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Dr Michael Naylor on the Future of the Insurance Industry

Doctor Michael Naylor has just released a book 

“A Perfect Storm in Insurance: How to Survive the Looming Waves of Disruptive Technology’ can be purchased as a paperback or a downloadable PDF from: https://sway.com/tOcPLREeEb0fFaQe The full report covers amongst other areas:

  • Key disruptors
  • Telemetrics
  • Big data
  • Social media
  • Automated underwriting
  • Automated claims
  • Robo advice
  • Motor insurance
  • Health and life insurance
  • Suggestions for how insurers can restructure their business to survive"

He is happy to send summaries out on any of these areas. 

Sorted: Highlighting the Cost of Rate-for-Age Cover

Sorted has a blog and on it Tom Hartmann has written a thoughtful post about the cost of rate-for-age cover. The powerful image of a steep set of stairs brings it home (he lives in Wellington, so it is an easy image to identify with). I'm a bit biased about the article because it quotes me, but more importantly, it does nail the issue of rising costs.

Let me illustrate: Use a fairly ordinary package of benefits to construct the 'ideal': repay debt, life cover of 5x income, plus IP at 75% of income, to 65 on a four week wait. I've only allowed a typical, but very low, $50,000 of Trauma and TPD. I did not select the best options in IP. I left out health insurance completely. 

  • At age 35 the package costs just under 4% of income
  • At age 40 it will have risen to over 5% of income
  • At age 55 it will be over 15% of income
  • At age 60 it will cost about 24% of income

Those scenarios allowed for increasing income and reducing debt levels. Combine that with the 'ideal' package of home, contents, and car, and 'ideal' health insurance, plus, of course, the 'ideal' contribution to KiwiSaver... I don't know if there would be much income left. It is easy to see why people aged 50+ are shopping their cover around and cancelling chunks of it. That's because there is nothing 'ideal' about spending a quarter of your income on insurance. 

Goodreturns on Southern Cross Changes to 65+ rates

Southern Cross used to switch to a flat rate at age 65 - a common rating. Over time this will shift out to 75, but very gradually. This is sensible. Increases in longevity and changes in the distribution of medical expenses now means that the appropriate rate for a 65-year old is very different to that of an 85-year old. The challenge is that Southern Cross will have a lot of members that are unhappy about the change.  

Southern Cross Product Changes

Southern Cross are making a number of changes to their Wellbeing range effective 7 November. They are adding medical oncology consultations and chemotherapy treatment to their list of Affiliated Provider-only healthcare services. More details are available on the Southern Cross adviser gateway. Here is a document they have put together for detailed FAQs about the changes.

ASIC Claims Review: Quantifying the Value of Advice in Extra Claims Paid

Advice has a number of contributors to claim outcomes. Courtesy of ASIC, we now have data to quantify exactly how those help consumers at claim time compared to non-advised insurance. The data is in section 184 of the ASIC report - page 53. This is how it breaks down, by claim outcome:

Non-advised decline rate is 12%, compared to just 7% for advised channel claims. That is a huge variation: you are almost 70% more likely to have a claim declined in a non-advised channel product. Why is that? The chances are, its the product. Advisers do not sell the types of products that are commonly sold in non-advised channels. The differences will be mainly in pre-existing conditions exclusions and the absence of underwriting in many of these products. This is a valuable indication of the size of penalty that Quality Product Research Limited should consider when rating non-underwritten products. This may also be influenced by the adviser reviewing the potential claim, and pointing out when it really shouldn't be made.

Non-advised claim withdrawal rate is 11%, compared to 12% for advised channel claims. That gap is again bigger than it looks. The claims withdrawal rate could mean quite different things. An adviser may recommend putting in a marginal claim and withdraw it when it becomes obvious that it will not succeed. Or a client might make a claim and be talked out of it by an adviser - especially if the nature of the claim meant that it was, in fact, misrepresentation or fraud. We don't know, and it might be good to talk about this.

Non-advised partial claim acceptance is just 1%, compared to 3% for advised channel claims. This gap is again bigger than it looks. It will reflect a mix of things: the first is again product design. Advisers are more likely to choose complicated but comprehensive products which include partial payments. Non-advised channels, in their quest for simplicity, tend not to have these features. Another possibility is that advisers can advocate for payments for their clients under sections of their complex wordings that clients themselves might overlook even if they buy a complex product from a non-advised channel. Lastly advisers may be twisting insurance company arms: a client on their own is just one client, an adviser represents a large number of current and future clients too, which may prompt a little more flexibility in marginal cases. 

Both channels have the same level of 'undetermined or unspecified' outcomes - of 3%

That leaves the 'Accepted in Full' category of claims at 74% for non-advised and 76% for advised channels.

