David Chaplin, very excited on discovering a section of a cabinet paper on new financial markets regulation was redacted, imagines a dirty politics-style approach to the content of those missing words. Link.
The costliest data breaches on average were malicious and criminal attacks. In the U.S., the average cost of a malicious and criminal attack was $246 per compromised record.
After an attack, in 2013 a U.S. business could expect to lose 2.8% of its customers on average.
This is increasingly a global problem. The number of people capable of helping themselves to your data is increasing. The damage they can do is increasing.
Now is the time to take data security more seriously. Start today with using a password on your smartphone and choosing stronger passwords, different for each service provider, for important web services. Tomorrow review your office security from your online banking services and core database outwards.
For those wishing that comparison websites would just go away, this is not good news. Another financial services comparison website has been launched. Link.
For those of us keen on educating consumers, making lots of information clearly available, it is just part of a big global trend. More and more information is being made available to clients. But for advisers, this is the key: most will still want advice.
Customers are most concerned about permanent disablement. Much more than temporary disablement. Whether you think that is right or wrong is irrelevant. The industry often moans about how little customers take interest in insurance, but this paper shows that we are talking past the customer: they are worried about TPD, and we are not even mentioning the cover...
Customers also have very limited cash reserves to manage an emergency. In fact most could not last even a month on their cash reserves. In practice, they have more flexibility - the format of the question leaves aside some key facts: they probably get paid in arrears, have sick leave entitlements, and access to some short-term credit. But it remains of great interest to financial advisers: asking clients about their cash reserves is another good question to help underline the value of emergency funds and insurance.
Policymakers and insurers should beware the idea of just sticking some 'cover' into superannuation. The idea that a 'bit of' insurance, to a level arrived at with no reference to the client's circumstances, is likely to cost money and create misinsurance. This is what Zurich has to say on the matter:
"Clearly, knowledge and engagement levels with life insurance are extremely low as is the extent to which people have analysed their individual needs. These factors appear to have combined to create the phenomenon of ‘misinsurance’ – where people don’t know what they are covered for, aren’t covered for what they think they are covered for, or don’t have the cover that actually suits their circumstances and risk priorities. Similarly they may not realise what types of cover are even available."
Chatswood Consulting will be entering it's fifteenth year in January, but we're celebrating another little milestone today: ten years of the Chatswood Moneyblog.
On August 18th 2004 I wrote our first blog post. Since then we have had a number of guest writers, and I am helped by having a researcher and administrator who can supply me with a pre-screened set of links and articles to help keep me creative.
In July last year the blog passed a milestone of 100,000 page views. Which isn't a very large number, but given we estimate the core readership of this blog to be about 200 industry managers and executives in sales, marketing, and actuarial roles in about a dozen insurers I am very pleased with it. There have been 20,000 page views since then, so those key people drop by about every four or five days.
Thank you to everyone who visits, argues, contributes, forwards, and so on. If you would like to sign up for our quarterly digest of the top ten stories then please drop Kelly a line on firstname.lastname@example.org
While you were looking at the Financial Advisers Act the Fair Trading Act came along and made the change that everyone has been wondering about: making it an offence to make unsubstantiated claims. David Ireland was quoted as saying:
“If you say one product is better than another, you have to substantiate that,”
Obviously, as I have a substantial stake in Quotemonster, the home of Quality Product Research, I am very interested in issues relating to comparison. This is why Ireland tells us that product comparison is necessary.
“Even if the product is actually better, if you weren’t able to substantiate it, you’d be in breach of your Fair Trading Act obligations. That’s the sting in the tail.”
Advisers could use rating agencies or research houses to help, he said.
“So it is now more than just slack practice to operate more by good luck than good measure – it’s a statutory offence. In essence, with limited exceptions, if you can’t substantiate something you allege when giving advice, even if it turns out to be true and no deception was involved, you have breached the law."
The Commerce Commission guide at this page has the detail on the substantiation point that Ireland highlights above. It is the fifth point in the summary list, titled, 'substantiation'. This is the detailed page you get if you click through, at the bottom of the page the Commission points out the maximum penalty under the Act for breach.
For advisers: it reminds clients that the amount of income they insure (say $75,000 benefit on a $100,000 income) is just the tip of the iceberg. In the example Hawes gives the client is aged fifty, so once the policy is inforce for a to age 65 benefit the amount at risk is fifteen times that benefit, plus inflation. Hawes put it as "well into seven figures."
For insurers: note Hawes prescription to 'find a good financial adviser' and 'shop around'. People never used to do this - an awful lot of what you reflexively call 'churn' is customer driven, and here is Martin Hawes suggesting that they do more of it. Pause for thought.
For Consumers: one tip Hawes did not offer was to extend your waiting period or reduce the benefit period. This was probably left out deliberately to avoid dealing with industry technicalities in a short newspaper piece, but it is an important part of creating affordability for at least some income cover. It is much better than the most often selected alternative - to have none.
After a run of bad news on TPD claims in Australia this time insurers won one back: a case summarised in this article was ruled in favour of the insurer as the claimant did not meet the definition of TPD int he policy.
