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Insurance in the News: Financial Underwriting Can Save Lives

Well, insurance has been in the news a bit recently for the worst possible reason. Not the run-of-the-mill 'premiums too high' or even the painful and emotionally charged 'my claim wasn't paid' but the issue of the pressure it may exert in unusual situations: 

  • This from Steve Braunias' article in the New Zealand Herald: "...the Crown would argue Lundy was under intolerable financial pressure and regarded Christine's life insurance as the answer to his woes." Link
  • This from Kurt Bayer's article, also in the Herald: "...she had expressed a wish to kill Mr Nisbet and take advantage of his $250,000 life insurance policy." Link

I recently had a discussion with someone who could not believe that someone could murder for the proceeds of a life insurance policy. In a way, that was really lovely to hear that, but the reality is that financial underwriting still counts, and may even save some lives. 

Love and Money

Hat tip: Sharon Epperson for finding this item on CNBC. It is a high level piece about couples managing money together, but the five keys are all good: 

  1. Be open about money missteps
  2. Keep your emotions in check
  3. Know what you owe
  4. Deal with money matters as a team
  5. Have regular money conversations

Read more and view the video at this link

It is hard to critique your own process and examine where you may not be having the right conversations: that applies to clients, and to advisers. If you are concerned that you may not be dealing with issues like this, or feel uncomfortable about them, then you may need an understanding industry friend or colleague who can help you. This is a good time of year to put your advice process through a warrant of fitness. That doesn't just mean compliance. 

ANZ Adviser Jailed for Fraud in Australia

Melinda Scott, a former ANZ-aligned Millenium 3 financial adviser was sentenced to six years and three months in prison with a non-parole period of three years and 10 months yesterday after pleading guilty to three charges of dishonest conduct and four charges of "making and use of false documents".

“Ms Scott’s misconduct continued over 20 years and largely involved superannuation and annuities products that were invested for the longer term,” said a statement from ASIC following the court decision today.

Click here to read more.

Trowbridge Report: Advice Failures

Third in our series covering the Australian Trowbridge report (you can read the report at this link) is the issue of advice failures. The report identified four areas at a high level: 

The specific areas identified where advice could be improved included:

  1. Inappropriate scaling of advice: where the adviser failed to exercise sufficient prudence and judgement in the scope of their inquiries into the client’s relevant circumstances

  2. Lack of strategic life insurance advice: where the adviser failed to add any meaningful value to their clients by: (a) helping them set an appropriate sum insured, balancing the competing priorities of under-insurance versus affordability; (b) testing the value of optional extras against the client’s ability to sustain the insurance over time by prioritising the essential and the non-essential; or (c) helping the client evaluate the merits of stepped versus level premiums relative to the amount of time the client may expect to hold insurance.

  3. Weak rationales for product replacement advice: where the advice lacked strategic consideration of the issues that brought the client to the adviser in the first instance.

  4. Failure to consider the relationship between life insurance and superannuation: where the advice failed to adequately consider the effect on retirement savings where insurance is funded through superannuation..

These areas of concern all probably exist, to a greater or lesser degree, depending on the financial adviser, here in New Zealand as well. 

I am particularly interested in the question of the ability of the client to sustain the insurance over time, stepped versus level premiums, and the last issue of the relationship with superannuation. Although KiwiSaver includes no life insurance component the sums in many KiwiSaver plans are significant, and should therefore be included in planning as an available asset in death and total and permanent disablement contingencies. 


Should We Pay?

The story of shrinking violet: link  has a great deal to commend it. A courageous person who has chosen to change their life and lose weight. Lose a lot of weight. I don't know the details of her attempts to get surgery from her District Health Board - perhaps there are things we do not know, perhaps there is always a wait... but the story is sufficiently interesting, that we can ask the question: should we (taxpayers) pay? 

There are incentives issues, and there are substantial health issues, to consider. Not just for Violet, but for others who may see her example too. I am on the side that the system should pay, because I bet that the costs imposed by all that extra weight are much higher in the medium to long term than the cost of helping this woman feel better about herself now she has actually done all the hard work. 

ASIC Cracks Down on Unlicensed Adviser

ASIC has issued a warning to consumers to avoid Shaun Morgan - an individual offering unlicensed services including financial planning.

Morgan was named and shamed (as well as all his businesses/websites) in an attempt to stop further consumers from using his services in Australia. Mr Morgan was imprisoned in the US after pleading guilty to fraud charges relating to the provision of financial services. 

Click here to read more.

ASIC Moves its Focus Over to Product Providers

Australian website Independent Financial Adviser writes "ASIC is ramping up its scrutiny of financial product providers as the corporate regulator looks to recover from a bruising 2014, says a commercial lawyer.

After being publicly dragged over the coals throughout 2014, ASIC is “definitely asking more questions” of the industry, Hall & Wilcox partner Harry New told ifa."
Click here to read the full article.

Trowbridge Report Criticism of Research Houses

In a description of the role of research houses the Trowbridge report (you can obtain a copy at this link) identifies three main concerns: that research houses often do not compare policy wordings with minimum definitions, and that: 

"Wider definitions on wider coverage will often improve a product’s rating even when the added benefits are of little or no value to the majority of consumers"

This last point is of particular interest to me as a stakeholder in Quality Product Research Limited. Our methodology was specifically established to remove this concern. We do that by weighting the policy definitions score by three other factors: 

  • Incidence: as a proportion of all claims what will this item account for?
  • Frequency: how often will this item be paid? (only once for some benefits, multiple times for others)
  • Amount: what is the actual amount paid by the benefit, as a proportion of that claim model?

Weighting on that basis means that if a new benefit is unlikely to be paid, it will score very little, or we may ignore it entirely. 

Finally, our approach of dynamically personalising the rating means that we do not rate 'products' which can contain lots of features either not chosen by the client, or irrelevant. We rate the package selected by the client, and exclude items they may not qualify for because of their age, sex, or occupation. 

Australian Trowbridge Report: Scope of Commission Options

The Trowbridge report - you can access it at this link - outlined a number of options for the payment of commissions in the Australian life insurance sector. This summary is helpful: 

For these reasons, the concept of upfront commissions is not dismissed but instead included within a range of commission-related options on which this report is seeking submissions , At the same time, the report does dismiss the idea of continuing with the most common current practice of upfront commissions, which typically are 100% to 130% of the first year’s premium. Equally, the report dismisses the idea of a nil commission model.

So Trowbridge is rejecting in the interim report the idea of continuing with upfront commissions in the range of 100% to 130%. Later in the paper, where hybrid options are discussed, the suggested maximum is given as 80% upfront.