuaries Nicole Kriek and Matan Abraham delivered the findings of their research into the impact and implications of sleep patterns as a new rating factor for life insurance^[3].

Based on a series of literature reviews and 10 months of anonymised sleep tracking data, Kriek and Abraham showed evidence of a clear link between lack of sleep and poor health outcomes across all body systems. More importantly, they proved a clear correlation between lack of sleep and mortality.

Their research then explored how sleep data could drive improved life insurance underwriting, the objectives being to:

• determine how sleep data can be used to identify undiagnosed conditions not assessable by initial underwriting
• determine how sleep data can be used to provide early warning signs of the future onset of disease
• provide an indication of the severity and effective management of disclosed conditions
• identify trends in sleep data over time that can be used to trigger interventions to improve lifestyle wellness.

Poor sleep can be caused by many factors, some of which may not be immediately visible, or even known to the life insured, including undiagnosed conditions, and external factors such as stress.

By introducing sleep data into the underwriting process, life insurers not only have further data from which to assess the health of applicants more accurately, they will be able to identify individuals suffering sleeping issues, and provide resources to help them improve their overall quality of sleep and quality of life.

People expect their life insurer to support their wellness

Consistent with the growing interest in wellness products and services, individuals are embracing those brands that offer support, resources, and incentives that promote healthier living.

This is certainly true with life insurance, with research by reinsurer SCOR finding nearly one third of consumers consider health and wellness guidance to be part of the life insurance proposition^[4].

While many insurers have responded to this demand, by developing integrated wellness offerings, there is still scope for improvement, with the same SCOR study finding that the amount of health and wellness guidance (and indeed financial tips) offered by life insurers was falling short of expectations.

Although underwriting is at the very beginning of the life insurance customer journey, the nature of the process is such that it can deliver positive health outcomes to applicants, in a number of ways:

• the nature of the questions can alert the applicant to potential health issues, by signposting symptoms (e.g., night sweats, unexplained weight loss) of potentially serious, but undiagnosed, conditions
• the use of loadings and exclusions provided a similar signpost, matched with a financial incentive to modify risk factors
• similarly, some insurers, as part of their underwriting process, provide access to resources to help manage conditions such as obesity and high blood pressure
• in the event that medicals are required as part of the underwriting process, this may also uncover any previously unknown issues
• the opportunity to have loadings reviewed can be used to create a framework for behavioural change, with specific targets and timelines.

Leaning on behavioural economics

Along with the relative complexity (and length) of the underwriting process, the accuracy with which individuals provide health and lifestyle information can also be problematic, with incomplete, inaccurate, or false data undermining the assessment of risk, and potentially leading to adverse selection, and disclosure related disputes at claim time.

In this sense, an underwriting process that is simple, faster, AND more accurate would seem like nirvana. With the help of behavioural science, this nirvana may well be achievable.

Real life is not like the textbooks, and human decision making is not rational, it is largely irrational, driven by a complex array of emotions, biases, and mental short cuts. Behavioural economics is a science that seeks to understand the how and the why of decision making.

Historically, insurance application processes have been grounded in rational economic theory, with under-disclosure and non-disclosure viewed by some as being a rational attempt to mislead, for the purposes of financial gain. Over time however, the understanding of behavioural economics has helped insurers understand that other factors are at play, and by understanding these factors and adjusting question design accordingly, the accuracy and simplicity of the health disclosure process can be dramatically improved.

In an underwriting context, there are generally four main drivers behind inaccurate disclosure:

• framing
• honesty beliefs
• cognitive resources, and
• negative behaviours.

Framing

Framing is a cognitive bias which can drive people to make drastically different decisions, even when presented with the exact same data, based on whether the options are presented with negative or positive connotations.

The classic demonstration of this was an experiment^[6] by Kahneman and Tversky, who presented the same scenario in two different ways. The scenario related to a new disease that had emerged in a country and was expected to claim 600 lives. Participants had to choose between option A and option B. These options were the same in each scenario, one was just expressed differently.

Honesty belief

A powerful concept in behavioural economics is that of the dishonesty threshold, that is, people will only be dishonest to the point they can still feel good about themselves. In an insurance context, intentional inaccuracies are often driven by psychological motives, for example they are aware of a health condition, but they make their own decision as to whether that is relevant, perhaps because it happened a long time ago, or perhaps because their doctor told them it was all ‘under control’. Similarly, somethings are difficult to admit, and people can be in denial about conditions such as obesity, excessive drinking, or some chronic health condition.

Cognitive resources

The human brain lacks the cognitive resources to consciously make the thousands of decisions required of each day, which is why we develop mental short cuts. In his book, ‘Thinking, Fast and Slow,’^[7] Daniel Kahneman described two systems of thinking:

• System 1 – Fast Thinking, based on intuition and automatic processing.
• System 2 – Slow Thinking, which is deliberate and requires more work.

In an underwriting context, understand the way people process information, and use short cuts, can help insurers explore ways to ‘nudge’ them towards desirable behaviours.

Negative behaviours

Some people attach shame or stigma to certain behaviours, and may be inaccurate in their responses as a result.

Smoking is a classic example, alcohol consumption another.

How behavioural economics can help

Behavioural economics can increase application accuracy in a number of ways, including:

• making it easier to be accurate
• making it easier to be truthful.

Accuracy is often undermined by the complexity of the question being asked, and reducing the cognitive load required to answer a question may help improve the accuracy of the answer. This can be done in a number of ways, including:

• using simple, everyday language – avoid ambiguity
• using numerous simple questions rather than one long multi-faceted question
• prompting memory by listing possible answers – use drop-down menus, scales, and other methods to replace the usual binary ‘Yes’, ‘No’ response
• asking about experiences (if possible), rather than illnesses.

Questions about lifestyle choices (such as tobacco usage and alcohol consumption) can be framed in a way that destigmatises them, for example by focusing on how much they consume, rather than a binary, judgemental ‘have you ever smoked, do you ever drink?’.

Insurers and reinsurers continue to evolve underwriting approaches based on these behavioural economics principles, and keen observers will have noted that over the last few years, the structure and nature of questions asked at application stage has changed, sometimes in a major way, sometimes in a more subtle way. This evolution will undoubtedly continue.

Big data, digital technologies, and Artificial Intelligence

Arguably, it will be technology, powered by big data and artificial intelligence, that has the most scope to drive customer centric innovation in underwriting, underpinning faster, more personalised decisioning, and a more contemporary, omnichannel client experience.

Life insurance has long been a data driven industry. Mortality tables, after all, are based on life expectancy data going back over a century. When that data is supplemented with the wealth of data from other sources, including an insurer’s own claims experience, lifestyle data, global mortality, and morbidity data (from reinsurers), an even more accurate picture can be built up of the risks associated with various health, lifestyle, and psychological factors. In simple terms, the more data an insurer has, the more precise their decisioning can be.

Internationally, some life insurers already incorporate non-traditional risk rating factors – such as education, driving history, even social media activity, into their underwriting. In an ideal world, consumer sovereignty over their own data (via the Consumer Data Right) will give individuals the ability to grant access to their personal data, such as their electronic health records and health insurance claims history, opening up the potential for faster, more accurate underwriting.

(Today, speed is everything. Indeed, Deloitte’s research^[8] on Life Insurance underwriting suggests that the likelihood of prospects buying a policy once they apply increases by around 20% as the underwriting and application process gets closer to real time).

When that big data is coupled with developments in artificial intelligence, the possibilities become even more exciting.

Artificial intelligence, including machine learning, has the capability to analyse vast volumes of unstructured data, recognising patterns and producing insights that would otherwise take months. Aside from the incredible speed and granularity of underwriting that AI can drive, the insights uncovered could be turned into new risk factors (e.g., gym membership) that are incorporated into the underwriting process, allowing greater personalisation, and potentially opening up client access to more cover.

Diagnosing diabetes with AI and 10 seconds of voice recording

The intersection point for all these developments may well be our digital devices, including our phones and wearables.

Just using the Apple ecosystem as an example, between their phone and Apple Watch (the highest selling watch in the world), users accumulate a vast array of data, including steps, heart rate, sleep patterns and so on, that can be used to assess health. The cameras and microphone within those devices are also powerful sources of data, especially when combined with the latest developments in disease diagnosis.

Using the camera to send photos of skin cancers is one example. More recently, scientists have found a way to scan for type 2 diabetes using AI and just 10 seconds of voice recording!

According to Medical News Today^[9], researchers in India have developed a highly accurate model tool by analysing six-to-ten-second voice clips from 267 study participants — some of whom had diabetes and some of whom did not — recorded on their smartphones.

The study found that changes in pitch and voice strength were significant for diagnosing type 2 diabetes.

In summary

Historically, seen as a complex and lengthy process, creating barriers for potential clients, underwriting in the life insurance industry is experiencing a profound transformation, evolving in line with several megatrends, and making strides towards a more client-centric approach by harnessing the power of big data, AI, and behavioural science,

One significant trend shaping the future of underwriting is society’s growing focus on well-=being. The wellness industry’s rapid growth, with global spending estimated at $4.4 trillion, is reshaping the way insurers assess risk. Sleep, in particular, is gaining prominence as a focus of wellness, with the potential to reshape underwriting through the power of sleep data collected through wearable devices like the Apple Watch.

Consumers expect insurers to support their wellbeing, and this expectation is driving the development of integrated wellness offerings. By engaging applicants with thoughtful questions and tailored resources, underwriting can become a tool for positive health outcomes.

Behavioural economics plays a pivotal role in improving underwriting accuracy by understanding the psychological factors that influence disclosure. By framing questions positively, addressing honesty beliefs, and considering cognitive resources and negative behaviours, insurers can enhance the precision of health disclosure.

This ongoing transformation promises a more streamlined, accurate, and personalised underwriting process, ultimately benefiting both insurers and policyholders.

———–

References:
[1] https://www.linkedin.com/pulse/dont-think-underwriting-customer-experience-rajesh-singh/
[2] https://retailbeauty.com.au/australia-ranked-as-10th-largest-wellness-market-in-the-world/
[3] https://www.actuaries.digital/2022/05/26/how-the-foundation-of-health-can-shake-up-insurance-underwriting/
[4] https://www.scor.com/en/expert-views/consumer-view-life-insurance-market
[5] https://www.scor.com/en/expert-views/consumer-view-life-insurance-market
[6] https://www.scor.com/en/expert-views/simplified-underwriting-behavioural-lens
[7] https://thedecisionlab.com/reference-guide/philosophy/system-1-and-system-2-thinking
[8] https://www2.deloitte.com/content/dam/Deloitte/ke/Documents/financial-services/Insurance%20Outlook%20report%20EA%20-%20Interactive.pdf
[9] https://www.medicalnewstoday.com/articles/ai-10-second-voice-clip-help-diabetes-diagnosis

The post Adviser briefing – the future of client-centric life underwriting appeared first on AdviserVoice.

Responsible underwriting has evolved from an inwardly focused risk management process to an externally focused process that is transparent, socially aware, adaptive, and sensitive to evolving community expectations.

Introducing responsible underwriting 2.0

When viewed from a technical perspective, it is tempting to characterise life insurance as revolving almost entirely around the interplay between product design, pricing, underwriting and claims. And while this true on one level, when viewed through a consumer lens, life insurance can be distilled down to something far simpler and more fundamental – a promise to be there to pay claims.

In a sobering piece of research from PWC, 78% of Australians said they viewed life insurance as important, while only 42% believed their life insurer would be there for them in their time of need^[1].

Being there to pay claims relies on two related concepts, the first being that the insurer is quite literally still in business and has the financial resources to honour those claims. The second, which facilitates a theoretically smoother claims process, is that the insurer is confident that when they first admitted the client to the insurance pool, it was on the right terms, and at the right price.

At the heart of both these concepts is the idea of sustainable – responsible – underwriting.

Life insurance underwriting has always been a balancing act, treading a fine line between encouraging enough new lives insured into the insurance pool to keep it viable, whilst also ensuring their premiums and policy terms accurately reflect their likelihood of claiming.

Treading this balance has never been more important, nor more challenging.

A fundamental reshaping of the workforce is colliding with health and societal trends that are driving claims incidence – especially for disability and trauma cover – ever higher. At the same time, a cost-of-living crisis is engulfing many households, as the Reserve Bank’s desire to quell decades’ high inflation has seen almost a year of successive mortgage rate increases.

Meaning Australian families’ need for life insurance is increasing, just as their ability to afford it is decreasing.

Responsible underwriting is therefore about an approach to underwriting which truly puts the customer at its heart. It is an approach that drives the long-term affordability of life insurance, it is an approach that drives the payment of more claims in less time, and it is an approach that creates more consumer confidence and trust in their insurer. Ultimately, it is an approach that is making the entire life insurance sector more sustainable.

In this article, the first in a series exploring the future of life underwriting, we will explore the concept of sustainable – or responsible – underwriting in more detail, including how it has evolved. We will look its fundamental principles, the outcomes it can drive, and the challenges to implementing it effectively.

The basics of underwriting risk

The basic premise of life underwriting is to assess the risk profile of an individual, relative to the likelihood of them claiming on a life insurance policy.  In order to do that they need to understand the circumstances of the individual across a number of criteria, including:

• age and gender (simplistically, the likelihood of claim increases with age, and females have lower mortality but higher morbidity)
• occupation and income (needed to determine whether the job itself has higher risk of death or injury, and also to judge appropriateness of sums insured and likelihood of return to work)
• pastimes and sports (mountain climbing, motor racing and scuba diving are risky, and footballers have high rates of injury)
• lifestyle (alcohol, tobacco and other recreational drugs are linked to higher mortality and morbidity)
• health history (current state of health, any past health issues, and any family history of hereditary conditions).

Underwriting is done with reference to a price point

Assessing whether one individual represents a higher or lower risk than another is meaningless without context, and in life insurance that context is the standard premium rate.

That premium rate is calculated (and legally certified) by actuaries, who – with reference to a variety of data sources including life mortality and morbidity experience tables – essentially predict the likelihood of experiencing a claimable event, in turn allowing them to calculate a premium which reflects this risk (along with other costs such as distribution, administration, and the cost of capital).

With reference to this standard premium rate (which varies by age, gender, and smoker status), and after understanding the risk profile of the applicant, the underwriter then calls on other data sources (usually consolidated as a set of guidelines) to determine whether that applicant should be accepted in the insurance pool at standard rates and on standard terms, or whether their increased risk justifies:

• paying a loaded premium, and/or
• having certain risks excluded, or
• being denied cover altogether.

Underwriting has always been about sustainability

In one sense, underwriting has always been responsible and sustainable, because its role has been to ensure that customers enter the insurance pool on the right terms. If that process is applied correctly, then – on the basis that actuarial assumptions about price and likely expected claims experience are correct – the pool should become sustainable well into the future.

