I was concerned that I would not have anything more to worry about other than focus on my clients, helping them to navigate the post-GFC economy, convince them that the government really doesn’t see them as bourgeoisie simply because they save for the future, and protect them from unforeseen risks through insurance.

Ah, that last part, mundane risk insurance.  For well over 120 years, Australians have relied on financial planners and before that good old fashioned insurance salesman, to be the party-poopers that reminded them that, no, they won’t live for ever and even if they do, they might just get sick along the way.  You, dear reader, may not appreciate that these types of events can have a deleterious effect on one’s prosperity planning.

Despite this obvious risk and the fact that, generally, people do care about providing for their family if the unforeseen should happen, most people don’t have enough of the stuff. I’m told in the olden days, General Stores would have shelves full of insurance policies available for purchase.  They were priced at cost, plus a simple retail mark-up for the shop owner.

Sadly, most remained unsold.  Only a few customers that had just been to their doctor and received an unfortunate diagnosis were buying – everyone else was happy to wait and delude themselves that it would happen to somebody else or they’d get to it another day.

Now, this wasn’t a good outcome, especially for those insurance companies that wanted to profit from making the insurance.  Their only customers were ones that they didn’t want to insure in the first place.

But why wouldn’t people want buy the insurance? Well mainly because it wasn’t fun.  First up, you had to dwell on the nasty things that could happen, as well as contemplate your own demise.  But even after that, you had to fill in lots of forms, and ‘fess up to all the horrible diseases and ailments you had already suffered.  As if that weren’t enough, you then get to have a stranger show up with some needles to take blood, or perhaps strap machinery to your person and run on a treadmill while a physician does his best to provoke a heart attack.

Finally, after these indignities, you get a call from the underwriter (aka a faceless stranger) to advise you that those anal fissures actually could result in colon cancer so your premium will be 25% more than you thought and didn’t your doctor tell you about these?

So, perhaps it is unsurprising that the insurance companies realised that there needed to be an incentive involved, so they built in a commission system as a way of remunerating their agents.  In fact, they’ve even increased it over the years – upfront commissions have more than doubled since this author was first involved in the 1980s.

This commission system turned out to be the worst way to structure risk insurance distribution that was ever invented, apart from all the other ways (with apologies to Churchill).  Customers loved it, because if they changed their mind or got loaded or rejected, it didn’t cost them a cent if they didn’t go ahead.  Insurance companies loved it, because it gave them an incentivised distribution channel and allowed them to arbitrage accounting standards and tax law to increase profits.  And planners loved it, because if they worked hard they could earn a good living.

Commission is an appropriate remuneration method, beyond the obvious reasons of the marketplace.  It’s a reason that most of the schmexperts seem to forget.

It’s what I call ‘completion riskc – an economic risk which all parties expect is borne by the adviser.  And, until consumer behaviour changes, it’s why upfront commissions are entirely appropriate for discretionary risk insurance purchases.

You see, unlike investments, there is an independent third party to every insurance contract who decides whether it completes or not.  No matter how much the customer and the adviser want the cover to proceed, unless the underwriter agrees as well, it will not.  Hence, this means a certain proportion of proposals are not completed.

Who pays the adviser for their professional advice when this happens?  Answer: nobody.

Alternative answer (with extra points for thinking it through): all the other people who have insurance, indirectly through cross-subsidisation.

Now, more schmexperts have decided that, despite the unpleasant process of gaining insurance, despite the completion risk being borne, despite every other damn else thing  we have to do, there is a problem.  Financial planners are churning customers insurance just to keep getting upfront commissions for the sake of getting upfront commissions.

This is a serious problem that threatens the viability of our largest insurers.  They’ve swung their massive international resources behind getting this hitherto unknown issue onto the national agenda.  It’s so serious that they are relying totally on anecdotal evidence to make their case.

Apparently, there are some advisers out there that have a bunch of customers that don’t mind undergoing invasive medical investigations every couple of years just to help said adviser make some more commish. These nefarious planners threaten to bring the entire insurance industry to its knees by refusing to leave their customers with uncompetitive insurance rates.

I have to admit, I don’t know any of these personally.  I think I met one of these guys once, Fred someone-or-other but that was in the mid ‘90s at a conference and I don’t think he stayed past FSRA reform but then again I could be wrong. But I am assured that they are out there.

I have an alternative solution.  Let the insurance companies reduce premiums by the exact amount of the upfront commission they pay to advisers at the moment.  Let the clients pay a fee for my expertise in obtaining the cover, regardless of whether they are able to get any insurance or not.

If everyone did this, would our society be better served? Answer: No

Alternative answer (yes more extra points): No, because the marketplace is not ready for that concept yet.  Yes, it’s a beautiful Field of Dreams, but build that sucker and no-one will come, at least for the next ten years or so.

To read the first article in this series, ‘Experts schmexperts’ click here.

The post Insurance Schmexperts appeared first on AdviserVoice.

The June 2012 Investment Trends Planner Risk Report is an in-depth study of Australian financial planners and their usage of insurance. The study is based on a survey of 929 financial planners concluded in June 2012.

“The volatility in the markets is driving a greater proportion of clients’ investments to cash and cash products,” said Investment Trends Senior Analyst Recep Peker.

“To ensure clients continue getting value from using an adviser, planners have continued to increase the role of insurance advice within their business.”

“This also diversifies revenue streams for planners’ businesses which is beneficial for both client and adviser.”

“Empirical evidence demonstrates the importance of risk advice in the current climate, especially in driving profit growth,” said Peker.

“Our analysis shows that planners reporting an increase in practice profitability derive a greater proportion of their revenue from risk commissions than those who said their practice profitability declined.”

93% of planners now provide risk advice, up from 73% in 2005 (see chart), and they typically spend a fifth (20%) of their client time discussing insurance needs, up from 17% last year. On average, risk advice accounts for a third of the revenue financial planners are currently generating.

High satisfaction remains key to retention
Planner satisfaction with insurance providers increased and is very high overall. The number of planners rating their insurer as “good” or “very good” increased from 77% to 82% over the last year. Planner ratings of individual features offered by insurers are more mixed, giving rise to significant opportunities at an industry level.

“Insurance providers have done a remarkable job addressing some of planners’ key needs identified in 2011,” said Peker.

“Significant improvements in the areas of IT systems, websites and support have helped drive overall satisfaction up.”

“Satisfaction is critically important to retention as planners are very willing to seek out the best insurer for their clients.”

Nearly half (47%) of financial planners said they reduced usage of or stopped using at least one insurance provider in the last 12 months, and a very strong statistical relationship between satisfaction and switching behaviour continues to be evidenced.

“With planners demanding further enhancements to underwriting and technology, these areas will continue to be key battlegrounds for insurance providers over the next year”, said Peker.

The top three insurance providers by overall planner satisfaction in 2012 were:

1. Asteron Life
2. AIA Australia
3. Macquarie Life

Three quarters of planners remain open to switching in the future, with 42% saying they would change their main insurance provider for lower fees, and 34% for better features/policies.

Competition remains very heated among insurance providers
Although planners use an average of 3.8 insurance providers each for new business, they tend to place an average of 56% of their premiums with a single provider, making it crucial for providers to become a planner’s primary insurer.

Following a few years of industry consolidation, the top 5 insurance providers by number of primary relationships are now:

1. OnePath/ANZ
2. AMP/AXA
3. MLC/NAB
4. Asteron Life
5. TAL

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