Of course, these are only averages, for some companies the decline rates are higher, and some much higher. There also appears to be an interesting effect on the level of disputes, but we will write on that later. 

Lastly it should be pointed out that the claim acceptance rate on insurance you don't buy is always 0%. I am a great advocate for insurance and feel that non-advised cover fills an important gap for many people. 74% full claim success rate is a very, very, great deal better bet than not buying cover at all. 

Sue Laing Writes to ASIC on the Danger of Releasing Claim Acceptance Rates

In this piece at RiskInfo.com.au Sue Laing is quoted as highlighting the dangers of publishing claim acceptance rates. Here are some examples of her concerns: 

The underlying reason for Laing’s concern is that a ‘leader-board’ of decline rates will create competition between insurers to avoid rejecting claims in order to achieve a higher placing. She believes this is a dangerous precedent that would lead to an unsustainable pricing structure that could only be addressed by price hikes.

It is possible for such data to be misinterpreted. ASIC's report was balanced and positive for the industry, only noting some concerns with some types of direct insurance and the high variability in TPD payment rates, but the media has held it out as something far worse in some coverage in Australia.

But we felt that, on the other hand, the research raised some really valuable issues for advisers: it highlighted that claims are much more likely to be paid from insurance arranged by an adviser. That may have something to do with the difference between underwritten and non-underwritten products - a problem we probably have here. That's a valuable insight which consumers would not have from a trusted third-party if ASIC had not done this research.

Laing proceeds to list problems with the data as issues as well: 

She also questions whether the industry even has the capacity to report consistent claims information, saying claims data reported by insurers is “…ridiculously inconsistent.” Laing adds, “Even claims causes, which most of the life insurance world globally reports based on an international code but our industry doesn’t, are impossible to properly collate. The risk store has experienced that first hand for 10 years as we have struggled to gather and publish annual industry claims paid and causes statistics to the best quality we can muster from what we are given.”

Laing has a point, but I think secrecy is the wrong answer.

I know the claims data is poor. Plenty of evidence supports scepticism about the numbers. Take the calls to Sovereign after the Christchurch earthquakes for example, they were just confused customers, not real claims. But what about someone who thinks they have IP and only have TPD, is that a claim? Probably not. Now what about someone who thinks they might qualify for a partial payment under their TPD but just misses out? Probably is a claim. And so on. But the answer to this complexity isn't to allow claim payment rates to remain in the shadows. The answer is to work towards industry standards of record-keeping and reporting.

When Laing points out that most of the life insurance world globally reports based on an international code, but Australia doesn't... the first question in my mind is: why not? There may be a good answer, but claims rates look like exactly the kind of data we should be working on.

Finally, I think that focusing on one measure alone is always a bad idea: just price, just product quality scores, or just financial stability, or just claims data, or even just customer service scores. People need to take a look at the lot and make a call. Some won't want to - too hard! - they will be better off using a professional adviser. Others will be happy to rate trade-offs and consider options just like they do with other complex financial purchases with multi-year downstream effects (like buying a house). 




Quotemonster High Users

Are you a high user on Quotemonster? You may want to consider the following tips if you use Quotemonster to do all your quotes:

  • Think about saving your quotes elsewhere. Quotemonster is not designed as a CRM and therefore we do drop old quotes off the system to allow for the site to continue running a good speed for advisers. Be sure to save copies of the Quotemonster reports you create in a CRM, or online storage such as Google Drive, OneDrive, iCloud, or Dropbox, a hard drive or another source of external storage.
  • Be sure to regularly check your 'Settings' button to ensure you are quoting the products you think you are. Occasionally we will add new products or an enhanced version of an existing product which will also be found in the 'Settings'

Talk to us - feel free to drop us a line or give us a call on (09) 480 6071. If you have any feedback or would like to ask questions we would love to hear from you. 

Avoiding 'Magical Thinking' in Personal Financial Planning - and Sales

Trent Hamm at Lifehacker has this thoughtful article on avoiding 'magical thinking' in personal financial planning. It lists a number of 'dreams' people can indulge in such as: imaging they will always earn more in the future, assuming that at some point their 'ship will come in', and that 'something will happen', and just naturally as you get older, you get richer. 

The piece is mainly focused on retirement savings, but there is a personal risk planning version of this kind of magical thinking. People think all sorts of things 'ACC will pay' and 'we're pretty healthy - that's unlikely' and so on. Trent Hamm finishes with one of my favourite pieces of good general strategy: have an emergency fund. 

Of course, we all suffer from self-deceptions. The insurance industry does too. We talk about an undefined ideal in risk planning, we have quote tools, but very few people quote the ideal forward into the future and show the client how much it will cost in 10 or 20 years. Our 'magical thinking' is that income will rise to pay for it.