Underwriting as part of a feedback loop

Underwriting and claims are both part of a continuous feedback loop, where signals about health trends and claims experiences are fed back to actuaries. In the event that there is a deviation between expected and actual claims experience, then this signals the need for some (hopefully minor) adjustments to premium rates, and potentially even to underwriting guidelines and philosophies.

Sometimes these deviations are small, and represent minor corrections within the parameters of some fairly evident trends, such as mortality improvements (good), or the proliferation of HIV in the 80s and 90s (bad). Other times, insurers are caught by surprise, and major intervention – rather than minor tweaking – is required, as it was with retail income protection recently.

Shocks to the system – life insurance profitability

If the product design, pricing, underwriting and claims feedback loop operated efficiently, then life insurers should exhibit consistent, predictable, and positive profitability at any given time.

Up until recently however, the overall Australian life insurance sector, was making substantial losses, largely attributable to one product category – Individual Disability Income Insurance (IDII).

Indeed, in the 5 years to December 2019, IDII products recorded losses in excess of $3 billion^[2], a figure which threatened the sustainability of both the product category and the overall life sector. It was this threat to sustainability which prompted APRA to intervene in the sector, an intervention which resulted in an overhaul of product design, and which kicked off a cycle of premium increases which is still continuing.

A shock to the system of this magnitude only occurs when there is a substantial divergence between what the actuaries expected, and what actually occurred, begging the question: what took them by surprise?

The answer in this case was a combination of industry product design and spiralling mental health claims.

Mental health and life insurance – it all happened so quickly

The proportion of Australians suffering a mental health condition has increased steeply in a relatively short period of time.

According to the National Health Survey series^[3], the proportion of Australians aged 15 and over suffering mental and behavioural disorders more than doubled between 2001 and 2021 (from 9.6% to 21.4%.) The Australian Institute of Health and Welfare estimates over 2 in 5 (44%) of Australians have experienced a mental disorder at some time in their life^[4].

Mental health claims under life insurance have similarly skyrocketed, climbing 53% between 2013 and 2018 alone, according to KPMG analysis^[5], which also found the average length of claim increased 36% over the same period.

Mental health is now the leading cause of claim for TPD, and the third leading cause for Income Protection, making it the second largest cause of claim overall^[6].

Responsible underwriting of mental health

Across the industry, a traditional ‘responsible underwriting’ approach has usually been one based purely on risk pricing and protecting the sustainability of the pool through limiting entry where risk was not well understood.

Certainly, the initial underwriting response to mental health was shaped by the industry’s general lack of experience and data was skewed towards the inclusion of exclusions.

There is a wide spectrum of mental health conditions, ranging from general anxiety, and mild depression, through to more significant conditions such as schizophrenia and bipolar disorder. These conditions differ in their complexity, their treatment, and their longevity. But the relative recency of the growth in poor mental health has contributed to a general shortage of detailed mental health morbidity data.

This fed an initial industry underwriting response to mental health sufferers that was ‘one size fits all’’. For a period of time, anyone reporting any sort of mental health condition ­– regardless of how severe and whether or not they were currently suffering from it – was likely to be offered a mental health exclusion, or have their application declined outright.

A new type of ‘responsible underwriting’

The life insurance industry doesn’t exist in a vacuum, it exists within a community. There is now widespread recognition by insurers that remaining sustainable means balancing commercial considerations with the needs and expectations of the wider community. It must have social licence.

In the case of mental health, the government and mental health advocates made it clear that the approach taken by life insurers was not acceptable.

In response, life insurers have significantly reshaped their approach to underwriting mental health, in several major ways:

• putting in place plans to accelerate the collection of data, to allow better decision making
• taking steps to better educate underwriters about different mental health conditions
• replacing the blanket exclusion approach with a more individualised approach so that not all mental health conditions are treated the same, allowing people previously excluded to get cover
• being more transparent and consultative with stakeholders including mental health advocacy groups.

Such an approach can be thought of as one as the earliest examples of ‘responsible underwriting 2.0

Other trends underwriting will need to adapt to

While the detailed analysis above is specific to mental health, the responsible underwriting response is a framework equally applicable to the many other social, economic, and regulatory changes insurers will need to deal with in the future.

1. The changing nature of work

Occupation has long been a significant risk factor considered by underwriters, and as the nature of work changes, underwriting must adapt. Megatrends, such as the ageing of the workforce, are unfolding. In the 20 years leading up to April 2021, the workforce participation rate of older Australians more than doubled (from 6.1% in 2001 to 15% in 2021)^[7], and in the future, we are likely to see evolution in product design and underwriting to cater for the insurance needs of this segment. The gig economy and the flexible working revolution, as well as constantly emerging new occupations in fields such as AI, virtual reality & drone technology, are similarly likely to force changes in the way income and occupational risks are underwritten.

2. Health – Long term trends and emerging risks

Life expectancy is increasing, as are survival rates for serious diseases like cancer. Increasingly, people are living with, rather than dying from these conditions, and in the future, it is likely that a history of suffering serious health conditions will no longer represent an automatic ‘decline’ from underwriters too. Obesity represents a challenge to underwriters, as its prevalence is increasing, and it can exhibit strong comorbidity with other health conditions, including heart diseases, musculoskeletal issues, and poor mental health. Risks associated with head injury in contact sports leading to an increased risk of developing CTE (Chronic traumatic encephalopathy) are only just beginning to be understood and can pose a new challenge for underwriters to consider.

Another positive health trend that underwriting can play a role in is wellness, where people are increasingly adopting healthy behaviours to take back control of their own health and wellbeing. The underwriting process, by helping people understand the mortality risks associated with obesity, alcohol consumption, and tobacco usage, may act as a catalyst to meaningful behavioural change. Similarly, requiring applicants to consider their family health history, and the presence of any potentially serious symptoms (e.g., sudden, unexplained weight loss) can create awareness of possible ‘red flags’ in their health.

3. E-cigarettes/vaping

The growing popularity of e-cigarettes (vapes) is an example of a health trend that is not yet fully understood. Because of their newness, data on the health effects is not as comprehensive as that existing for tobacco usage, however emerging studies show e-cigarettes can contain harmful chemicals and may also cause DNA damage. In most states and territories, it is illegal to use e-cigarettes in place where smoking is illegal. This is an example where the decision of many insurers to treat e-cigarette usage in the same way as cigarette smoking is not only responsible from a risk perspective, it is an approach generally endorsed by the wider community, who harbour wider concerns about their longer-term health effects, and their rapid take up by young people.

4. Transgender and gender diversity

Underwriting will need to adapt to changes in the way people identify from a gender perspective. Gender is relevant from both a risk pricing and communication perspective. At the moment, most insurers, including Zurich for example, still only offer two binary gender options, but are working towards offering non-binary options in the future:

 “When you apply for life insurance with Zurich you can disclose the gender identity that most suits you. Today, that still means choosing between two binary gender options, but we’re working to offer non-binary options to our customers in the future.”^[8]

Genetic testing

Genetic testing is becoming more sophisticated and more affordable, putting it within the reach of the average person. Typical tests range from the basic family tree and ethnic origin type tests – offered by website such as ancestry.com – through to more comprehensive tests for medical purposes, such as those which test for genetic conditions. To the extent that test results could encourage a person to take out life insurance – thereby exposing the insurer to anti selection risk, this has been a controversial and much debated topic. Scientists and doctors were fearful that people would choose not to take a test in case it harmed their chances of obtaining life insurance. This could set back research efforts and put individuals at risk if they indeed were unknowingly carrying some genetic condition.

Rather than simply denying people cover to people who have taken genetic tests, the industry – in an example of the new breed of responsible underwriting’ consulted with many stakeholders, and agreed to a self-imposed genetic testing moratorium^[9]. Under this moratorium, Australian life insurers agreed to a set of principles to ensure that Australians felt free to undertake genetic testing without fear it would prevent them obtaining life insurance. These principles include not requiring applicants to take genetic tests, and not asking for the disclosure of any adverse test results for sums insured of up to $500,000 of life and TPD cover, and up to $200,000 of trauma cover.

What are the characteristics of responsible underwriting?

The responsible underwriting of the future will balance sophistication, empathy, and social awareness. It will be:

• Data driven and AI powered
  Growing claims experience and technological advances will enable more data to be gathered and interpreted than ever before, with Artificial Intelligence turbocharging the ability to underwrite and price risk at a more individual level.
• Trend aware
  Social trends can be just as relevant to risk as health trends.
• More personalised
  The abundance of data, combined with the power of Artificial Intelligence, will turbocharge the ability of life insurers to underwrite and price risk at a more individual level.
• Reflect community concerns and standards around inclusivity and transparency
  Life insurers recognise that they can’t take their social licence for granted, and will need to shape their approach to be consistent with evolving community expectations.
• While still remaining risk focused and disciplined.

The outcomes of responsible underwriting

If implemented diligently, the ultimate outcomes of the new ‘responsible underwriting’, should include more people being able to get cover, more affordable cover, more stability and consistency of pricing for existing policy holders and lives insured (less surprises), greater community trust in life insurers, a more personalised and convenient underwriting experience, and the payment of more claims, more quickly.

Together, all of those outcomes can underpin the sustainability of a healthy, vibrant, life insurance industry, that improves the lives of individuals, families, and the communities they live in.

———–

References:
[1] https://www.pwc.com.au/insurance/future-of-life-insurance-mar17.pdf
[2] https://www.apra.gov.au/news-and-publications/idii-back-on-track
[3] https://www.abs.gov.au/Ausstats/abs@.nsf/Lookup/9FF78528B74F5AC5CA256DF100796E89
[4] https://www.aihw.gov.au/mental-health/topic-areas/mental-illness
[5] https://advisers.zurich.com.au/content/dam/au-documents/advisers/tools-and-resources/individual-disability-income-insurance.pdf
[6] https://www.aph.gov.au/DocumentStore.ashx?id=d0ed5689-21b2-4440-96f0-b936d76e351f&subId=705543
[7] https://www.aihw.gov.au/reports/older-people/older-australians/contents/employment-and-work
[8] https://www.zurich.com.au/latest-news/magazine/lgbtq-hub/applying-for-life-insurance.html
[9] https://fsc.org.au/news/media-release/genetics-moratorium

The post Responsible underwriting 2.0, creating trust, affordability, and claims confidence appeared first on AdviserVoice.

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.

———–

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/

The post Practical ways to build a sustainable risk advice proposition in a post-QAR world appeared first on AdviserVoice.

Can reframing claims handling as claims advocacy capture value at claim time?

Ahead of the Quality of Advice Review’s final report being released, Michelle Levy gave some early clarity on the topic of commissions in life insurance, when she made public her recommendations ^[1] that 1) commissions remain permissible and 2) they should remain at the current levels (60/20).

Although the clarity was welcomed in many quarters (so called consumer advocacy groups being a notable exception^[2]), several high-profile industry participants^[3] have been quick to point out that, within the existing regulatory framework at least, providing compliant risk advice within a 60/20 model remains economically challenging.

Within this context, advisers must take the opportunity to examine their business model from many perspectives, including the ways they deliver value to clients, and how they in turn commercialise that value.

It is hard to argue that the true value of life insurance – indeed any type of insurance – is only realised in the event of a claim, and certainly assisting clients to lodge and manage claims is one of the most important services a financial adviser can offer.

But whilst traditionally most advisers have managed claims without charging any extra fees (arguing that the commissions they receive are in effect payment in advance for such a service), this approach is becoming increasingly questionable. This is especially true in light of both the aforementioned economic challenges, and the increasing complexity of life insurance claims, exacerbated by newer style IDII contracts and the growing number of people experiencing poor mental health.

It is a given that advised life insurance clients get better claims outcomes, and that many advisers regard claims management as one of the most rewarding aspects of their role. But unless the remuneration they receive for that role accurately reflects the work they do and the value they add, the incentive to cut corners and spend less time working and developing in this area will increase. And that could ultimately spell bad news for the client experience, the claims outcomes, and the adviser/client relationship.

Claims are now serious business

At the start of 2022, long mooted legislation relating to insurance (life and general) claims handling came into effect^[4]. This legislation gave effect to a recommendation from the 2018 Hayne Royal Commission that insurance claims handling be regarded as a financial service, and be regulated as such. The main outcome of this was to require anyone involved in ‘claims handing and settling’ to hold – or be an authorised representative of – an AFS licence.

ASIC Information Sheet 253^[5] sets out guidance around ‘claims handling and settling services’, defining such a service as:

These activities include:

• making a recommendation or stating an opinion in response to an inquiry about a claim or potential claim
• making a recommendation or stating an opinion that could influence a decision about making or continuing with a claim
• representing someone in pursuing a claim
• assisting another person to make a claim
• assessing whether an insurer is liable under an insurance product
• making a decision to accept or reject all or part of a claim
• quantifying an insurer’s liability under an insurance product
• offering to settle all or part of a claim, or
• satisfying a liability of an insurer under a claim.

These services include those provided to the insured person, and third-party beneficiaries.

To the extent financial advisers already operate under strict licensing and compliance requirements, the direct impact of this change on advisers and their employees was minimal^[6], especially when compared to many participants not previously required to be licensed (including some insurers and claims advocates). Nevertheless, the introduction of the legislation underscores the expectations that claims must be handled to the highest standards of compliance, client care, and professionalism, and that the provision of these services will be under heightened scrutiny.

APRA’s latest claims statistics

In October 2022, APRA released the life insurance claims and disputes statistics for the 20/21 financial year^[7].

The data reinforces a number of important points about life claims, including the massive volume of claims being paid in any given year, the length of time it can take to settle claims, and the superior claims outcomes for advised claimants versus direct policyholders.

In terms of claims volumes, FY22 saw life insurers admit over 80,000 claims, including over 44,000 group super claims, and 16,132 retail advised claims. DII (income protection) had the most claims admitted, followed by TPD.

In terms of claim admittance rates, as Table 1 reveals, retail advised clients continue to achieve higher claims acceptance rates across all product types, relative to those holding direct policies (admitted rates for rates for group products are higher still because auto-acceptance removes non-disclosure as a factor).

Claims can be complex and time consuming

Life insurance claims can be complex and time consuming, due to a number of factors:

• complexity in product design making eligibility for benefits challenging to determine (this applies as much to new era IDII products as it does to older, legacy style products in all categories)
• complexity in the evidence required to support a claim, ranging from death certificates and probate forms to medical reports, and comprehensive financial documentation
• factors which impact the willingness and/or ability of claimants to assist in the process, such as their location, cognitive ability, or emotional state.

Benchmarking several years ago^[8] revealed just 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.

TPD claims, which are subject to more comprehensive medical evidence, and which can also throw up a number of tax traps for unwary claimants, are like to be at the upper end of these ranges.

