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Industry Issues

A selection of advisers in discussion last night brought up: Quality counts - the lessons of the earthquakes Research counts - how else do you know what works Premium doesn't count as much as it did But there is a big difference between the market that has money and that which hasn't.

Do dealer groups mean higher premiums?

I spotted this comment over at goodreturns:

"why would you think dealer groups have nothing to do with clients – they adversely affect client premiums – if not in the short-term then definitely in the long term. The obvious reason for this being providers having to pay more for advisers than would normally be expected."

Now logically, you might think this is so, there is a plausible causal mechanism: higher commission should be reflected in higher premiums.

But there is a serious problem with the thesis - a total lack of any supporting evidence.

As we have shown previously, with an analysis of premium rates offered by a variety of 'direct' and 'broker' offers, there is no correlation between the premium rates and the commission offered - while there are some very cheap direct offers, there are also some very expensive ones - just like the range for broker offers, from cheap to expensive. You can see that picture here:

Sample life cover comparison v1
Then there is a lot of time-series data to look at as well. You might expect that in the mythical pre-dealer group nirvana, when commission rates were lower that premium rates were lower too - but they weren't. And, yes, we are sure: we've got 9 years of commission rate history in our surveys, and premium rate data going back 8 years. In fact, life insurance premiums have trended down over the past ten years even while commissions have trended up.The situation is more complicated for income protection and trauma, but certainly no clear evidence links premium rates and commission - although the two are certainly connected.

How can this be?

Well, premium rates might be even lower were it not for dealer groups. But let's not rush too hastily to that conclusion. Life companies have got more efficient. Mortality has improved. Volume matters as well, and there are costs in accessing distribution. Dealer groups can reduce that cost for some companies, and so you cannot assume that overrides are all dead weight surcharge or rents.

Now, as it happens, I suspect that commission rates may fall. However, distribution costs will not, the pressure is entirely the other way. Exactly what this will do to the share a dealer takes is a good question, but I hope there will be a little less leaping to conclusions and a little more examining the data. It's going to take some thought.


Pure Risk Insurance

Well, hasn't the definition of "Pure Risk Insurance" stirred up a hornets nest? There is an element of hysteria about some of the comments, many of which are ill-informed. Some people seem to think that this opens up the sale of an investment contract to any RFA so long as it is somehow loosely defined as a life insurance contract. We can forgive them for some of this confusion - many of these advisers have seen contracts of this type. But this rule does not apply to them. We can also blame, a little, the title for the confusion too.

The wisest commentator included the link to the actual regulation. Here is the link, and here is the key definition:

In sub clause (1) Pure risk contract of insurance means a contract of insurance: "(a) for the payment of money for the happening of a contingency not dependent on the continuance of human life; and (b) that does not, and never will, have a value on its cancellation or surrender that is greater than the value of - i) an unexpired premium relating to a period after a cancellation or surrender; or ii) the sum of the premiums paid to the insurer"

So all those unbundled contracts that the commenters are moaning about would not qualify - they are not contractually limited to a return of premiums, or a portion of premiums.

A purist could argue that the return of premium element to an insurance contract is, effectively, an investment. A theorist could argue that insurance amounts to a reliance on investments - in this case the investment fund is the insurance company's reserve. But both views ignore that the consumer is predominantly buying a contract of insurance, and cannot use the product as a part of an investment plan. They can easily compare several with a return of premium feature in order to assess value, and can even compare them with contracts without a premium payback feature.

There is confusion however, with several advisers writing about investment-linked contracts of insurance as being categiry two. Others talking about 'whole of life' and 'endowment' contracts as being pure risk insurance. We may well publish a little decision tree so you can easily work out which one it is, but focus, for now, on b) ii).

 


Weirdly bad Consumer Article on Health Insurance

I've re-read the Consumer article on insurance and tried to hold back, but it can't be done. We checked several of the rates here and found we couldn't match them all. Later in conversation with Partners Life they said that several of their rates were wrong. So we have some incorrect rates.

