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Business Income Offsets – The Devil is in the Underwriting

Recently I have had some good discussions with advisers about offsets operating in income protection, particularly in the case of business clients.

One of the reasons it is hard for researchers to assess the actual contract differences with offsets is that virtually all insurers say that they do not offset investment income, virtually all insurers say that they will offset income from personal exertion, “Business Income” is not some mythical third category. It must be one or the other. The attitude of the insurer in classifying it is the key to the performance of the policy for your client.

An important determinant of how this will be treated is in the client’s hands. It is the client who is in control of the pre-disability structuring of their business. It is the client that determines how much of the profit from an SME is taken as salary versus dividends. It is really the client who determines how credible this division is. But the insurer’s attitude is paramount.

This may be discovered during underwriting.

Two insurers, responding to a case put before them by an adviser we talk to regularly, both have great offset provisions in their contracts and state very high or theoretically unlimited benefit levels are available – subject to underwriting.

When the adviser presented a case to underwriting, with a high income, and almost equal level of dividend coming from a shareholding in the business, both insurers offered maximum cover levels well below 75% of the income.

The adviser felt that this was pretty much an ‘offset applied at the beginning’ so the offset provisions in the policy were meaningless. I suppose at least you can say the client was aware of that and able to make an informed choice. But the adviser could have been spared a lot of wasted work if both companies had been a bit more transparent about their criteria from the start: a declared maximum benefit level and clear disclosure on the treatment of investment income would generate more respect from professional advisers.

But this case is merely one of wasted effort. The real danger comes when the attitude is only discovered at claim time.

Some insurers have obtained legal advice describing pretty broad circumstances in which dividend income can be classified as coming from personal exertion. The breadth of criteria would be a surprise to many policyholders – even cynical business-owner policyholders that had read their policy documents carefully. If policyholders and advisers are being surprised at claim time then we need to be better at communicated what will and will not be paid so that they can make a better decision before they buy.

Talking About Funeral Plans

A five minute conversation with Mark Sainsbury on Funeral Plans and there was so much I realise I wish I could have said on the subject.

Subscribers to Quality Product Research Limited will be able to look at the research tools section for a good basic introduction to the area. Here are the key points I would have liked to cover:

  • Do you need it? If you have other assets that could be accessed readily, or your family are happy to fund the funeral until they receive the proceeds, from, say a house sale, then talk to them about that.
  • Obviously guaranteed acceptance insurance is more expensive than underwritten cover - if you can qualify for the latter, then you should buy that.
  • But insurance is a good solution when you have exhausted those alternatives and can alleviate the financial situation for your dependents.
  • The market is large, and growing fast: there is probably room for another 200,000 funeral plan policies to be sold right now, and the demographic shift is right now seeing the eligible group growing very fast.
  • Most of these policies are sold by phone or mail, but some are sold online, and increasingly the market is being served by financial advisers as well.
  • Some clients will buy these policies because they are scared to buy underwritten cover, a financial adviser can help with that and make a big difference to affordability.
  • Equally there are many people who will not buy a funeral plan who should, or would like to, but are scared because they don't feel confident that they will really not have to answer health questions. A good financial adviser can help them overcome that. But so can a good direct marketer.

In short, there is a growing need, a good range of products, and plenty of opportunity for all. My thanks to Ed Saul of Pinnacle Life for passing on the opportunity to take the radio spot.



Actual Levels of Insurance Fraud

Following on from the attitude survey from Southern Cross Travel Insurance that we highlighted yesterday we have more news on the actual level of fraudulent claims. This article from COVER by Amanda Fyffe Helen Walters details what constitutes fraud and the actual levels of detected fraud: 

In 2012 8% of UK income-protection claims received by insurers were stopped or declined either because they were fraudulent or because full and correct information was not provided when the insurance policy was purchased.

Obviously not all miss-statements are fraud, but if they are material, and are followed by a claim, which is directly connected to the disorder affected by a miss-statement then it it highly likely to be fraudulent. Perhaps the most difficult issue is financial miss-statement: it can be harder for a client who is self-employed to accurately assess their income, and they may not realise the impact of that at claim time, unless the adviser takes great care to help them get financial disclosure right.