The total processing duration of claims can also be long too, even for relatively straightforward claims, meaning they remain as open tasks which require monitoring and reporting, often over a period of months not weeks (ongoing IDII claims can of course be open for years).

APRA’s reporting on average claims duration, as shown below^[9], revealed the average claim duration ranges from 6 weeks to 6 months, and although averages can be misleading, the point is clear that claims are more likely to be open for months, not weeks. (Note, in the table, ‘duration’ refers to the processing duration).

From claims handler to claims advocate

Handling claims successfully for clients requires a great deal of technical skill, communications ability, and emotional intelligence. At the same time as needing to be able to understand and decipher complex policy wordings, some of which may date back decades, advisers need to understand the specifics of claims processes which differ from product to product and insurer to insurer, and they need to communicate with, and care for, clients likely to be in an emotionally vulnerable state, depending in the circumstances of their claim. Advisers need to show empathy and set expectations around timeframes and potential outcomes (positive and negative).

In other words, handling claims for clients is not simply a matter of helping them with paperwork, it is about being a professional advocate on your client’s behalf.

The business imperative to become a claims advocate

If we pull together the threads of the insurance claims narrative thus far, it is becoming clear that:

• managing claims is complex and demands specialised technical and relationship management skills
• the regulatory framework around claims is becoming more onerous
• managing claims within a framework of professionalism and high-quality service is very time consuming
• the cost of the adviser’s time in providing this service and keeping their skills up to date will often far exceed the remuneration they receive by way of commissions.

In other words, managing claims can be a loss maker, begging the question, is now the time to redefine the role of advisers from being that of claims manager or handler, to Claims Advocate?

How is Claims Advocacy different from simply helping my client at claim time?

The role of Claims Advocates is to help their client navigate the claims process with one or more insurers. A typical process could look like:

1. Understand the claimable event.
2. Investigate potential eligibility for claim, including examining policy terms and any applicable exclusions.
3. Understand processes specific to the client’s insurer.
4. Assist with the completion and submission of forms and gathering and provision of other requested documents.
5. Liaison with insurers, medical specialists, employers, trustees, and other external parties as part of step 4.
6. Educate, update, and inform the client throughout the process.
7. Where appropriate, advise on any tax or other financial implications of the claim payout.
8. Facilitate payment.

For some advisers, particularly risk specialists, this process may seem virtually identical to that they already follow when managing a claim for a client. And whilst that is largely true, Claims Advocacy has a few key distinguishing features:

• it is a true end – to – end service
• it is a specialised service which requires the Claims Advocate to gain a deep understanding of the claims processes of different insurers and become an expert in dealing with medical practitioners and other experts (according to one study^[10], only 50% of advisers dealing with claims have ever been trained in this area)
• it is articulated and documented as a separate service, which the Claims Advocate provides as a core offering (rather than a value add)
• it is a service that can be provided to clients who didn’t obtain their insurance through you, and – crucially
• it is a service for which there is a clearly documented cost of provision, and for which the client is charged.

Will clients pay for Claims Advocacy?

The best answer to this question lies can be seen in the number of businesses actively providing and charging for such services.

In the area of Claims Advocacy, legal firms – many operating on a ‘no win, no fee’ basis – have become highly active in this space in the last few years. Some larger legal firms have even invested in advertising campaigns, many of which target superannuation fund members who may be unaware they even have any cover.

Examples of such targeting can be seen on the first page of a Google search for ‘TPD claim’ (at the time of publishing, 5 of the first 6 results for this search were law firms).

With some ‘no win, no fee lawyers’ taking as much as 40% of a successful claim payout in legal fees^[11], their involvement is the source of ongoing – often heated – debate within the financial advice profession. Regardless, it suggests clients are more than happy to pay a fee for a valuable service, provided there are claims proceeds from which to pay that fee.

Happily, we are starting to see the emergence of Claims Advocacy firms from within the financial advice profession. In some cases, this is purely done as a way of elevating the quality of the service provided to existing clients, in others, advisers are looking to provide this service to non-clients, some with a growing number of financial advisers incorporating Claims Advocacy into their service offering, some even going so far as to establish standalone businesses to do this at scale. (These firms undoubtedly view the tens of thousands of ‘unadvised claims’ – such as those made by super fund members and direct policyholders – to be an obvious target for such a service.)

Clients don’t automatically expect advisers to do this work

The other data point that can help us gauge the client’s willingness to pay for claims advocacy is research which revealed – perhaps contrary to expectations – that most clients don’t instinctively expect to approach their adviser in the event of a claim. The Beddoes/AFA Whitepaper^[12] found many policyholders “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”.

In other words – the number of clients who expect you to do this work could be small, and the number who expect you to do it on an unpaid basis, could be even smaller.

How much should you charge for Claims Advocacy?

There is no definitive answer to this vexed question, although avoiding the approach used by the no win no fee lawyers could be the way to go if maintaining client relationships is important!

One starting point is obviously to base a fee purely on the hours spent managing a claim. So, a total of 30 hours spent managing a claim might cost $9000 at $300 per hour. Whilst seeming equitable to both client and adviser, this can become problematic if a claim is complex but low value.

Conversely a flat fee, agreed in advance, gives certainty, but can be problematic if the actual time spent is far greater or far less than that estimated.

A percentage-based fee may be easy to sell to a client (especially if it is a reasonably modest one), however complexity often bears no relation to size of the claim, and so this approach could prove unfair to either the claimant or the adviser.

Some standalone claims advocates use a combination of all these methods, charging a flat fee in conjunction with a modest percentage (capped in some cases). Also seen is the application of different fees to different product types, with TPD and IDII claims attracting higher fees than death and trauma.

Ultimately, the right approach will vary from adviser to adviser and client to client.

In summary

Claims management is a core propositional element for most advisers active in the life insurance space. Yet a reliance on historical commission streams which bear no relation to the cost of providing claims services, can end up short-changing the adviser. When claims become a loss-making service, in an already challenging economic framework for risk advice, this can act to diminish an adviser’s incentive to invest their maximum energy in developing and maintaining critical claims management knowledge, and in providing a high quality, professional claims service.

To the extent that consumers with a pending claim can more easily understand the end benefit of Claims Advocacy services, they are likely to be more willing – and able – to pay for such support, especially when those fees can be paid from the proceeds of a successful claim. As a result, reframing claims management as Claims Advocacy not only helps elevate the professional reputation of advisers, it also creates opportunities for advisers to both provide, and capture, more value at claim time.

———–

References:
[1] https://www.afr.com/companies/financial-services/levy-review-green-light-for-insurance-commissions-20221102-p5buzx
[2] https://www.afr.com/companies/financial-services/consumer-groups-demand-ban-on-insurance-commissions-20221117-p5bz62
[3] https://www.professionalplanner.com.au/2022/11/dangerous-policy-position-to-take-the-line-in-the-sand-over-risk-commissions/
[4] https://www.insurancebusinessmag.com/au/news/breaking-news/claims-handling-is-now-a-financial-service-323037.aspx
[5] https://asic.gov.au/media/13aboqnx/info253-published-6-may-2021.pdf
[6] https://riskinfo.com.au/news/2020/12/07/afa-advice-on-removal-of-the-claims-handling-exemption-as-a-financial-service/
[7] https://www.apra.gov.au/life-insurance-claims-and-disputes-statistics
[8] https://riskinfo.com.au/news/2020/11/24/poll-results-the-value-of-claims-services/
[9] https://www.apra.gov.au/life-insurance-claims-and-disputes-statistics
[10] https://adviser.tal.com.au/-/media/tal/files/claims/tal-value-of-advisers-at-claim-time.pdf
[11] https://www.murphys-law.com.au/faq/how-no-win-no-fee-works/
[12] https://www.afa.asn.au/news/whitepapers/the-value-of-protection-2

The post Risk claims handling – rethinking the advice approach post-QAR appeared first on AdviserVoice.

Specialised advice strategies can manage the challenges associated with running a private practice.

Private practice is a common – and in many cases dominant – career path for members of many traditional professions, including the law, medicine, accounting, and architecture. To the extent that many professionals are effectively small business owners, and often high earners, they face a number of unique and complex challenges which in turn demand more specialised life insurance advice and solutions.

In this article, we will examine the nature of risks faced by professionals in private practice, and the strategies that can be employed to help mitigate these risks, and which in turn allow individual professionals to enjoy the fruits their labour as their practices flourish.

Private practice – a popular path

For many professionals, private practice is the ultimate career goal, and a deserved reward for the years of study, internships, and the formative years of doing the hard yards.

Some professions lend themselves more to private practice than others. For example, a 2020 report prepared for the Law Society estimated that, of 83, 643 practicing solicitors, 67% worked in private practice^[1]. This compares with the 49.7% of medical practitioners who worked in the private sector, according to 2018 figures from the Department of Health^[2]. Both CPA Australia^[3] and the Institute of Chartered Accountants^[4] each have more than 100,000 members, many of whom would be represented in the 35,000 businesses providing accounting services in Australia. And of the 12,000 members of Australian Institute of Architects^[5], one imagines a significant proportion would be in private practices.

Many of these private practices are likely to be small too (for example 92% of private practicing solicitors are in firms with 1 – 4 partners^[6]), meaning as clients they are not only members of strictly regulated professions, they are not only high-income earners, but they are also small business owners, bringing forth a whole extra layer of complexity.

High level life insurance considerations as high earning professionals

To the extent that the earning potential of professionals would – on average – exceed most non-professional individuals, securing appropriate cover in the right amounts can be challenging. This is particularly true of income protection, where the impact of APRA mandated restrictions on product and benefit design will be more keenly felt by those protecting higher incomes.

Across the market, different insurers have interpreted APRA’s guidelines differently, and wide variations can be found in both the replacement ratios (the maximum proportion of annual income you are allowed to insure) and maximum monthly insurable benefit.

Replacement ratios as low as 50% and 60% are not uncommon, with 70% being the usual maximum. Additionally, some products only allow a maximum insured benefit of $30,000 per month, and for many professionals this will fall well short of their income requirements.

For professionals with annual incomes of $550,000 or more, advisers will need to seek out more specialised offerings (some of which are only available to members of strictly defined professions), with higher monthly benefits, and, in some cases, time limited ‘boosted’ replacement ratios for pre-defined events.

The merits of keeping existing, legacy, income protection policies in force, may also warrant special consideration in these circumstances, even in the face of dramatic premium increases.

Any gaps in protection are amplified for higher income earners, which is why business expenses cover become even more important for professionals running their own practice (as a sole practitioner or in partnership with others).

This is because the value of income protection cover can be severely eroded if by fixed business expenses which continue in disablement, even when the client’s income has stopped.

Typical continuing expenses for a professional practice could include:

• non income generating employee wages
• rent
• equipment leasing
• telephone, internet, and other utilities.

Without business expenses cover, these expenses would need to be paid from any income protection benefits, eroding the ability of those benefits to the client’s daily living expenses, such as the rent or mortgage, groceries, school fees, credit card bills and many more.

The case study in the table below provides a powerful example. It is based on a single partner drawing $25,000 in salary per month from a practice, and with $11,000 per month in ongoing business expenses.

Expenses which can typically be covered under Business Expenses insurance – the premiums for which are normally 100% tax deductible – include:

• wages of non-income generating employees
• rent on premises
• equipment and vehicle leasing
• telephone, internet, and other utilities
• interest on loans
• net cost of hiring a locum.

The definition of disablement – as it applies to TPD and Income Protection cover – is another crucial consideration when putting in place a protection strategy for high earning professionals.

A major priority for professionals is to ensure any disablement claim is assessed against their ability to perform the unique aspects of their own, specific, occupation, rather than any non-professional roles they may be capable of performing (‘own rather than ‘any’).

To that extent that many new era income protection policies revert to ‘any occupation’ after two years on claim, and TPD through super can only operate on an ‘any occupation’ basis, strategies which link super and non-super TPD benefits are thus particularly relevant for professionals, as is the use of trauma cover to provide protection for the most serious health events.

(For this same reason, any group life coverage a professional may have had in place from early in their career is unlikely to be suitable.)

It needs to be remembered that although the cash flow advantages of paying premiums from existing super balances – rather than out of pocket – can be especially tempting for professional clients with larger premiums, this must be weighed against the fact that premiums deducted from existing funds will erode retirement balances, whilst new contributions to risk only superannuation policies (will count towards concessional contribution caps, severely limiting the ability to make extra contributions for investment purposes.

Jumbo lump sum cover

In addition to larger incomes, professionals are also likely to have more expensive lifestyles and higher debts, meaning their lump sum cover needs will also be higher than average.

Although many insurers claim there are no upper limits on what can be applied for, in reality not all have an appetite or ability to handle ‘jumbo’ cases – and it is worth seeking out an insurer who is experienced in dealing with ultra-large sums insured.

Considerations as business owners

Running a private practice creates additional complexity for professionals, particularly if there are multiple partners or ‘key people’ in the business. Some of this comes down to pure statistical inevitability – the more partners or key people, the more likely it is that one will die or become disabled. In this regard, the table below makes for sobering reading:

There are many adverse outcomes that can result when a key person within the business dies or becomes disabled:

• loss of revenue in the period following a business owners’ death or disability
• suppliers who are concerned about credit risk and suspend the provision of goods/services
• banks and credit providers suspending credit and/or calling in debts; and
• lack of alignment and poor relationship between surviving family members and/or surviving co-owners/partners over control and future of business.

Specialised strategies that therefor become relevant to professional practices include the use of life insurance for:

• revenue protection
• asset protection
• ownership protection (and business succession), and
• estate equalisation

Revenue protection

The loss of a partner (or indeed any key person) makes a decline in revenue almost inevitable, especially when that person is a revenue generator because of their skill set and role within the business.

But there can be indirect revenue impacts as well. Finding, recruiting, and training a replacement can be very time consuming, – and very costly – taking other key people in the business away from their customer facing roles.  The new recruit may take years to reach the capacity of the person they are replacing, so the revenue impact may last for a long time. Staff morale may be impacted, such that their ongoing capacity to serve and meet customer demand, and generate revenue, may be adversely affected.

A life insurance-based Revenue Protection strategy, which can include the use of death, TPD, business expenses and trauma cover, is designed to provide business with cash to compensate for this loss of revenue.

From a tax perspective, premiums for insurance for revenue protection purposes (which must be comprehensively documented) will generally be tax deductible to the business, while claim proceeds will be assessed as business income.

Asset/business loan/debt guarantor protection

The death or disability of a business owner can put a significant strain on the ability to repay business borrowings, which can threaten the ongoing provision of credit and bring personal guarantees (for example, those secured against the business owner’s family home) into play.

