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Code Recommended

Anyone that has followed the development of the Code will know that a lot of work has gone into its development. Also, it requires high standards, and grasped a number of specific issues (such as commission, independence, disclosure, and so forth) and always chose the path of consumer protection. There may be some issues of style, and a variety of individual points that people can take issue with from a variety of directions, but overall, the code deserves its recommendation.

Long Term Care Reform

In the UK, and more recently in the US, there has been a bit of excitement about new approaches to long term care. This is a largely unexplored area of potential for New Zealand. It has been tried once, and examined a couple of times in the last fifteen years. A number of obstacles exist that prevent development of the market. One, as always, is likely to be taxation. Another is the policy around asset testing for current state-provided long term care, the third is product design, and finally - there is an economic issue.

Given that we have an emerging market in Home Equity Release which is still struggling with an unhelpful tax regime (among other things)- and this is a market with pretty good levels of demand - we're unlikely to see tax issues fixed any time soon. Likewise with policy around asset testing - the last time this was touched was when there was plenty of cash and government made the thresholds higher (more generous) but did not deal with other problems. Like taxation, no change is in sight.

Let us ignore those areas and turn to product. What will help this market considerably will be product design. It must be simple: like the breakthrough made by Sentinel (Seniors Money International) in simplifying what HER is all about. So there needs to be a very simple initial solution for long term care. Finally, the economic issue is this: most Kiwis don't have the levels of assets and income necessary to justify the protection of long-term care just yet - but a few do - and that group could be economic.

So this is a niche product for about the next 10 years. However, the companies that develop the market will be best positioned to profit from it as it grows. Also, they may be in a position to help develop the policy discussion necessary for tax and benefit reforms that would be helpful to a large and growing demographic of people - whether they take out long term care insurance or not.

A Valuable Warning - Sales of PPI alongside loans

This is a valuable warning to institutions wishing to get involved in insurance sales. Before you read it, I should state that I am very happy with banks selling insurance alongside loans, but there are some significant issues that need to be addressed - there is a world of difference between selling monthly paid term life insurance alongside a home loan, for example, and selling a lump sum PPI contract alongside a car loan. 

It is important to over insurance coverage when someone is taking on additional liabilities and commitments. It's important to offer good value whatever you are doing (in the insurance and in the loan, too). My preference is for monthly paid term insurance - it's easy to compare, the consumer can stop it any time, they don't have a pile of interest to pay in addition to the premium, and it's clear that it is not a component of the loan. When you no longer have any problems like these in the sale you can focus on the real value add: if anything happens to you, then you are covered.

Even lump sum PPI can be a good contract to have - but so rarely is - because the cost of the cover is opaque, value is very hard for the consumer to assess, the sales process often imparts too little information - or may mislead, implying the cover is a necessity, and the cover is really hard to integrate with the clients other insurance. Overall, there are many issues to be addressed - and so here we have a bank deciding that enough is enough.

Financial Markets Reform

Apparently the reform of the FSA into a new consumer protection authority under the Bank of England will cost GBP50 million - thats about 1 pound per head of population, although I am sure a measure per pound of GDP would be fairer. Whereas our regulation change was going to cost about $8million - about $2 per head of population using brutal approximation. That's ever so slightly cheaper on a per head basis but probably slightly more expensive on a GDP basis, as our GDP per head on a PPP basis is about 1/3rd lower than the UK's.

These things cost money.

That's about a detailed as analysis can get when I am about to pop out to the Pacific Aviation Museum. Link.

Green Turtles

Over the last few days I really 'got' snorkelling. I swimming on a reef at Shark Cove I saw thousands of fish of at least three or four dozen varieties. On my third swim I saw three turtles. There was one pair, and then another lone turtle. They looked like juvenile Green Turtles. Later that day we headed another 10 minutes up the coast to Turtle Beach which completely lived up to its name:


The red rope is thrown around an area two meters beyond the basking turtle. The turtles have a couple of minders on the beach that make sure the law protecting them from any interference is enforced.

Journalists Are Exempt

Mary Holm has obviously attracted the attention of a number of trolls that say she is a financial adviser and should therefore have to go through the process of authorisation. I think she's exempt - pretty clearly from section 14, 1, A of the Financial Advisers Act 2008.

You may not like it that as a journalist she's exempt, but I believe that she is. What's more, I believe that it's valuable that she is, along with other financial journalists. 

BMI in Insurance - and Health Care

This is about the incomplete measurement that is BMI.

I read a parable about why a command economy can never be as efficient as a market economy, and like all such stories, while it is horribly wrong in many ways, it contains an important truth - incentives count. I shall share just a little of the story:

If you instruct the factories to make 10,000 pairs of shoes you will get them all the same size, because that's what is most efficient for the factory.

If you ask for them in a range of sizes you bet 9998 in one size, one pair for babies, and one pair for a giant - because that's what's most efficient for them. What's more they will be made out of recycled paper, because it is cheap.

If you ask for heavier shoes then you will get one pair, made of concrete.


and so on... simply nothing beats the discipline of having to deliver what consumers want, because you learn fast to make what sells.

In most areas of consumption we have mainly market-based solutions, usually bounded by regulations for consumer protection, security, or standards. In Healthcare we have a mainly command-based approach with only a few tertiary areas where consumers can exercise direction.

That's why health care systems can take shortcuts. BMI is an obvious one. It's a handy rule of thumb. Like starting from the idea that insurance books of business are worth a multiple of renewals. In almost all sales you start there and then you modify your view based on other factors and anything else to be included in the sale.

Insurers use BMI as well. When used well it's just another piece of data in the puzzle which an intelligent underwriter will put together to arrive at an assessment. Unlike our healthcare system you do not need access to a complicated aappeals process because you have at least half a dozen other companies you can try if you don't like their decision.

Monolithic health care systems are more dangerous though - they can take a measurement like BMI and while one doctor may apply it sensibly others may not. The automatic checks and balances of the market are absent and appealing the decisions based on this incomplete guideline can be very difficult.

This is precisely why some people are concerned about such information being a requirement in federal records in the US: link.