In case you missed it here is the latest newsletter from the FMA.
Do pop over to Seth Godin's blog and read this (short) post about comparing yourself. Link.
AMP in Australia have released a new online tool called Goal Explorer which is part of a new campaign to promote goals-based advice. Click here to read more on Australian website Independent Financial Adviser.
'Goal Explorer takes customers through a series of questions that require them to pick from a list of goals, such as “retire right”, “simplify my finances”, “protect my income”, and “buy a home”.
The tool then asks the user to prioritise these goals before it generates a “goals timeline”.'
Bernard Hickey writes in this column at the New Zealand Herald on the recent stress tests by the Reserve Bank. The test simulate the impact on banks of a combination of a large drop in house prices, a sharp recession, a rise in unemployment, and prolonged low dairy prices. Link.
One of the possible outcomes of the proposed changes to the Financial Advisers Act is an increase in average business size. In an article by Jenée Tibshraeny at interest.co.nz quotes Richard Klipin contemplating the rise of multi-disciplinary advice businesses.
The proposed changes make this more likely through a number of mechanisms. While a lot of attention is focused on the licensing of the Financial Advice Business, "...licensing would be required at the firm level (for the avoidance of doubt, a sole-trader is considered a firm) " - p.62 this is not the main issue. If there were no difference in either cost or requirements for registering as a sole trader then there would be no real drive to form advice businesses.
But I think Richard Klipin is right, and there will be a strong drive.
That push is mainly provided through increasing the requirements on RFAs. One part of Coase's theory of the firm holds that as fixed costs rise then average business size rises. Another argues that if larger organisations can reduce error rates then they are more attractive. Both those factors could explain increasing scale in financial advice businesses.
Will such factors increase? The FMA fee for registration is only a small factor. The requirement for, say, increased education is a much bigger contribution to the new cost model. Even bigger than that are the business changes required to provide detailed compliant personalised advice in an efficient way. That usually requires good information technology, regularly updated and maintained. That fixed cost will push many advisers to contemplate participation in the kinds of advice businesses Klipin mentions in the article. In addition, larger organisations with good processes for ensuring compliant advice will have smaller error rates and may apply lessons learned more quickly to more advisers.
Theoretical models are buttressed by current experience. Several commenters are already pointing out the similarity between the FAA review proposals and the existing Australian regime. That approach led to larger businesses in Australia. In New Zealand the current FAA has already led to larger businesses - consolidation has been ongoing across the insurance sector. To some extent cost sharing has explained the rise of our broker groups, and recently professional associations are joining the movement.
Jon-Paul Hale from Willowgrove Consulting discusses the recent research from Australia about insurance literacy. You can view some of the results here. This is also why we have literacy questions in our new Needs Analysis tool on Quotemonster.
The FMA has this new page of advice to consumers on replacement. Link.
The first thing to note is that this is very 'pro-advice'. The premise of the page is that the consumer should get advice on insurance replacement, and that advice is essentially the best way to overcome the risks of replacement. Including suggestions which advisers may find useful when faced with, say, an inability to get good information on an existing policy.
The second is that they are very clear about the consumer's obligations in the replacement process - honesty.
Finally they also make it clear to consumers the kinds of incentives that advisers may enjoy for replacing a policy - listing commission, and types of soft commissions as well.
Do read it.
Quotemonster already helps more than 3,700 advisers to do price comparisons on the most popular insurance products in the market - completely free. Out of them more than 1,300 advisers have also discovered the power of insurance product research to help them identify the meaningful differences in product, personalised to each individual client based on their age, gender, occupation, and product selection choices. But just a couple of hundred advisers are “power users” sucking every possible advantage out of the system. These are the extra services that they use to build the best insurance report possible.
- Head to head – a more detailed comparison of just two products ‘head-to-head’ showing the differences between them to help your client make an informed choice.
- Underwriting requirements – based on your client’s choice of products and sums insured we do the hard work of picking through the non-medical requirements and produce a report which shows exactly what paperwork, tests, and exams are required. A huge time-saver. Really useful for clients scared of needles. Eliminates ‘you didn’t tell me that’ objections.
- Statistics that help you sell: everyone can add a personalised client risks report which tells your clients their working life risk of death, total disability, temporary disability, and trauma.
- Recommended product premium choices: if you have chosen a specific company to recommend but you don’t know whether the client would prefer a wait period of 4, 8, 13, or 26 weeks, or perhaps an excess amount on their medical of nil, $250, $500, $1,000, or more? This makes it easy: it includes a table of all the different premiums for each option at the end of your price comparison report. Saves lots of requoting.
- Needs analysis – enables you to develop a scope of service, set objectives, record what advice your client wants, capture basic financial information, and calculate an ideal cover package – in minutes, not hours, and adds all that data to the comparison report. Automatically sends the values to the quote saving more time.
- Historical policy documents are searchable by date, company name, and type.
In this article by Rob Stock he discusses the review of insurance policies by banks in New Zealand after recent scandal involving the Commonwealth Bank of Australia.
Quality Product Research compared the NZ policies in our recent roadshow - you can view the presentation here.
I've recently been sent a great piece from Gen Re on heart attack definitions. At the start of what is a pretty through review of the use of different diagnostic techniques they ask some great questions which bear repeating:
Although medical definitions are part of an insurance contract, suggesting an absolute meaning, the insurer’s claims philosophy must address questions such as, “What is intended to be covered?” or “Is the condition covered even if not all claims criteria are fully met?”
This should be contrasted with a media which has a taste for black and white declarations on the subject, such as recent articles which talk about '...using “out-dated” medical definitions in their
Trauma (Critical Illness) policies" that was a quote from the Australian media, but it happens that Rob Stock wrote about this very issue in an article published this morning (at this link).
In their review Gen Re talk about the value of being clear about what is intended to be covered. In doing so they talk about impact, impairment and loss: all reaching back to a concept that should be behind every insurance, the principle of indemnity. Put another way, insurance shouldn't be a kind of lottery where a small heart attack could trigger a financial 'win'. In order to have affordable products which can protect us all from real losses we need to have payments that broadly match impacts. So Gen re suggests that insurance wordings may never match the terms used by medical staff, and that perhaps they never should. That is why I am not in favour of a general ban on some more restrictive conditions, but I am in favour of clear communication of what we mean by each definition, in terms that at least most people reading the document can understand (see my post at this link). Indeed, there are many circumstances in which having a tough definition is preferable: one is when you want to reduce cost, another is when you only want a payment triggered by a serious event (such as shareholder protection). But whatever the wording, if an insurance definition differs from a medical term the customer should know how and why. To prevent 'scandals' the customer probably need to know that before they buy, not right after they claim. The challenge is that when buying the cover, clients are rarely that interested.