Asset protection – sometimes also referred to as Debt Guarantor protection or Business Loan Protection – ensures that the business borrowings (and/or owners’ guarantees) can be extinguished or reduced in the event of death or disability, freeing up cash flow, and importantly, preserving a good credit rating.

Asset protection strategies are generally based on lump sum cover types.

Ownership protection and business succession

The complexity and diversity in personal circumstances of business partners and their families make proper succession planning – with life insurance at the core – vital. There are many benefits to a properly planned succession plan, for both the remaining business partners, and the outgoing owners (and their estate):

For the remaining partners:

• eliminates claims to management rights of the practice by the estate of departing partner
• prevents unwanted introduction of new owners with incompatible philosophies and agendas
• protects against control of the business being ‘frozen’ because of probate difficulties or legal restrictions if an owner loses legal capacity
• provides assurance of the opportunity to buy shares from an affected partner should they suffer a tragic event
• predetermines funding for the purchase, as well as the price of the business
• assures continuity of the business with minimal disruption
• provides security for suppliers, staff, creditors, and other stakeholders.

For the outgoing owner or their estate:

• removes pressure to remain involved in the business
• assures purchasers will buy the business
• provides fair price for the business interest
• reduces delay between suffering a tragic event and receiving funds.

Business Succession plans are generally supported by Buy/Sell agreements, and there are many complex considerations that go into their preparation, including tax optimisation, business valuation, and business structuring, as well as the associated estate planning objectives of individual partners and their families. As a result, Business Succession Planning is often a process which will see advisers collaborating with accountants and lawyers.

Business Succession planning – case study

Louise and Ben ran an award-winning architectural practice that was in its 8^th year of operation, employed 18 people, and was becoming very profitable.

Just when everything was going perfectly, tragedy struck, when Ben was diagnosed with late-stage cancer and died just three months later. Ben left all of his assets to his wife Rebecca, including his interest in his practice.

Rebecca had never been involved with the practice and wasn’t an architect herself, but she needed to convert her half ownership into usable funds; she had relied on Ben’s salary, and she needed money to support herself and their three children.
Louise would have been happy to pay Lisa her share of the value of the business if:

1. She knew what the business was worth.
2. Rebecca agreed with the value.
3. Louise could find the money to pay her.

With a proper Business Succession plan in place, supported by life insurance, Rebecca could have then expected Louise to purchase her share of the business for an agreed predetermined price. Louise in turn could have required Rebecca to sell her share of the business to him for that predetermined price, which would have been in the best interests of both parties.

Estate equalisation for sole partner practices

A related strategy of particular relevance to sole partner practices is estate equalisation. Estate equalisation is about creating wealth to offset assets which are not easily divided in the case of the death of the owner.

There are a number of reasons why an asset such as a business creates difficulties in its division and distribution upon the death of the owner. These include the following:

• A business cannot usually be easily broken-up.
• It may not be commercially viable for the business if all beneficiaries were to receive a part of it.
• Continuing the business may not interest all or any of the beneficiaries.
• It may be difficult to convert the business into cash.
• A Capital Gains Tax liability may arise if, after receiving the asset, the beneficiary disposes of it.
• Even though the beneficiaries may be interested in continuing to operate the business, they may not have the knowledge and skills to do so.

Like Business Succession planning, Estate equalisation, will need to be supported by appropriate legal agreements and funding (e.g., life insurance).

In summary

A common career trajectory for qualified professionals is to move into private practice, bringing into play specialised life insurance products and advice strategies which reflect their higher-than-average cover needs, and the challenges they face as small business owners. These challenges relate to their role as key revenue generators within their practice, the ongoing nature of business expenses, and the challenges of equitably and appropriately transferring ownership entitlements upon the untimely death or disablement of a business partner.

By understanding how these solutions and strategies differ from mainstream approaches, advisers will be better equipped to help high earning professionals enjoy the fruits of their labour, confident that in the event of their death or disablement, their business will have the best chance of continuity, and their loved ones will be provided for and treated equitably.

———–

References:
[1] https://www.lawsociety.com.au/sites/default/files/2021-07/2020%20National%20Profile%20of%20Solicitors%20-%20Final%20-%201%20July%202021.pdf
[2] https://hwd.health.gov.au/resources/publications/factsheet-mdcl-2018-full.pdf
[3] https://www.cpaaustralia.com.au/about-cpa-australia
[4] https://www.charteredaccountantsanz.com/about-us#:~:text=Chartered%20Accountants%20Australia%20and%20New,are%20known%20as%20Difference%20Makers.
[5] https://bit.ly/3BBg2Xc
[6] https://www.lawsociety.com.au/sites/default/files/2021-07/2020%20National%20Profile%20of%20Solicitors%20-%20Final%20-%201%20July%202021.pdf
[7] https://www.adviservoice.com.au/2019/07/cpd-insurance-and-business-succession-planning/

The post The unique life insurance needs of private practice professionals appeared first on AdviserVoice.

Trustees must consider life insurance as part of the investment strategy.

The surging popularity of ‘do it yourself investing’ since the start of 2020 is now well documented.

Attracting less attention, but equally seismic in nature, is the mirroring of this DIY trend in the superannuation sector, with the last 2 years marked by significant growth in the ranks of Self-Managed Superannuation Funds (SMSFs).

In FY21, more than 21,000 new SMSFs were established, taking the total of established funds to just over 600,000^[1]. These funds represent more than 1.1m members and around $822 billion in assets^[2]. For perspective, this is around one quarter of all superannuation assets in Australia and means more is invested in SMSFs than in retail funds or public sector funds. As such, it is one the most significant parts of the superannuation landscape and one which all financial advisers should be equipped to understand.

One of the major motivators for people to establish an SMSF is to have more control over the way that fund is invested, and certainly much of the focus in the SMSF narrative is about investing. But equally important is the topic of life insurance, especially since much of the recent growth in SMSFs has come from the 35-44 age group (which made up one third of all new establishments in the 20/21 financial year^[3]).

To the extent that SMSFs are regulated by the ATO – and not APRA – there are some key characteristics that make the topic of life insurance in SMSFs inherently complex. These complexities include, but are not limited to, the following considerations:

• allowable insurance types
• what premium types are deductible
• the claim implications of claiming tax deductions for premiums
• maintaining cover in existing retail or group funds
• trustee obligations
• beneficiary rules.

In this article, we will take an introductory look at the topic of life insurance in SMSFs, with the intention of giving advisers a working knowledge of some of the issues to be aware of, and traps to avoid, when working with Millennial and Gen X SMSF trustees and members in particular.

Trustees must consider life insurance as part of the investment strategy

Under the Superannuation Industry (Supervision) – SIS – Act 1993, SMSFs are required ‘to formulate, review regularly and give effect to an investment strategy’.

In August 2012, following a federal government review, the SIS Regulations pertaining to investment strategies were amended to include reference to life insurance. Specifically, trustees are now required by law:

1.  to consider whether insurance cover should be held by the fund on the lives of the members, and
2. to review that decision as SMSF trustees regularly as part of the review the investment strategy of the fund.

Note that this does not mean that SMSFs must take out life insurance cover, just that they need to have considered it. However, most experts still recommend that this decision and the reasons behind it are supported by appropriate documentation. And by definition, just as it is mandatory to periodically review a fund’s investment strategy, so too the life insurance approach of the fund should also be similarly reviewed.

What does appropriate consideration look like?

For the purpose of the annual SMSF audit, it is necessary to prove that the trustees have considered the issue of life insurance. An example of appropriate documentation might include trustee prepared minutes/resolutions which:

• acknowledge that the trustees are aware of the obligation to consider insurance cover
• show that the trustees have considered the need for insurance cover for each of the members of the fund
• document that they have implemented cover where possible to meet those needs of the individual members and of the fund itself, and
• acknowledge that the trustees have determined that insurance is or is not required for a particular member(s)

In order to ensure this process is as robust as possible and can stand up to any potential family/beneficiary disputes down the line, trustees might consider asking each member individually whether they wish to have cover and keeping appropriate records of that process and each member’s decision.

Determining the need for cover for SMSF members

On one level, the process of determining the cover needs for SMSF members is the same as for other clients in retail or public sector funds. A comprehensive analysis of their situation, including debts, assets, budget, and any existing coverage would be central to that process.

An extra consideration that can arise specifically for SMSF members relates to Limited Recourse Borrowing Arrangements (LRBAs).

LRBA’s and life insurance for SMSFs

Data shows the SMSF sector represents over $30 billion in limited recourse borrowing arrangements⁴, many of which are entered into to buy property (which is then held on trust by the fund).

The SMSF has beneficial ownership of that property until the loan is paid off, after which time it attains legal ownership. If the SMSF defaults on the loan repayments, the lender may repossess or dispose of the asset in order to settle that debt.

For this reason (and because the death of a member may trigger the repayment or refinancing of the loan) it is not uncommon for lenders to make it mandatory for an SMSF to have life insurance in place for its members.

In these circumstances, the structure of the life insurance arrangements – in terms of claims payments – can be just as important as the cover itself. If there are issues with a trustee gaining access to an insurance payout – because of who they are paid to and in what form – this could lead to major liquidity challenges for the fund and an inability to pay off any LRBA, ultimately seeing the fund lose that property or asset.

One example of where this challenge could arise is if trustees – due to the absence of valid superannuation dependents – were required to pay the entire balance of a member’s account and insurance to that member’s estate, thus creating a potential liquidity problem for the fund if it doesn’t have all the funds to pay that balance.

Structuring is thus crucial.

Permissible types of cover through SMSFs

The rules around allowable covers within SMSFs are largely the same as for APRA regulated funds, although a degree of grandfathering means that cover types generally not permitted in modern funds can sometimes be found within existing SMSFs.

SMSFs – like other super funds – are allowed to provide any type of insurance cover that meets any of the following superannuation conditions of release:

• death (life insurance)
• permanent incapacity which causes the fund member to be unlikely to engage in gainful employment for which the member is reasonably qualified by education, training or experience (total and permanent disability insurance or TPD)
• temporary incapacity which causes the fund member to temporarily cease working (income protection insurance), and
• the diagnosis of a terminal medical condition (by two medical professionals) that is likely to result in the member’s death within two years.

While the terminal medical condition meaning under the Superannuation Industry (Supervision) Regulations denotes a period of 24 months, some life insurance policies may have a different duration for early access to the life insurance benefits via a separate ‘terminal illness’ duration (e.g., 12 months). As a result, some super fund members may be restricted to accessing just the accumulated capital value of their super fund, and not the life insurance benefit.

As per superannuation generally, the only definitions of TPD that satisfy the legislation are ‘any occupation’, and the stricter ‘Activities of Daily Living’. ‘Own Occupation’ TPD does not satisfy permissible conditions of release, and thus is no longer offered.

Similarly, trauma cover does not satisfy the above conditions of release and thus cannot be offered by super funds.

That said, there are circumstances where trauma/and or own occupation TPD can still be found within an existing SMSFs. Those circumstances involve the cover already being in place prior to 1 July 2014^[5] (or earlier, depending on when the respective product provider chose to go live with the changes in legislation).

This ‘grandfathering’ means any covers already in place for members before this date can be maintained, although as discussed below, there are limits on the extent to what premiums are tax deductible to the fund.

Note that whilst this grandfathering is not strictly limited to SMSFs, many regulated and group funds took the decision to cease supporting these cover types, even for members who were eligible, hence this scenario is more likely to be encountered in SMSFs than in APRA regulated funds.

Tax deductibility of premiums

When it comes to the tax deductibility of life insurance premiums held within super (and thus owned by the fund trustees), there are two major considerations. One is strategic – whether or not to claim deductions, even where allowed, the other is one of detail: what type of premiums are deductible to the fund?

Dealing with the last point first, the ATO permits life insurance premiums held within super to be deductible to the extent that they relate to benefits which satisfy the SIS conditions of release. This means premiums that relate to death, any occupation TPD, salary continuance and terminal illness should generally be 100% deductible to the SMSF.

For grandfathered covers, that portion of premium which relates to benefits not satisfying the conditions of release will not be deductible. In the case of trauma covers, this is the entire premium, meaning no deduction is allowable. In the case of TPD, standard proportions apply. The following table from the ATO explains these standard permissible proportions. (Note that funds wishing to claim a non-standard proportion must provide an actuarial certificate when lodging their fund return.)

The major strategic consideration with regards to deductible premiums, is where to pay the premiums from, and whether to deduct them at all (even if permitted). What at first may seem to be obviously advantageous (funding life cover from super contributions rather than out of pocket from after-tax dollars) can be actually be fraught with complexities and traps.

The main consideration relates to the likely recipients of any payout.

Where claim proceeds are paid as a lump sum to a “tax dependant” (such as a spouse or a child under 18), the whole amount of the death benefit payment – including the life insurance – will be tax free.  However, where the beneficiary is a non-dependant, the tax implications can be significant.

This is because life insurance claim amounts paid into a super accumulation account form part of the taxable component of the fund.  If the premiums have been claimed as a deduction by the fund, then it is necessary to calculate an “untaxed element”. Importantly, this untaxed element will apply not just to the life insurance claim amount but is calculated on the entire taxable component in the member’s account.

As this can literally mean many thousands of dollars in tax, it becomes crucially important to consider who the end recipient of any insurance proceeds will be before deciding to claim a deduction for premiums.

In terms of where premiums are paid from, the introduction of the Transfer Balance Cap a few years ago adds complexity if the member has both a pension and an accumulation account. This is because when life insurance claim proceeds are received, they are allocated to the account from where they have been paid.

Whilst at first glance, paying premiums from an accumulation account may seem a smart strategy, there may be an impact on the Transfer Balance cap for the beneficiary, meaning the excess needs to be withdrawn into a less tax effective environment.

If, on the other hand, the beneficiary is a dependant with a reversionary nomination in place, paying the premiums from a pension account instead of the accumulation account could potentially be a better option as the insurance proceeds won’t be considered when assessing the Transfer Balance Cap.

Again, this is a complex area where the optimal structure will vary with individual circumstances.

Maintaining life insurance outside the SMSF

The cash flow benefits of structuring life insurance within super can be compelling, especially for older members facing steep premium increases each year. And whilst there can be reasons for holding cover outside super – including minimising the erosion of retirement balances – holding life cover within super, sometimes in conjunction with ‘linked’ trauma and Own Occ TPD cover outside super, remains a commonly recommended strategy.

In the context of SMSF members however, that doesn’t have to mean the cover should always sit within the SMSF itself. Indeed, there can be a variety of reasons why maintaining existing coverage within the member’s other – already existing – super funds can be the best approach.

These reasons can include:

• continuing access to cheaper group rates (although recent price increase in group cover have changed the differential somewhat), and
• avoiding the need to be individually underwritten (either because they have health issues which would attract loadings and/or exclusions, or just for convenience reasons).

