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The Market is Made Up Of Segments

People want different things, because they are different. That seems obvious. But it was underlined for me yesterday when I was talking with a group of advisers about cover levels. They were operating in a segment where $1m+ cover levels were common - they were surprised to discover that much of the market sells, typically, $200,000 of cover, and that still more segments exist.

Take another example. On Wednesday morning I spent three hours working on statements of advice. One adviser found that most clients accepted his recommendation as made. Another found that recommendations were always scaled.

Consider medical insurance. The major segments are no cover, employer-paid cover, and individual cover. But take the no-cover segment and split it up - there are people that don't want cover, want it but cannot afford it, want it but can no longer get it, and had it but had to let it go. Each has different views and needs.

The value of segmentation is that it allows us to understand why different people work in different ways, and have different views. Even within a segment there is room to accept that different solutions can exist. It is a valuable challenge to the over-simplification of 'there is only one right way to do this.'

Also, right now most insurers try to serve all the different segments with just one product, adding or deducting options. That may not be optimal.

Activist Claims Chaser (UK) Names Adviser Businesses

A claims management company based in the UK has taken the step of publishing a list of adviser businesses that have been the subject of complaints. This is the second time they have published a list. They state that they warn clients adequately about what the list means. However, it is hard not to see the list being used as evidence that clients should not use a particular company, or if they have used them, then to consider whether or not they have a potential claim against them.

Our view is that there are some cases where claims may be unfairly denied, and everyone has a right to get third-party advice - including legal advice - in support of their claims. Concerns arise when such companies take a much more activist role to support marketing efforts. We think that New Zealand advisers need to be aware of the development of this segment of the market.

Simpler Products? Or Merely Worse?

Failure to understand trade-offs can lead to poor decision-making. We can overcomplicate products and wonder why there is a falling uptake and rising premiums. This fault may explain both the position of most major medical insurance plans and the two new offers to the market which are both focused on high frequency claims with a high co-payment. They are almost the opposite of the dominant medical insurance product design.

On the other hand simplification can lead to products that are simply worse. This article from the UK by Alan Lakey highlights the issue as a panel of experts looks at term life insurance. The group is contemplating the 'terrifying' complexity of things such as:

  • Terminal illness benefits
  • Waiver of premium
  • Special events increase in cover options

I personally doubt whether a single sale is lost because of the offer of these options. Some are underused, such as Special Events, and Waiver, but terminal illness? The terminal illness benefit is easily grasped, sensible, and adds considerable value. A term life product without it would be considerably worse.

What doesn't make sense is why we offer a product which will increase in cost at something like three times the rate of inflation.

What also doesn't make sense is being embarrassed about the value of some of the complexity that we do employ. Since underwriting a product allows us to charge lower premiums for those that are better risks wew should talk about that.


Automating Advice

There is a move in some circles in the UK to automate advice. This pits traditionalists who set a great deal of store by listening to a client and engaging in human to human contact against the funny new breed who are all shy, have thick glasses, and want to do everything online. Normally the two rarely mingle, let alone debate the idea. So I was fascinated to read the following in Money Marketing today:

FCA [Financial Complaints Authority] chief executive Martin Wheatley’s appearance before the Treasury select committee last week created something of a stir in financial advice circles.

As reported in Money Marketing, when he was asked by TSC chairman Andrew Tyrie; “do you believe that financial advice can be delivered online without human intervention”, to the surprise of those present, and many who have read the press reports since, he replied “yes”.

Can this be done? Yes, it can. There aren't so many advice outcomes that a decision-tree cannot be built to manage it. For thos that say such tools can never capture the advice process fully, I would suggest that advice that cannot be justified cannot be compliant. If you can justify it, you can probably automate it.

No, the better question is "will clients actually use an automated advice process?" That remains to be seen. A certain type of client, usually following quite a narrow, goal directed process, could certainly use it. Think "how much income protection do I need?" rather than "please design an insurance plan for me"

Andrew Firth in Money Marketing - read the whole article at this link.