Fair Disclosure: Commission or Fees

Whether you receive a commission or charge fees, or a combination of the two, good disclosure should be the norm. When you buy something you would like to know if the person offering it is free from a big conflict of interest and that there will be no surprises in charging fees. That is ideal. Another good test is to consider how your disclosure could be attacked by an unfriendly competitor or unreasonable client. Based on a review of disclosure by the UK's financial complaints authority Simon Collins at Money Marketing has come up with five principles, which are so good I recommend you read the brief but helpful article at this link.

Sovereign Life Premium Rates Rising from 1 July

Sovereign life premium rates will rise by 2.23% from 1 July 2014. Some in-force contracts will rise by 2.83% and some older Accidental dealth benefit rates will rise by 3.71%.

You can read more about the changes at this page on the Sovereign website.

The new rates will be live on Quotemonster on the day of change and will be reflected in a new Premium Comparison Database available next week.

Research Shows High Proportion of Customers Prepared to Commit Insurance Fraud

Southern Cross released the details of research it has done into the attitudes of customers towards insurance, and specifically how they regarded certain kinds of insurance fraud. The results are frankly shocking. These are key statistics from the release.

Southern Cross Travel Insurance (SCTI) found that:

- 21% of men felt that with any type of insurance, it was acceptable either ‘all’ or ‘some of the time’ to inflate the amount claimed to cover a policy excess

- 11% of men felt it was ok to claim for pre-existing damage to an item that occurred prior to travelling.

By comparison, 17% of women felt it was ok to inflate a claim, while 9% thought it was ok to claim for pre-existing damage.

SCTI dealt with the matter sensitively: heading the press release "Trust Issues" and also providing, for balance, the explanations offered by people in the survey. The survey found that many customers thought that insurers either 'always' or 'most of the time' look for ways not to pay a claim. They also proceeded to discuss the elements of good faith. You can read the release at this link.

Is this is reliable guide?

Admissions is probably under-reported, because a number of people will know that it is wrong to claim a higher amount than is justified, but will not admit it to a researcher. Indeed, given the relatively high level of admissions revealed in this survey, and typical rates of non-reporting for 'bad' behaviour and the actual levels could be a lot higher. It would be good to know more about the survey methodology to examine the way these admissions were obtained. There may be a difference between how a person views the behaviour of another and their own intentions.

What does this mean for other kinds of insurance?

It means that additional costs are added to the premiums for all insurers - and these costs take a number of forms. Even if inflated claims are routinely discovered and reduced to their proper amount it means the cost of that process must be paid by all policy holders, and the additional evidential requirements impose costs of time and effort on all claimants. Some of those claimants may give up in the face of a complex process, and ironically, blame the insurer for trying to find ways to make it hard to claim.

Of course this should be set against real cases where insurers deny valid claims, or make a claim too hard to make. It is a challenge to reinforce the levels of trust needed to ensure the efficient operation of an insurance sector. We can also ponder mainstream media's lack of interest in the survey: they are quick to pick up on stories of insurers not paying. I suspect that if this survey were on a different subject, then we could expect much greater coverage. What if the headline were "21% of men think it is acceptable to defraud Inland Revenue" or "17% of Women think it's acceptable to defraud local schools."



US Life Market: Years Behind

A US-based life insurance specialist site has an article titled:

"Will Google and Amazon offer one-click life insurance? The future is closer than you think"

The article offers us the idea that one day sites like Google and Amazon may offer life insurance. Then I actually had to check the date to ensure the article was current and not something somehow dredged up from years ago. Of course, here we have Lifedirect by TradeMe and a host of other smaller sites.

Then I thought I might title this post "New Zealand Online Leadership" but quickly remembered that a number of other markets are doing what we are doing online: and many are more advanced. Think money supermarket in the UK, and iSelect in Australia.

On reflection I realised with horror the truth: the United States, one of the most advanced markets in the world, has a dreadfully out of date insurance market. It got worse, reading the comments was like watching a car accident, and being helpless to prevent it, as one adviser wrote: "Interesting article but not very realistic."

Smarter advisers are getting online and using the incredible bandwidth of the net to create new advice models.

RBNZ to Offer Insurance Data Publication

The RBNZ has announced in it's June Industry Licensing Update that it will collect some industry data from insurers and will publish some industry statistics sometime in 2015:

The Reserve Bank is establishing a regular insurance data collection and reporting system. This is required for efficient prudential supervision of insurers and monitoring and analysis of developments at the sectoral level. Publication of some insurance statistics will occur late in 2015.

Link to the licensing update section.