For these reasons, and others, a common approach has been to leave the existing super fund with the insurance open, with the insurance premiums paid from the existing balance, which would obviously ‘run down’ over time.

As sensible as such a strategy may have once been, it is one that now carries inherent risks and the potential for unintended consequences, courtesy of the Protecting Your Super legislation.

Under the PYS legislation, funds with balances below $6,000 and not receiving new contributions for a continuous period of 16 months are deemed to be inactive (however, some policies may have adopted a shorter period of inactivity for members). Unless you have specifically contacted your fund to say you want to keep the fund and insurance in place – and in some cases even if you have – inactive funds will be automatically swept to the ATO (held on the member’s behalf), and any life insurance arrangements lost.

Suffice to say, when advising SMSF members on life insurance, it is absolutely critical to conduct a full review of what life insurances they already have in place, and what – if any – special restrictions might exist on those covers, even if they are allowed to be kept in place.

Examples of such restrictions might include:

• automatic loss of income protection cover after a certain elapsed period
• restrictions around maximum cover limits and waiting periods
• insurance in an employer sponsored plan ceasing if employer contributions stop
• minimum balance requirements
• automatic loss of insurance in a public sector fund if member leaves the public sector
• restrictions around terminal illness payouts
• special rules if the member is unemployed for a period of time.

Naturally, the normal comparison between group and individually underwritten retail cover should also be done.

Other life insurance considerations unique to SMSFs

Not all the processes applicable to regulated funds automatically apply to SMSFs. One example of this point relates to binding death benefit nominations.

An advantage of an SMSF is the flexibility for members to have binding death benefit nominations which do not expire or lapse, and which are not subject to the prescriptiveness of Regulation 6.17a of the SIS Act in relation to signatures and witnessing^[7].

A recent court case provided clarity around this and is highly relevant to SMSFs and financial advisers.

In Hill v Zuda [2022], the High Court dismissed an appeal by the daughter of an SMSF trustee, who had earlier tried to stop a death benefit being paid to that trustee’s widowed de facto partner, on the basis that the Binding Death Benefit Nomination didn’t comply with regulation 6.17a and was therefore of no effect^[8].

In dismissing this appeal, the High Court reinforced that regulation 6.17a does not ordinarily apply to SMSFs. It should be noted, however, that the regulation does apply to an SMSF where its trust deed specifically refers to or imports the application of the regulation.

Summary

Whilst the popularity of SMSFs continues to grow, the average age of those establishing new funds continues to drop, making it almost inevitable that advisers will encounter clients who need SMSF specific life insurance advice. Whilst many of the rules and considerations applying to life insurance within regulated super funds are equally applicable to SMSFs, there are a number of critical differences which can create headaches and traps for the unwary, and which therefore demand a differentiated approach, employing highly specialised strategies.

———–

References:
[1] https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Super-statistics/SMSF/Self-managed-super-funds–A-statistical-overview-2019-20/?page=2
[2] https://www.superguide.com.au/smsfs/smsf-statistics#:~:text=The%20passage%20of%20the%20Treasury,six%20from%201%20July%202021.
[3] https://data.gov.au/data/dataset/self-managed-superannuation-funds/resource/91500273-ad24-4d50-855b-3cdfc99aa104?inner_span=True
[4] https://www.clearview.com.au/News-Resources/Articles/SMSFs,-LRBA-strategies-and-life-insurance
[5] https://www.superguide.com.au/smsfs/smsfs-and-life-insurance
[6] https://www.ato.gov.au/forms/self-managed-superannuation-fund-annual-return-instructions-2018/?page=31
[7] https://www.holdingredlich.com/high-court-ruling-clears-up-smsf-binding-death-benefit-nomination-question
[8] Ibid.

The post Life insurance considerations and strategies unique to SMSFs appeared first on AdviserVoice.

Advisers are ideally placed to act as the facilitator of estate plans for their clients.

If there were a prize for the financial advice topic with the most associated myths and misunderstandings, estate planning would have to be in with a strong chance.

“It’s all about what happens after death”, “it’s mainly about Wills and life insurance”, and “only a lawyer can do estate planning” are just some of the misconceptions that are preventing many advisers from getting more actively involved in the discipline of estate planning. Which is a great shame and a missed opportunity, not just because estate planning has long been one of the top advice needs of consumers^[1], but because the evolving social, cultural, and technological landscape is making the complexity of estate planning considerations, and thus the need for expert advice, greater than ever before. And arguably, no one is better placed to help everyday Australians navigate these complexities and optimise their decision making than financial advisers.

In this article, we will examine 5 macro trends shaping the estate planning landscape, and why these trends in turn present 6 key reasons for advisers to strengthen their estate planning offering now.

The key objectives of estate planning

Before we explore the 5 trends, it is worth briefly revisiting some common objectives in estate planning (many of which don’t involve an ‘estate’ as such):

• ensuring that wealth is passed on to intended beneficiaries, and not unintended beneficiaries
• optimising the taxation of wealth transferred
• allowing for any special future needs of beneficiaries and protecting them in the event of their own challenges (divorce, bankruptcy, health issues)
• providing for situations where decision making capacity becomes limited (for example due to dementia) through the use of ‘living estate planning’ mechanisms
• optimising the provision of aged care
• giving special consideration to a family-owned business, in terms of the ability/desire of family members to carry on the business, and any complexities relating to multiple owners.

As can be seen, there are a great many issues, many of them complex, that make effective estate planning beyond the realms of ‘do it yourself’ for the vast majority of people.

1. The great wealth transfer is underway, but it may go astray

Around the world, the great intergenerational wealth transfer will shift trillions of dollars in wealth from older to younger generations.

In the US, the quantum of this transfer is projected^[2] to be between USD $30 and $68 trillion over the next two or so years, whereas in Australia around AUD $3.5 trillion is expected to be handed down over the same period^[3]. By 2050, Australian Baby Boomers will be passing on an estimated $224 billion each year^[4].

While the majority of that $3.5 trillion may be a decade or more from changing hands, researchers from Queensland’s Griffith University have calculated that around half a trillion dollars is currently sitting with individuals aged 80 or older, the transfer of which is therefore likely to be imminent^[5].

Unfortunately, without proper estate planning, these transfers are unlikely to go smoothly, with the real risk of assets ending up with unintended recipients, tax reduction opportunities being lost, and the irreversible breakdown of family relationships.

Some of your clients may be the ones about to transfer, or receive, these inheritances, making their estate planning arrangements directly relevant to you.

Research conducted on over 3,250 families who transferred wealth found that 70% of intergenerational wealth transfers fail because no preparation of the successors was taking place.^[6]

And yet despite this, it is estimated^[7] that up to 70% of Australians don’t have a legally binding will.

2. Changing family structures make disputes more likely

As society and cultural norms evolve, so too are family and household structures changing.

According to 2020 Census data^[8], around 3.5% of families are ‘blended’, meaning families with two or more children, at least one of whom is the natural or adopted child of both partners, and at least one other child is the stepchild of one of them.

A further 6.5% of families are stepfamilies, where there is at least one resident stepchild but no child who is the natural or adopted child of both partners.

Collectively that means around one in eight families are step or blended, an increase of around 20% since the 2016 Census. Additionally, we are seeing a significant increase in grandparent led families, as well as the emergence of ‘rainbow’ families, parented by LGBTI couples.

Divorce rates are also on the rise, with nearly 200,000 Australians filing for divorce in the past two years, the highest number in more than a decade^[9].

This evolving complexity in family structures makes the recalibration of estate planning strategies even more crucial, with one expert believing it to be the main driver of an 80% increase in family disputes about wills and estates in the past decade^[10].

Critically, the application of the law in this area is also evolving, with a ground-breaking ruling by the Victorian Supreme Court in early 2022 putting parents of blended families on notice that their Wills must consider their stepchildren and not only biological offspring^[11].
The court ruled parents are under a “moral duty” to consider the financial well-being of children who come from another relationship, even when the offspring contesting the inheritance did not live with them.

3. The growth of SMSFs and associated estate planning complexities

The growth of self-directed investing, underscored by the surge in new, mainly younger, retail investors since the start of Covid, has also been mirrored in SMSF establishments, with ATO figures showing that FY21 saw the largest increase in the number of SMSF being established since FY18, with 25,312 new funds^[12].

Much of the growth has come from the 35 to 44 age group, which represented around one-third of all new establishments. SMSFs now account for around one quarter of all superannuation assets in Australia.

Aside from the complexities in managing compliant funds – which can often take new SMSF members by surprise – the rules around death benefits are different to those applying to APRA regulated funds, bringing different, more nuanced, estate planning considerations into play.

Some of the challenge lies in the ‘mum and dad’, nature of SMSFs.

According to the ATO, around 69% of SMSFs comprise two members^[13] (around one quarter are one member funds), with these members typically being life partners. It is also common for these members to be trustees of the SMSF, as well as executors as each other’s estate, creating the potential for conflicts of interest, and associated legal action, if the appropriate estate planning instruments are not in place.

One of these instruments is a binding death benefit nomination. An advantage of an SMSF is the flexibility for members to have binding death benefit nominations which do not expire or lapse, and which are not subject to the prescriptiveness of Regulation 6.17a of the SIS Act in relation to signatures and witnessing^[14].

A recent court case provided clarity around this and is highly relevant to SMSFs and financial advisers.

In Hill v Zuda [2022], the High Court dismissed an appeal by the daughter of an SMSF trustee, who had earlier tried to stop a death benefit being paid to that trustee’s widowed de facto partner, on the basis that the Binding Death Benefit Nomination didn’t comply with regulation 6.17a and was therefore of no effect^[15].

In dismissing this appeal, the High Court reinforced that regulation 6.17a does not ordinarily apply to SMSFs. It should be noted, however, that the regulation does apply to an SMSF where its trust deed refers to or imports the application of the regulation.

Another common scenario in SMSFs is choosing to make superannuation pensions reversionary on death. What on the surface can seem a sensible idea can actually remove a great deal of flexibility from the surviving spouse/member, and may create an unwanted tax burden, especially if transfer balance caps are breached.

These are just two of a myriad of evolving estate planning considerations applying to SMSFs around which most people would need up to date expert advice.

4. As our longevity increases so does the incidence of dementia

Robust estate planning isn’t just about what happens after death, it’s also about putting mechanisms in place should accident or illness rob us of the ability to make current decisions ourselves. This is becoming particularly important in the context of our ageing population; whilst we are living longer, the prevalence of dementia is also increasing (see Figure 2).

The essence of ‘living estate planning’ is the ability of spouses and children to easily – legally – make decisions on behalf of a person who has lost their capacity to do so themselves. Those decisions could relate to financial affairs, accommodation arrangements, and health care.

Health care and medical treatment can be a particularly sensitive issue. Each individual has their own personal philosophy on living and dying, and whilst the default objective of health care professionals may be to save a life at any cost, this may not align with the wishes of the individual themselves, for whom quality of life is more important.

It is for these increasingly common circumstances that the variety of ‘living estate planning’ instruments – such as Powers of Attorney, Guardianship and Advanced Care Directives are designed, and with which people need expert help.

5. Digital assets and digital wealth

A few years ago, a survey by the NSW Trustee and Guardian found that only 3% of Australians with a Will had decided what to do with social media accounts after their death^[17]. At the time, this finding was probably dismissed as amusing trivia.

Now, however, in our highly digitalised world, the concept of digital assets and digital wealth is becoming increasingly accepted, as is the recognition that – as with traditional wealth – digital wealth will form part of an individual’s estate. Digital wealth can include digital stores of value such as cryptocurrency, PayPal accounts, and even flight credits. Along with non-financial digital assets (including social media accounts which can have valuable connections and followers, and online photographs), digital wealth needs to be considered as part of a comprehensive estate and succession planning strategy, so that on their death or incapacity, their digital wealth together with their other wealth is dealt with tax effectively and in an asset protective manner.

6. The majority of estate planning work doesn’t require legal advice

Notwithstanding the obligations imposed by ASIC via RG 175, sections 354 and 403, many financial advisers perceive estate planning to be solely about the preparation and execution of formal legal documents, and as such, beyond their expertise and the legal boundaries of their advice licence. As a result, some tend to only give cursory attention to such discussions, generally recommending the client discusses their testamentary wishes with their lawyer.

In actual fact, neither assertion is true. Not all aspects of estate planning require the involvement of a legal professional.

Furthermore, whilst only qualified legal professionals may be able to execute certain documents, financial advisers are generally far better qualified to help clients make the actual decisions that are being codified in those documents.

This is because the financial adviser generally has a far more holistic understanding of the client’s family and financial situation, and also because most lawyers are not qualified nor experienced to deal with the vast range of estate planning issues that planners often see within their clients’ affairs.

One example might be the navigation of superannuation death benefits post the 2017 reforms^[18], particularly with SMSFs with pension and accumulation balances. Other areas where many lawyers lack experience and expertise include Centrelink, aged care, and taxation issues arising on death. 

Arguably the most time-consuming parts of the estate planning process revolves around fact finding and decision making, based on discussions that require a familiarity with a client’s circumstances, and which do not constitute legal advice. As such these are discussions a financial adviser is well placed to facilitate:

• appointment, selection, and remuneration of an executor
• choice and selection of guardians and trust appointors
• identification of beneficiaries and their special needs or circumstances
• the identification of the client’s assets, ownership structures and the entities that control those assets
• the distribution and control of assets to beneficiaries
• superannuation interests and binding nominations
• life insurance claims
• relationship issues, including family conflicts and marital breakdowns
• financial insolvency, and
• asset protection issues.

Advisers are often the best placed to facilitate the estate planning process

Financial advisers are often in the best position to assist clients with estate planning issues because much of this information is usually within their files as part of their “know your client” duty, and because they already have the client’s trust.  As such, advisers are well placed to project-manage and co-ordinate an estate planning process directly with their client.

In this process, the financial adviser is working with the client to identify estate planning issues and motivating the client to solve those issues with appropriate legal mechanisms, provided either by the client’s lawyer, or the adviser’s own legal services provider.

It is a model where the financial adviser is very much at the centre, allowing them much more control over the quality and integration of the process, minimising any disconnect between client intentions and outcomes, and allowing the adviser to deepen their relationship with the client and the client’s family.

A major benefit of moving into estate planning facilitation is that it needn’t carry any ongoing administration or compliance burden, involves minimal upfront costs to introduce within a practice, and no legal responsibility if managed correctly in conjunction with a competent estate planning lawyer.

It is also an opportunity for the adviser to demonstrate value and charge appropriate upfront fees (commensurate with what other professionals would charge in this area).

Of course, whilst estate planning advice is not in itself a financial service, it may give rise to the provision of a financial service or product, and the usual compliance guidelines will still apply to these circumstances. Plus, there are other boxes advisers still need to tick before such a move is made, including issues around your licensee, the limitations of your Professional Indemnity cover, and your ability to give tax advice.