The gaps in the rate tables, and perhaps the errors, may not have been Consumer's fault but the writing was all their own work - we presume - and the invention of two completely new acronyms for insurance did nothing to help.

What insurers and clients alike know as "major medical" is called "Hospital Surgery Only" cover. This is strange, several of the policies lumped into this category cover more than surgery. That's a distinction that clients and insurers alike would feel is important. Many treatments are now carried out in a variety of clinics, not hospitals alone. So I am not sure what the 'only' refers to. Yet Consumer deems the word 'only' to be so important that it then refers to these contract for the rest of the article as "HSO-only" - in other words, "Hospital Surgery Only - Only". Genius.

Then a benefit that clients will be familiar with as "specialists and tests," which is pretty much what it pays for, gets renamed as well. Consumer, normally advocates of clarity, chose the badge "plus". So we have the crowning glory of "HSO-plus" which translates as "Hospital Surgery Only - Plus".

Given that train wreck I probably should have put the magazine down. But good advice was present, such as the reocmmendation to change insurer only if you know that you will have the same scope of cover. That message could have been highlighted more.

I was not sure whether the two curious comments about claims for people younger than 65 and those over 65 made any sense. I would have really llike to see a better discussion about the levels of cover and claims rates for those 65 plus. It is an important market.

Likewise, the suggestion of higher excesses is a good one - and could have been illustrated better from the data Consumer had.

Finally the recommended lists of insurers included three unrated insurers. I happen to think you can choose to deal with an unrated insurer, but having shown a table of ratings the fact that Consumer recommends three unrated insurers without further comment seems strange. In a financial adviser such a sin would be highlighted. An explanation would seem necessary.


Missing in Action - Good Middle Management

I haven't come across a business without a strategy for a long time. Some of them can be pretty wretched ideas, poorly formed, and rarely considered. Some of them can be glorious, shiny articles - a kind of trip to the holodeck on one of the more modern incarnations of the Starship Enterprise, and equally otherworldly.

Sometimes these strategies co-exist with a hard-working business which makes good money. Almost like dayshift and nightshift workers: they inhabit the same city but occupy quite different worlds.

I often see businesses without that interface.

The theme is this: the interface, middle managements, is the glue between strategy and action. The secret is that the interface is not a one way street.

Some senior managers develop strategy with little reference to the various groups that must implement it. This is a particular problem of the 'master' manager, someone who has a special skill but has never actually risen up through the ranks. It's also a failing fo specialist strategists parachuted into strategic planning units.But bigger businesses actually have an advantage in implementation because they do, at least, have middle managers and any attempt at implementation leads to a discovery of their role.

It is in the smaller business that the absence of a middle management function can go unmissed entirely - often because there will not be a specific person to handle the role. In many adviser businesses the function of implementing strategy will also be that of the adviser. The missing activities between the parallel worlds of planning and working are these:

1. How to critically analyse a situation or problem

2. How to take a decision

3. How to implement a choice

4. How to change culture


Friday Fun

A powerful story about Hollywood, not only was I attracted by the title:

"There's something rotten in Hollywood, and it starts with the sign"

...because of all the fuss about a "Wellywood" sign, but I was also attracted by the review of the business for which the town became famous. The writer likes films I like, too, which always helps. So take a break and have some fun this Friday.

I shall be working. I'm snowed under!


Product Labelling

This article from the UK's Money Marketing caught my eye. It's about the proposal to introduce more standardised product labelling. It includes a number of gems:

"It was not long ago that the Government considered forcing banks to adopt a traffic light system akin to food labelling to help prevent customers from buying financial products that were bad for their wealth."

plus, my personal favourite:

"A skull and crossbones for the most risky would probably be a step too far but the letters A, B, C and D are not the most eye-catching labels for consumers to look out for and mean little if taken at face value - and let’s face it, that is how consumers behave."

Heh, A skull and crossbones!