This article from Ian Teague at Coverin the UK is one for dedicated followers of life and health insurance only. If you work for an insurer or you are an adviser and you are concerned about the impact that the underwriting process has on clients in any way, then this is a good piece to walk you through the process efficiency versus rating efficiency conundrum.
One way we have seen companies in North America manage expectations of clients as they enter the underwriting process is with rating bands calculated from a short (5-7 questions) review of main underwriting issues in quote software.
A long but very worthwhile day conducting a strategic environment review with a client, the second such review in as many weeks - hence the blog lite. However, there are so many good subjects to write on as a result of many good conversations.
Sovereign's new medical product
Adviser use of automation
The 'right' number of advisers for New Zealand insurance industry
Problems of agency in management
Consumer and product dimensions to the problem of persistency
We could go on. So that is, in effect, a writing list for the next few days.
This article on Medicare claim fraud highlights an important problem in most health systems: payments by a third party (insurer or government) for treatment by a provider (second party) for a client (first) are difficult to authenticate.
The larger and more complex the system the more prone it can be to abuse. This story highlights the potential scale of the problem. It makes me wonder just how much fraud there is in private medical insurance, ACC, and our own health service. There is bound to be some, the question is, how much?
I have been having an ongoing debate with our compliance guru, Rob Dowler, about 'rules of thumb' for retirement saving. Rob is closer to retirement than I am, and has nearly completed all his saving and investing for that happy day. On the other hand I am about 30 years away from my preferred retirement date.
Although everyone should undertake their own specific planning and modelling, ideally with a financial adviser, it is nice to carry around a rule of thumb.
One suggested approach is "25 x expenses" one reason I like this is that it allows you to work on both sides of the equation - meaning that most people you come across are saving too little and spending too much. This formula captures the direct relationship between the two and leaves income out of the equation - it is covering your expenses.
Another suggested approach came from Nick Southgate, a behavioural economist from the UK. This was his rule of thumb:
"One way around this is to tell people if they want to maintain their current lifestyle in retirement they need to have saved a nest egg similar to the value of their property."
That assumes the property value has a rough proportion to their income and expenses. It often does. With high property prices relative to income that suggests perhaps bigger nest-eggs than the 25x guideline, but it still isn't bad. For those poor at maths it saves a sum: as most people know the value of their house. It also captures another relationship: maybe you aren't saving enough because you have too much house. This is a common trap for the home investor: every cent of income, savings, and personal investment of time is ploughed back into making home nicer. I can understand why, but it is hardly a balanced portfolio.
You may have alreaddy read about Lifetime group's acquisition in Wellington - we congratulate them. This is another emerging group which is developing on the basis of common ownership. After talking for more than a decade about how the average size of advice businesses will increase - due to the greater capital investment required to operate the business - the last few years have shown that happening. Link.
Technology makes operating in a new market easier: it can allow a clear pathway for an insurer, fund manager, or bank to provide services without as much physical presence as used to be required. Recent examples include:
Rabobank in New Zealand
Amazon - everywhere
Canada Life - in the UK
I am sure you can think of more examples. Which is why, even as the rewards for scale increase, the minimum threshold for launch has decreased. What business are you operating in locally that you could offer to a wider marketplace?
Westpac's decision to reintroduce trail commission for advisers is worth thinking about. Sometimes company announcements are empty: yet another repackage with only marginal significance even to those that use their products regularly. These are the corporate equivalent of the Facebook post of breakfast, and everybody makes these. We do too.
Westpac's announcement, on the other hand, seems so full of meaning it is hard to choose where to start. Is the return of trail commissions to the home loans market the definitive full stop - as far as New Zealand is concerned - on the financial crisis? Or shall we consider the arguments for-and-against the use of financial advisers to distribute home loans? We could calculate the cost of all the commissions they will pay on the loan given an average duration and consider how that compares to the distribution margin in the product, and also how that compares to the cost of distributing through the branch. We could consider the decision from a customer segmentation point of view: advisers can serve some customer groups better than the branch network can.
However, the area I want to point out is that the beneficial flexibility - given to both Westpac and their clients - is only made possible by the mechanism of commission. Yes, conflicts of interest are involved: as they are in bank branches, legal offices, and accounting offices too. But the ability to rapidly extend the reach of a product through advisers would not be there, if Westpac were not permitted to pay a commission. Clients get a range of different services from financial advisers and much greater selection of product to choose from because of the commission model.
There is customer benefit in the commission model, and that is the basis on which it should be retained.
Adviser Age in Australia say that the result of its survey of advisers is that advisers believe there is no link between commissions and advice. At least, that's the headline. As you read the article, though, the results and comments show a more sensible discussion of the real effect of commission on advice. It is limited, but it certainly isn't "no effect".
Almost every adviser that takes commission cheerfully acknowledges that they don't offer advice on products that don't pay commission. A smaller, thoughtful group, acknowledge that they are more likely to offer advice in an area where commission is payable, and try to offset this by offering to advise in other areas (depending on competence) for a fee. But it is fair to say that for most advisers commission is largely equal between their main offers - and to that extent it is not influencing them.