In conclusion

Whilst many advisers believe estate planning to be the exclusive domain of legal professionals, in reality financial advisers are often far better placed than other professionals to facilitate the estate planning process, due to their holistic and more up to date understanding of the client’s financial and family circumstances. Whilst some estate planning documents should be left to qualified legal professionals, this generally represents the very end of a process of fact finding and decision making which is not classed as legal advice, and as such is a process which financial advisers are generally more than capable of managing for, and with, their clients.

Understanding this reality is increasingly important given there is an evolving context for estate planning which makes the need for advice – and therefore the adviser opportunity – in this area greater than ever before.

———–

References:
[1] https://asic.gov.au/regulatory-resources/find-a-document/reports/rep-627-financial-advice-what-consumers-really-think/
[2] https://www.forbes.com/sites/josephcoughlin/2021/11/16/millennials-are-banking-on-the-great-wealth-transfer-4-words-why-you-shouldnt-cash-that-check-yet/?sh=5b4a3f402dde
[3] https://www.afr.com/wealth/personal-finance/how-to-get-the-great-wealth-transfer-right-20191205-p53h7b
[4] https://www.afr.com/policy/economy/baby-boomers-to-pass-on-224b-a-year-by-2050-20211206-p59f7d
[5] https://www.afr.com/wealth/personal-finance/how-to-get-the-great-wealth-transfer-right-20191205-p53h7b
[6] https://www.forbes.com/sites/carolynrosenblatt/2011/12/09/wealth-transfers-how-to-reverse-the-70-failure-rate/?sh=544f8ed82879
[7] https://www.abc.net.au/news/2021-03-05/up-to-70-percent-of-australians-dont-have-a/13219682
[8] https://profile.id.com.au/australia/family-blending?BMID=20
[9] https://www.smh.com.au/national/divorce-20220628-p5axco.html
[10] https://www.afr.com/wealth/personal-finance/big-increase-in-inheritance-feuds-among-blended-families-20191212-p53jbs
[11] https://www.afr.com/wealth/personal-finance/court-enforces-rights-of-stepchildren-in-blended-families-20220311-p5a3u5
[12] https://insideadviser.com.au/smsf-numbers-jump-top-industry-fund-growth-in-2022/
[13] https://data.gov.au/data/dataset/self-managed-superannuation-funds
[14] https://www.holdingredlich.com/high-court-ruling-clears-up-smsf-binding-death-benefit-nomination-question
[15] Ibid.
[16] https://www.afr.com/property/residential/3-for-3-million-property-highlights-elder-abuse-risk-20200716-p55cmc#:~:text=Duncan%20HughesReporter&text=Specialist%20estate%20and%20family%20lawyers,they%20are%20not%20properly%20prepared
[17] https://hallandwilcox.com.au/thinking/what-happens-to-your-digital-wealth-on-death-and-incapacity/
[18] https://www.ato.gov.au/law/view/document?DocID=COG/LCG20173/NAT/ATO/00001#:~:text=This%20Ruling%20provides%20guidance%20on,the%20transfer%20balance%20cap%20provisions

The post 6 reasons why there’s never been a better time to offer estate planning services appeared first on AdviserVoice.

What are the options for reducing life insurance premiums while maintaining the integrity of core coverage?

Inflation – are we looking through the wrong lens?

“May you live in interesting times” is an English expression, full of irony and often claimed (without evidence) to be a translation of ancient Chinese curse.

Regardless of its uncertain provenance, it seems a more than accurate summation of the current challenges faced by consumers around the world.

Investment markets are well down, and volatility is up. Interest rates are up, not enough to earn a decent return on cash, but enough to send mortgage repayments skyward while property prices crash. And then there is inflation. Thanks to a perfect storm of climate related emergencies, war in Ukraine, geopolitical tensions with China and the continuation of Covid related supply chain issues, inflation has been rocketing, around the world.

The terms ‘cost of living’ and ‘crisis’ are increasingly appearing together, like the latest Hollywood celebrity couple.

From an advice perspective, these times are especially challenging. For the year ended 30 June 2022, the cost of a comfortable retirement for a couple rose by over 6%, forcing retirees to to eat into more of their likely shrunken capital just to maintain the stats quo^[1]. Stock market losses are likely to force pre-retirees to keep working longer than they had planned. Families in large households are being particularly hard hit by mortgage stress, rising petrol and electricity prices, and school fee increases which seemingly defy gravity.

Most recent commentary about inflation in the financial media has centred on its impact on the sharemarket, and how advisers might rethink and restructure client portfolios to best survive and thrive in the current climate.

But this emphasis on the investment response to current challenges, while important, perhaps overlooks the far more fundamental need clients have right now – for help and guidance on how to manage their cash flow and savings. It might not be exciting, but in the context of ‘holistic’ advice, helping your clients get the household finances in order might be the most important thing you can do currently to keep their financial plans on track, preserve wealth, demonstrate value, and protect your client relationships.

What exactly is happening with inflation?

The causes have been well discussed, but where exactly have the impacts of inflation between felt?

ABS data for the June 2022 quarter^[2] showed prices climbing by 6.1% – the fastest annual pace since 2001.While prices across most categories are rising, the largest increases over the last 12 months have been^[3]:

• automotive fuel 32.1 per cent
• oils and fats 14.0 per cent, coffee, and tea 9.3 per cent, breakfast cereals 8.8 per cent, bread 7.2 per cent, soft drinks 7.6 per cent
• vegetables 14.6 per cent, beef 9.4 per cent, lamb 7.1 per cent, milk 5.3 per cent
• furniture 8.5 per cent, floor coverings 6.9 per cent, home maintenance 5.9 per cent, cleaning products 8.0 per cent
• domestic travel and accommodation 7.8 per cent

Of course, averages can sometimes be misleading, and just as the impact of inflation varies from state to state, so too different demographic groups feel the impact of price rises in different ways.

One group hit hard is retirees

One group of particular relevance to advisers – and particularly challenged by inflation – is retirees. Indeed, in a recent global survey^[4], 49% of advisers said that underestimating the impact of inflation was the number one error made by people when planning their retirement.

In Australia, an often-quoted benchmark is the cost of a ‘comfortable’ retirement, as calculated each quarter by the Association of Superannuation Funds of Australia (ASFA).

As of the June 22 quarter, ASFA estimated the cost of a comfortable retirement to be $66,725 for couples and $47,383 per year for singles^[5], representing an annual increase of 6.2% for comfortable couples and 6.7% for singles. In lump sum terms, ASFA now estimates the comfortable retirement benchmark to be $640,000 for a couple, and $545,000 for singles^[6] (Of course, these figures are national and don’t reflect differences between states, or between cities and regional areas).

Reflecting their different life stage, relative to young singles and working families, ‘retiree inflation’ is influenced more by healthcare costs and less by rent and mortgage costs.

Whilst age pensions are pegged to CPI, the number of retirees receiving the pension continues to fall, meaning more people who are self-funded and therefore without this automatic ability to keep up. According to ASFA, only 40% of new retirees receive an age pension, down from 60% a decade ago and 80% when compulsory superannuation was first introduced^[7].

Mortgage stress is about to go through the roof

Perhaps even more impacted by inflation – and the associated efforts to curtail it through inflation rate rises – are those families with large mortgages, especially those in major capital cities where property prices are much higher.

In one widely publicised survey^[8], up to 65% of respondents said they held some level of concern they could default on their loan at some stage due to interest rate increases. Homeowners in NSW (38 per cent) are more likely than those in Victoria (27 per cent), Queensland (24 per cent), and South Australia (23 per cent) to feel ‘very’ concerned.

The same survey also found that more than one in six homeowners have little or no clue how the lift in cash rates will impact on their budgets, while almost a third do not consider increases in the cash rate at all when budgeting for a home loan.

Of those who did factor interest rates in, 40% had budgeted for a maximum cash rate of 3%, beyond which they would experience ‘significant’ mortgage stress. (At the time of writing, most bank economists expect rates to rise to 3.3% and beyond^[9]).

Some observers are also concerned that the average 3-month processing lag – the time it takes for RBA rate rises to actually be reflected in higher repayments – means that the true impact of even the first tranche of aggressive hikes is yet to be felt.

Clients with large families are more likely to hold larger mortgages (on larger properties), and have larger educational expenses, especially if they have children in private schools in Sydney, where fees have risen 50% in the last decade – and are expected to hit $70,000 per annum within 15 years^[10] – or in Victoria, where parents are paying the highest median private school fees in Australia^[11], with a price tag this year across all high- and low-fee non-government schools of over $14,000.

What do they want? Advice on cash flow. When do they want it? Now.

It seems then that two groups in particular, established families and retirees – both of whom are significant advice client cohorts – are seeing their financial and mental wellbeing come under additional pressure in the current climate. Meaning they need additional help.

Expert advice in managing household cashflow and budgeting is arguably the most foundational type of financial advice you can give to clients. Traditionally this has been to form the building blocks of lifelong wealth building. Right now, however, this advice is needed to protect the wealth already accumulated and keep their financial plans on track.

From a client perspective, demand for this type of advice has always been strong, not just for younger clients, but across all age groups, with over one quarter of Baby Boomers and 40% of Gen X clients saying it is a service they value^[12].

The need for help in getting household budgets under control is likely stronger now than it has ever been, and consumers around the world are turning to advisers, and financial institutions for help.

Recent UK research^[13] found that 57 per cent of mass affluent people have sought guidance or advice on managing the increased cost of living. This same group was found to have been twice as likely to consult a financial adviser for this guidance.

At the same time, a survey of US bank customers^[14] revealed that their widespread expectation that their bank would support them during these difficult times was equalled only by their widespread disappointment in how little their bank had communicated to them over recent months, beyond general ‘economic updates’,

All of which is likely to ring true in Australia.

As AFCA Chief Ombudsman David Locke said recently^[15], ‘there was a lower level of hardship complaints in FY22 which reflected the work the banking sector has done to support consumers in recent years, however we’ll be working with industry and consumer groups as we monitor the impact of cost-of-living pressures and higher interest rates on financial services consumers in the coming year’.

So how can financial advisers help?

Those experiencing financial challenges are twice as likely to encounter mental health issues according to a new report commissioned by ASIC and Beyond Blue^[16], and perhaps the first port of call for advisers is to have calming, coaching conversations with their clients. Find out how your clients are coping and if there are any particular stressors.

Secondly, consider offering your clients help in managing their cash flow. This could involve formal advice, or the provision of budgeting tools (e.g., My Prosperity) that clients can use, either by themselves or in conjunction with you).

Many advisers will also be in a position to provide direct assistance in a third, and major way, helping clients with their mortgage costs through refinancing (if you are aligned with a mortgage broker), and/or their life insurance premiums.

Strategies to optimise life insurance premiums

Life insurance provides crucial financial protection, and arguably becomes more important during challenging times. As such, maintaining coverage in the form you recommended it should always remain a priority. Realistically however, there will be times where retail policyholders – your clients – have no choice but to seek opportunities to trim premium costs. Many clients will be tempted to seek to reduce their sums insured, or cancel their cover altogether, simply because they perceive these to be the only options available. As an adviser however, you are privy to a far more extensive range of alternatives, and here is where your expertise can come to the fore.

Fundamental to understanding where to look for these cost saving opportunities is knowing how premiums are actually calculated. Beyond age, gender (neither of which you can change!), retail life insurance premium factors you may be able to influence are:

• occupation
• sports and past times
• health status
• sum insured
• premium type and payment frequency
• extra cost options
• linked or non-linked
• super or non-super
• income protection benefit periods and waiting periods

Savings opportunities possible with existing policies

1. Review loaded premiums

Premiums can be loaded because your client smokes, has a high-risk occupation or hazardous pastime, or because of the state of their health, all of which may have changed since they first took out their cover and therefore may be eligible to be removed by request. They may have retired from their sport, or changed to lower risk occupations, for example becoming office based rather than field based. Sometimes this can occur as a promotion at the same company, so try and stay up to date with your client’s specific work duties, along with their title and job status. Similarly, they may have stopped smoking, or got over an issue with their blood pressure, both of which attract removeable loadings.

2. Income protection waiting and benefit periods

Work by Zurich^[17]shows the impact on IP premiums of changing benefit and waiting periods. For example, the premium difference between a 30-day waiting period and 90 days could be as much as 41%. Finding alternative ways for your client to survive those early months of a claim (e.g., through available liquid assets or taking some/all of their accumulated sick leave) could allow significant savings without needing to reduce the benefit amount, which could be critical for more serious, longer-term claims.

Similarly, a 6-year benefit period can be as much as 26% cheaper than age 65. With KPMG statistics^[18] suggesting the average IP claim is 14 months for cancer and 18 months for mental health, however for many claimants, transitioning back to full time work can be a journey, taking time and involving extended periods of rehabilitation, which over the course of a claim can extend to many months and even years. As a result, and with the possibility of longer-term partial disability claims, it’s important for advisers to consider the appropriateness of supplementing reduced benefit periods with lump-sum total and permanent disability benefits.

3. Removing optional extras

Extra cost options that are frequently added to retail policies include claims indexing, boosted coverage for certain predefined events, and trauma reinstatement. Removing these may be preferable to reductions in core coverage.

4. Re-assess sum insured and decline indexing if appropriate

There can be a variety of reasons why the sum insured under some or all of your client’s policies may exceed their needs (equally, there are reasons why cover could now be inadequate, but the focus here is savings!). Their circumstances may have changed, for example they have moved and reduced their debt levels, or they have changed jobs and their income is permanently lower. Or the sum insured has got ahead of their circumstances through the effect of CPI indexing over the years. Either way, a regular review of the appropriateness of cover amounts should be a priority and may open up opportunities for savings.

5. Linking policies

Standalone covers offer more protection than ‘linked’ policies because a claim for one benefit doesn’t reduce the sum insured for other benefit types. However, for that reason they are also more expensive than linked covers. Just like changes to IP benefit and waiting periods, changing from standalone to linked coverage represents a meaningful reduction in overall coverage, however it may be one where circumstances make it a viable strategy for reducing cost without lowering the sum insured for the first claimable event.

6. Structuring through super

Death, TPD and IP can all be written through retail risk-only super products, and paid for via rollover, with obvious benefits for a client’s cash flow (there are downsides in that super-based policies have less generous benefits and definitions, e.g., TPD can only be ‘any’ occupation). Whilst some may argue this is merely about payment method rather than premium savings, some policies do benefit from the passing back of a 15% fund tax deduction, translating into lower premium rates for the equivalent cover.

7. Payment method

Payment method changes allow either the opportunity to save on premiums (by switching from monthly to annual), or smooth cash flow (switching from annual to monthly).

8. A last resort

For those clients with very temporary, but extreme, financial challenges, a premium holiday option – offered by most insurers – could be worthy of consideration. The obvious downside is that the client has no protection while the holiday is in effect, the upside is that cover recommences once the client starts paying premiums again, making it considerably more preferable (especially for older or non-cleanskin clients) to cancelling cover, then needing to be re-underwritten.

As can be seen, the options available to match appropriate cover levels with client budgetary constraints are numerous. The way some of these options are offered may vary from insurer to insurer, meaning the pathways available for each client will require specific investigation as needed.

Conclusion

Consumers around the world are facing a cost-of-living crisis, with pressure on household finances the highest it has been in decades. Two large advice cohorts – retirees and established families – have been more impacted by these challenges than most, increasing their need for a more foundational type of financial advice around their cashflow management. As well as providing clients with much needed guidance around their cash flow management, advisers are ideally placed to help clients unlock potential savings with their life insurance, by finding ways to trim premium costs whilst minimising any compromises to core coverage.

———–

References:
[1] https://thenewdaily.com.au/finance/superannuation/2022/08/21/superannuation-jumps-in-july/
[2] https://www.theguardian.com/news/datablog/ng-interactive/2022/jul/27/cost-of-living-australia-price-changes-inflation-2022-sydney-melbourne-brisbane-interactive-data-explorer-june-quarter
[3] https://nationalseniors.com.au/news/finance/retirement-spending-is-up
[4] https://www.financialstandard.com.au/news/2022-is-the-hardest-year-to-retire-report-179796726?q=cost%20of%20living
[5] https://startsat60.com/media/news/seniors-dealt-another-blow-as-the-cost-of-a-comfortable-retirement-increases
[6] https://nationalseniors.com.au/news/finance/retirement-spending-is-up
[7] Ibid.
[8] https://www.realestatebusiness.com.au/industry/24277-cash-rate-rises-cause-for-concern-for-65-of-aussie-homeowners
[9] https://www.canstar.com.au/home-loans/interest-rate-forecast-australia-2022/
[10] https://www.smh.com.au/national/nsw/sydney-private-school-fees-jump-50-per-cent-in-a-decade-20220906-p5bfuy.html#:~:text=Fees%20at%20Sydney’s%20private%20schools,expensive%20schools%20within%2015%20years
[11] https://www.theage.com.au/national/victoria/victorian-private-school-costs-rise-to-nation-s-highest-as-pandemic-fee-freeze-ends-20220126-p59r9w.html
[12] ‘My Generation Report’, ING, 2019.
[13] https://www.ftadviser.com/your-industry/2022/08/24/half-of-savers-turn-to-advice-and-guidance-amid-cost-of-living-crisis/
[14] https://www.businesswire.com/news/home/20220630005108/en/Customers-Demand-More-From-Banks-as-Cost-of-Living-Crisis-Bites
[15] https://www.professionalplanner.com.au/2022/07/less-complaints-about-bad-advice-but-more-on-product-interpretation-afca/
[16] https://www.professionalplanner.com.au/2022/08/more-services-needed-to-improve-financial-wellbeing-asic-beyond-blue/
[17] https://www.zurich.com.au/advisers/tools-and-resources/change-navigator/individual-disability-income-insurance.html
[18] https://home.kpmg/au/en/home/media/press-releases/2020/06/joint-study-reveals-large-rise-life-insurance-claims-costs-22-june-2020.html

The post Cost of living crisis – shifting the advice lens appeared first on AdviserVoice.

How can advisers assess the commercial merits of business insurance as an offering, potentially opening up opportunities to assist both new and existing customers?

Australian business – a finely tuned Ferrari, or a ute blowing smoke?

Small businesses are – we are often told – the economic engine that powers Australia. Indeed, according to ABS figures^[1], around 89% of Australia’s 2.6 million business entities (have 4 employees or less (60% have zero).

But the engine doesn’t always purr along luxuriously. It frequently splutters and sometimes even fails altogether; one Australian study^[2] found the four-year survival rate to be just 56% for businesses with no employees, and 68% for those with 1-4.

Given the unique challenges faced by smaller businesses, we should perhaps be unsurprised that so many don’t survive for long. Smaller businesses are, after all, more prone to cash flow issues, and are far more reliant on key people. This can be especially problematic if that person is removed from the business, whether this is due to foreseen circumstances (retirement, career change, holiday), or an unforeseen event (accident, illness, or even death).

None of us are bulletproof

Small business owners – and employees – are just as susceptible to accidents and illness as the rest of the population (perhaps even more so given the associated stress levels), and the maths can be quite confronting. According to Zurich^[3], a two-partner business has a 35% of chance of being disrupted by the death of one of those partners before they turn 65, and a 52% chance that a partner will die or become totally disabled (temporarily or permanently). For larger partnerships the odds skyrocket to more than 70% and 80% respectively.

So, what happens when a key person – either the business owner or a critical employee – is suddenly removed from the business?

As you would expect, the death of a business owner can often also prove fatal for the business itself, and most sole proprietor businesses would almost certainly cease to operate in these circumstances. But even for larger businesses the prospects are grim. A University of Warwick study⁴ found that sales dipped by 60%, on average, four years after the death of the founding entrepreneur, and employment at the firms was down 17%. The survival rate of these businesses was 20% lower than at similar firms where the owner was still living. At the same time the likelihood of bankruptcy rose at firms where the owner passed away.

Regardless of whether a business survives – or shuts down – in these circumstances, further complexity is likely to arise in terms of the decedent’s ownership stake, and its potential sale and/or transfer.

Even the disablement of a key person can cause havoc with the viability of a small business. Removing their skills and intellectual capacity will impede the capacity of the business to serve its customers, shrinking its revenue stream without necessarily shrinking its cost base, and at the same time increasing the risk those customers will defect to competitors.

What is at stake – in either scenario – is the entire value of the business

Business continuity and business succession

The preservation of the value of the business – and the management of risks that could erode that value – are the core objectives of business continuity and business succession planning.

Business continuity

Business continuity is about maintaining business functions, or quickly resuming them, in the event of a major disruption, such as fire or flood, a pandemic related shutdown, or the permanent or temporary loss of a key employee. Issues that would typically be covered off in a business continuity plan include:

• health and safety of staff
• securing of premises
• data security
• IT systems
• Ccustomer communication
• staff procedures and communication, and
• temporary or permanent replacement of equipment or staff.

Risk management is also a critical component of business continuity, and for simplicity sake this can be thought of as comprising two components – risk minimisation and risk mitigation.

Risk minimisation describes the steps taken to prevent or reduce the likelihood of a disruptive event occurring in the first place. Examples can include fire proofing premises (e.g. sprinkler systems) or making them more secure against physical or cyber intrusion.

Risk mitigation is about damage limitation. One of the most important forms of risk mitigation is to insure the assets that are at risk, so any loss from their reduced capacity is minimised, and this is where general insurance (machinery, premises etc) and life insurance (key people) play crucial roles.

Business succession

In a small business context, succession planning is a strategy for passing on leadership roles, and often a degree of ownership of a business—to others, whether they be family members, or other business partners. It preserves the value of the business by ensuring the business can continue to run smoothly after key people have moved on, retired, or passed away.

The benefits of an effective succession plan can include asset protection, business growth, harmonious structuring, and an optimised tax situation. Without a plan, the process of business succession can descend into conflict, and even litigation, dramatically eroding business value along the way.

Yet worryingly, research^[5] undertaken in 2015 revealed that the majority of Australian business owners surveyed (66%) did not yet have a formal succession plan in place.

A business succession plan will typically address:

• business valuation
• identification and development of successors
• ownership versus control, and
• the alignment of family interests.

Business succession mechanisms can include formal instruments (e.g. partnership agreements and buy-sell agreements) and, of course, life insurance.

Life insurance in a business context – the ‘key person’ concept

Central to the role of life insurance within business succession and business continuity strategies is the concept of the ‘key person’.

Most businesses have one or more key persons whose skill, knowledge, experience and leadership ensures the success of the business. A key person in any business may generally be defined as one whose death, disablement or early retirement may have an adverse economic effect on the business.

It is important to identify these key people and to quantify the adverse outcomes that are likely to be suffered by the business in the event of their death, disablement or illness. Specifically, these adverse outcomes could include:

• loss of revenue in the period following a business owners’ death or disability
• suppliers who are concerned about credit risk and suspend the provision of goods/services
• banks and credit providers suspending credit and/or calling in debts, and
• lack of alignment and poor relationship between surviving family members and/or surviving co-owners/partners over control and future of business.

Life insurance – in conjunction with appropriate legal instruments and documentation – can thus become a crucial risk mitigant, minimising the adverse outcomes by providing protection across three broad risk categories:

• revenue
• assets
• ownership.

Revenue protection

The loss of a key person makes a decline in revenue almost inevitable, especially when that person is a revenue generator because of their skill set and role within the business.

But there can be indirect revenue impacts as well. Finding, recruiting and training a replacement can be very time consuming, – and very costly – taking other key people in the business away from their customer facing roles.  The new recruit may take years to reach the capacity of the person they are replacing, so the revenue impact may last for a long time. Staff morale may be impacted, such that their ongoing capacity to serve and meet customer demand, and generate revenue, may be adversely affected.

A life insurance-based Revenue Protection strategy is designed to provide business with cash to compensate for this loss of revenue.

Asset protection

The death or disability of a business owner can put a significant strain on the ability to repay business borrowings, which can threaten the ongoing provision of credit and bring personal guarantees (for example, those secured against the business owner’s family home) into play.

A forced sale of assets may become necessary if creditors call in debts because they are worried about sustainability of the debt. Cash flow may need to be diverted away from day to day business expenses (wages, stock, rent) to repay debt, which can have unintended flow on effects.

Asset protection – sometimes also referred to as Debt Guarantor protection or Business Loan Protection – ensures that the business borrowings (and/or owners’ guarantees) can be extinguished or reduced in the event of death or disability, freeing up cash flow, and importantly, preserving a good credit rating.

Ownership protection

Ownership protection – also known as or buy/sell cover – is designed to help ensure the smooth succession of ownership between shareholders in the event of the death or disablement of a business owner.

The sudden and unexpected death of a business owner will often require surviving owners to negotiate with the deceased owner’s legal representative over the transfer of equity. Naturally the executor may be more concerned about the needs of the estate than the needs of the business. With appropriate formal buy/sell agreements in place, and the appropriate funding (via life insurance), an ownership protection strategy can provide the continuing owners with sufficient cash to purchase the outgoing owner’s equity. (A similar issue can occur when an owner suffers disablement or a health trauma and is no longer willing or able to continue in the business.)

Note that for this strategy to be effective, the life insurance (funding) and the formal legal agreements need to work hand in hand. Without this combination, it is possible such a situation can descend into acrimonious disputes, over the value of the ownership stake, and the ability of surviving family members to enter, and influence the direction of, the business.

Ownership protection – how it can go wrong

Under a partnership structure, partners are jointly and individually responsible for the debts of the business^[6]. This means if a business partner is unable to pay a debt that they have incurred on behalf of the business, other partners may need to pay this debt themselves. This becomes particularly relevant in the event that a partner passes away.

In the absence of a written partnership agreement, the Partnership Act in each state or territory would generally apply^[7], usually triggering the automatic dissolution of the partnership and leaving the surviving partner(s) liable for the entitlements of any laid off staff and the debts (including tax) of business. On top of this they must find a way to pay the deceased partner’s estate their share of the partnership value. Without the right agreements and funding in place, this could prove disastrous for everyone involved.

Taxation considerations for business insurance

The tax treatment of business life insurance premiums and claims benefits can vary, depending on the ownership and funding of the relevant policies.

The table below provides a high-level summary of the likely tax treatment for different scenarios. (Naturally this list is not exhaustive and does not constitute tax advice!)

Put it in writing

The deductibility of revenue protection premiums requires the clear documentation of the cover purpose and sum-insured calculation methodology. This can be covered in business minutes, and then used for tax and auditing purposes.

Ownership and funding considerations

Decisions about policy ownership and how to fund premiums can have a significant impact on:

• the cost of cover
• the ease with which premiums can be paid, and
• the tax treatment of both premiums and claims proceeds.

Self-ownership, cross ownership, super fund ownership and business ownership all have their pros and cons. The structure of the business, if it has multiple entities, also has implications, as does the use of trusts by business and individuals. The optimal ownership solution will naturally vary on a case by case basis, depending on individual circumstances.

Insurance isn’t always the answer

It is worth remembering that in the context of ownership protection – life insurance is being used as a funding mechanism to support the ultimate transfer of the business interests in the event of the death, disablement, or critical illness of a business owner. There will naturally be succession events which are not insurable, or circumstances where the owners themselves are unable to obtain cover, perhaps because of health issues. For these reasons, Buy Sell agreements should generally outline alternative funding arrangements for the various succession events.

A massive opportunity for financial advisers

Australia has around 2.4 million actively operating businesses powering our economy, of which around 90% employ 4 people or less. They provide employment, are a source of innovation and help bring communities together. They also represent the hopes and dreams – and wealth – of business owners and their families.

Estimates^[8] suggest 80% of Australian businesses will change hands in the coming decade, due to the planned retirement of their baby boomer owners. What is not estimated but just as certain is that many unplanned business exits will also occur, due to the untimely death or disablement of business owners and partners. Without the right planning and protection mechanisms in place, the value of these businesses may be shattered, the wealth of families destroyed, and the jobs of thousands of employees will be at risk.

Given the dire consequences of not planning, one would expect almost all businesses to have formal plans in place to cover these succession events. Sadly, it seems many business owners are just too focused on running their business to focus on broader issues, and some studies estimate that upwards of 66% of Australian businesses are without a formal succession strategy.

This substantial gap represents a meaningful opportunity for experts capable of providing appropriate advice. To the extent that life insurance can be a central component of business succession and business continuity strategies, it is an opportunity which financial advisers are perfectly placed to take advantage of.

———–

References:
[1] https://www.abs.gov.au/statistics/economy/business-indicators/counts-australian-businesses-including-entries-and-exits/latest-release ‘Small business counts: Small business in the Australian economy’, Australian Small Business and Family Enterprise Ombudsman, Australian Government, 2016.
[2] ‘Small business counts: Small business in the Australian economy’, Australian Small Business and Family Enterprise Ombudsman, Australian Government, 2016.
[3] ‘What are the odds?’, Zurich Life Insurance Fact Sheet, published July 2016.
[4] ‘Many firms don’t survive after owners die’, Elaine Pofeld, forbes.com, published February 2013.
[5] ‘Succession Planning Report: Understanding the current perceptions of business owners towards succession planning’, RSM Australia, 2015.
[6] ‘What happens to the partnership if my partner dies?’, https://legalvision.com.au/what-happens-to-the-partnership-if-my-partner-dies/ .
[7] ‘What’s the back-up plan if your partner dies tonight?’, Drew Browne, Smallville.com.au, June 15 2017.
[8] ‘The MGI Family and Private Business Survey 2006’, published in Australian Family Business Sector Statistics, familybusiness.org.au.

Other sources:
[1] ‘Understanding Business Insurance’, GWM Adviser Services, mlc.com.au.
[2] ‘Understanding Business Insurance’, Glen, D., moneymanagement.com.au, published 21 February 2020.

The post Keep the engine tuned – How financial advisers protect Aussie businesses and make ownership transition smoother appeared first on AdviserVoice.

Many experts believe the key to future success for Australian advice practices is specialisation.

The courage to be different

“In order to be irreplaceable, one must always be different.”
Coco Chanel.

One of the most foundational concepts in marketing, and indeed business more generally, is the Unique Selling Proposition (USP). In less technical terms, this the nature of your business/brand/product that stands out from the crowd, such that customers should choose to buy from you and not your competitor.

But whilst most people will happily agree with the sentiment – the value of differentiating your offering is pretty hard to argue with after all – successful execution is much less commonly seen, especially in financial advice.

Closely tied to concept of differentiation is a strategic question, one that is frequently asked by many a financial adviser. That question is whether to pursue a generalist approach – simplistically being (in an advice sense) many things to many people ­– or more of a niche approach, where the expertise offered is narrower but deeper.

Some industry observers fervently believe that specialisation is the way of the future for financial advisers, and certainly there are many advantages that accrue to niche players, many of which pertain to efficiency – in process, in marketing, and in professional development. But there are downsides too. Getting a niche strategy wrong can be an efficient way to shrink a business!

In this article, we will explore the concept of niche marketing as it pertains to financial advice, including both the advantages and disadvantages. We will also look at the steps in developing a niche-base strategy and examine examples of advice niches, including real market examples.

What is a niche market?

In simple terms, a niche is a narrow subset or segment of customers, within the total market.

For it to be viable, a niche must have the following characteristics:

• customers within that niche must have identifiably unique characteristics relative to the overall market – whether in the products or channels they prefer, their demographics, needs, or lifestyle
• they must be able to be identified and reached as a niche (meaning it is possible to speak to that niche individually), and
• the niche must be of sufficient size, and with sufficient purchasing power, to make serving that niche financially viable.

Examples of niches, depending on the context, might include surgeons, fitness fanatics, millennials, and life insurance buyers. (A hyper niche might be people who fall into all four of these categories!).

The advantages of a niche marketing

At face value, the expression ‘the riches are in the niches’ suggests the gold in a more focused approach is all about increasing revenue. And certainly, the more focused marketing approach that a niche strategy necessitates should lift revenues. But it’s not the only outcome that matters.  The business sustainability equation has many elements – including the cost of doing business, quality of client relationships, and efficiency – and a well-executed niche strategy can drive improvements across all these areas.

Advantage 1 – Stand out from the crowd

It’s human nature to think of ourselves as unique and special, and as consumers this manifests as an attraction to products and brands that seem more tailored to our uniqueness. There’s no shortage of advisers offering the same thing (build wealth, secure your retirement, reduce tax etc), but advisers who genuinely speak to a specific audience are relatively scarce, meaning they stand out.

Of course, standing out in a modern context means standing out online, where most consumer journeys begin. Being a niche player makes it easier for you to standout in Google search too, particularly as our search behaviour becomes more natural language and voice based, either via our mobile devices, or using smart speakers such as Alexa and Google Assist (see below). In the US for example:

• 50% of all mobile users search via voice^[1]
• Mobile users are 3 times more likely to use voice than text search^[2]
• Around one third of households own a smart speaker^[3].

Given our reputation as an early adopter of mobile technology^[4], these figures could be even higher in Australia.

Advantage 2 – more focused marketing is cheaper and more responsive

When you more narrowly define your target audience, and tailor your message, the efficiency of your marketing and communication improves from two directions.

Firstly, your target audience is likely to be more responsive to messaging that speaks more directly to them and their unique – niche – needs.

Secondly, you can be more targeted in the channels you use to speak to that audience. There is no need to spend money reaching prospects who aren’t in your target. That means less wastage.

From a practical perspective, this could mean you promote your services on those websites specifically dedicated to your niche community.

Importantly, it allows your Google search marketing to be far more targeted and affordable.

Insurance and funds management are amongst the most expensive keywords categories you can buy^[5]. The more refined you can be, the less competition and the cheaper those terms are likely to be.

So, your marketing is cheaper and more responsive. Nirvana!

Advantage 3 – It’s easier to articulate your value and earn what you are worth

According to CEG Worldwide research^[6], 70% of top financial advisers (those earning $1 million or more annually) focus on a particular niche. This shouldn’t come as a surprise. In the same way that surgeons earn more than GPs, and barristers charge more than suburban solicitors, specialists are generally able to charge a premium for their deep subject matter expertise.

Advantage 4 – there are efficiencies across other aspects of your business

When your business is geared around a specific segment, you don’t need to waste time – or resources – catering to others.

There could be efficiency in process, for example if you designed an engagement experience that was completely virtual (if your niche involved younger or more tech savvy clients).

Tailoring your CRM to the unique needs of your niche can also create longer term efficiencies, and a more homogenous client group can also make the task of outsourcing (paraplanning, virtual assistants, data clean-ups) easier.

Your professional development can be more efficient too because you can focus on developing skills and knowledge specific to your speciality.

Other aspects of your marketing and communication, such as your collateral, your client events, and your newsletters, can also be more focused and streamlined because you only need to cater to one audience who are all share the same niche characteristic(s).

And importantly, dealing with a narrower set of products and/or customers can create efficiencies in terms of the amount of regulatory change you need to keep on top of.

Advantage 5 – less competition and greater client loyalty

Research published in the Adviser Ratings 2020 Landscape Report suggests that the highest earning advisers spent around 44% of their time with clients and 36% on business development. By comparison, the lowest earners spent only 24% and 10% of their time respectively in these critical areas. (The lowest earners spent 26% of their time on general administration, compared to 4% for the highest earners.)

This intuitively makes sense. The more time you spend with clients, the deeper, more loyal, and more profitable those relationships are likely to be.

As a niche player, your deep expertise and genuine interest in that niche will make it easier for you to build deep relationships.

Additionally, niche players have less direct competition, meaning clients are less likely to ‘shop around’.

Advantage 6 – it can be easier to build Centres of Influence

Having a more clearly identified speciality can be attractive to potential referrers, because you are less of a direct competitor, and because it easier to understand what type of referrals you seek.

In an earlier article, we mentioned the experiences of Phil Thompson, a Melbourne based financial adviser who recently transitioned from generalist to risk specialist. One of Phil’s most powerful observations was that his traction with referral sources increased. In his words:

“Referral partners won’t promote opaque benefits to their treasured customers. Getting narrow has increased clarity in my referral relationships. My referral partners have sent me more clients because it’s cut and dry where I can help”.^[7]

How to become a niche player

The complexity and sheer volume of financial services products, and the diversity of the clients using them, makes financial services ideal for niche plays. For those planning to become more specialised, there are some critical steps to be undertaken.

Step 1 – overcome the fear

Some business owners hold – quite reasonably – a fear that narrowing their target audience will mean they will attract less customers. But the paradox of a niche strategy is that the opposite is generally true. With more clarity about the value you add, and to who, niche players can actually attract more customers.

Phil Thompson again:

 “Niching is scary, I have wanted to do it for a long time and have avoided it because it means you need to say no to people. My business grew almost 250% during 2020 and getting specific on what advice I was providing and for who, was a significant contributor to that uplift. Ironically, narrowing my scope generated a high level of ideal new clients and efficiency”.^[8]

Step 2 – assess your strengths and interests

Having conquered any doubts, the most fundamental step is to obviously decide what niche to specialise in, a decision which has several dimensions.

The first dimension is all about you, and which niche are you suited to in terms of your qualifications, experience, interests, and existing networks.

• Do you already have some clients, or social connections, in that niche?
• What aspect of advice are you passionate about?
• Are there some clients who rub you up the wrong way?
• Do you share a common interest with people in this niche?

Deciding to specialise in SMSFs or High net worth clients (who often have complex needs) is easy, but fruitless if you can’t back it up with the specialised expertise or deep insights into the lives of clients in that niche

Step 3 – scope out the viability of the niche

Next, the niche has to be scoped out in size and nature. How big is it? Is it big enough to support a new player?

There are numerous ways you can quantify the size of a niche.

Google is a good starting point – either a general search (for example how many GPs are there in Australia? answer, around 31,000 as of 2020^[9]) or check the popularity of certain keywords in Google Ads (an example for ‘financial advice doctors’ is shown below). Other useful resources can include industry publications, member forums, and specialised clubs and associations.

Step 4 – Aligning your offering

Next you need to align your offering to that niche. This means every aspect of your offering need to be tailored and appropriate to the needs and expectations of that target audience, including:

• premises
• client experience
• staff and their training
• website, marketing collateral, search presence and advertising
• content and social media activity
• professional development and conferences
• product and service offerings
• processes
• fees.

A failure to totally align the business to the target audience is arguably the single biggest driver of unsuccessful niche plays.

An example is the High Net Worth segment/niche, increasingly attractive as the economics of advice become more challenging. This segment has complex advice needs, and elevated service expectations, and not every firm is able to credibly compete in that space.

As one HNW specialist observed^[10]:

“There’s only a certain number of businesses that can play at that level. At that higher-end client level they want to speak the chief investment officer, they want to understand what’s going on as you’re moving forward. They want to have assets that not everybody is finding, so you have to gear your business to do that. If you’re just giving them vanilla assets, then you’re not adding as much value as they demand.”

Step 5 – monitor and refine

Keep abreast of developments in your niche and your own business performance. Over time, refine your offering and narrow or broaden your focus as needed.

Examples of niches in advice

Many niches in advice are based around client type of product offering, or a combination of both.

Common examples are advisers who specialise in working with a specific profession, such as

• pharmacists, surgeons, commercial pilots, or
• manual occupations such as miners and tradies.

Some advisers specialise in SMSFs, while others specialise in

• expat professionals
• estate planning, or
• business life insurance,

all of which require deep technical expertise.

Life insurance as a niche or hyper-niche play

As the number of dedicated risk specialists continues to decline, life insurance advice is arguably becoming a niche play, but a healthy one, thanks to continued strong community demand for life insurance.

Investment Trends data^[11] from 2019 suggests the proportion of advisers specialising in risk had dropped from 34% to 15%, equating to around 2500 risk specialists. Certainly, when compared to the 31,000 GPs in Australia (referenced earlier), risk advice is beginning to look very specialised!

The complexity of life insurance strategies and processes (including underwriting and claims management) also lends itself to specialisation, especially when talking about the needs of specific segments. Indeed, if risk advice is a niche, then there are also a number of hyper niche opportunities, some of which we see already in the market:

• life insurance for medical professionals
• mey man and buy/sell agreement specialists
• life insurance for ultra high net worth individuals.

A niche play in this space with much potential is that of claims management specialist.

Managing claims can be problematic for many non-specialist advisers. The processes can be resource intensive and complex, and for those advisers who don’t charge for this work (which is the majority of those paid by commission), uneconomic.

Additionally, they can be stressful. One recent survey of Australian advisers^[12] revealed that 60% found life insurance claims stressful and emotionally challenging.

The impinging of the ‘no win- no fee’ law firms into life insurance claims space is a good indicator that this space is lucrative, no doubt because of its size (there are around 20,000 retail life claims paid every year^[13]) and because claimants are happy to pay (if they get a result).

The future is specialisation

Many experts agree that – on a number of front – increasing specialisation in advice is inevitable.

One high profile licensee CEO, who had overseen the acquisition of over 60 practices, said he had concluded that having a niche strategy was the most important ingredient for a firm’s success and growth.

“Generalist practices who do a bit of everything are going to find the future a bit harder than those practices with some form of capability that is deep and narrow.”^[14]

Many, including former FPA CEO Dante DeGori, believe more specialised educational paths will also open up once we have achieved a consistent minimum level of ‘core’ education for advisers^[15].

The growing normalisation of video-conferencing means that geography is no longer a barrier, making some ‘hyper niches’ more viable (while making geography-based niches less relevant).

And certainly, the continuing squeeze on advice practice profitability will make the potential financial benefits of specialisation even more enticing.

Of course, whether Australia is large enough to support the type of niches seen in the US remains to be seen. In that market, for example, specialist advice for widows and divorcees is not uncommon. In the case of the latter, there are even multiple professional associations, with specialists having a choice between membership of the Institute of Divorce Financial Analysts (IDFA) or the Association of Divorce Financial Planners (ADFP)^[16].

Regardless, it seems inevitable that niche plays in financial advice will become more common, and more creative.

———–

References:
[1] https://www.dbswebsite.com/blog/trends-in-voice-search/#:~:text=Opens%20in%20new%20window.%20reports,External%20Link
[2] https://review42.com/resources/voice-search-stats/
[3] https://au.oberlo.com/blog/voice-search-statistics
[4] https://cfotech.com.au/story/australians-lead-the-way-in-digital-payment-use-report
[5] https://www.statista.com/statistics/195680/share-of-keywords-prices-in-google-adwords-advertising/
[6] https://www.cnbc.com/2019/05/14/knack-for-niches-financial-advisors-are-keen-on-specialization.html
[7] Evolution of Best Practice, Zurich adviser presentation, 2021.
[8] Ibid.
[9] https://www.health.gov.au/health-topics/doctors-and-specialists/in-australia
[10] https://www.professionalplanner.com.au/2022/01/hnw-might-be-holy-grail-but-firms-will-have-trouble-chasing-the-space/
[11] https://www.professionalplanner.com.au/2019/11/advisers-flee-risk-advice-in-droves/
[12] https://www.insurancebusinessmag.com/au/news/breaking-news/tal-60-of-advisers-felt-stressed-handling-life-insurance-claims-414528.aspx#:~:text=It%20found%20that%2060%25%20of,key%20part%20of%20their%20offering
[13] https://www.apra.gov.au/sites/default/files/2021-10/Life%20Insurance%20Claims%20and%20Disputes%20Statistics%20June%202021.pdf
[14] https://www.ifa.com.au/news/28539-how-to-set-your-practice-up-for-future-growth
[15] https://www.professionalplanner.com.au/2019/03/advice-specialisation-inevitable-fpa/
[16] https://www.cnbc.com/2019/05/14/knack-for-niches-financial-advisors-are-keen-on-specialization.html

The post The future of advice is specialisation – 6 reasons you should become a niche player appeared first on AdviserVoice.