Advisers and ASICs Claims Review

Advisers in Australia seemed to line up, initially, with insurers in expressing some discomfort at the release of data contained in ASIC's recent report on claims payment in Australia. In New Zealand, unaffected by ASIC's jurisdiction, people that follow such things have tended to focus on the positive endorsement of advisers and advice contained in the review: that claims are more likely to be paid when advice was provided during the sales process, a pretty powerful endorsement.

Now I have seen the first article from Australia which picks up on this point, and I am delighted to do so. It is often easy to think of the regulators job as an adversarial one. They can become adversarial, certainly, but don't necessarily want to function that way. In fact, the more we all focus on a kind of 'market development' paradigm, the better the whole outcome will probably be. This report actually contains a lot of information useful if you care about the development of the market as a whole. 


Car Insurance Industry To Vanish? Or Change?

Will the car insurance industry be gone by 2030, as Tamsyn Parker at the NZ Herald suggests in this article. Well, maybe.

But first, imagine everything we have to do with roads, cars, and transport, remains the same, except the cars are all driver-less. Then imagine there are very few accidents. I still don't see a future in which there is no car insurance industry, but rather one which is radically changed: many fewer loss adjusters and panel beaters for a start. But rare events - like an accident in an environment where 99% of accidents have been eliminated - are likely to have greater financial consequences and you will still want some cover. Life insurance is like that. Compared to 150 years ago early death has been almost eliminated. But far more people today have insurance than back then. 

But the problem with that kind of futurism is that rarely does only one thing change, we think it is important not to think of one change on its own. Uber, Lyft, and other ride-sharing companies have a different goal: they want to change the nature of transportation from privately owned vehicles which currently dominate, to a more efficient model of shared or corporate ownership where you only pay for the service when you use it. In such a circumstance the nature of insurance has changed again: such companies will require big liability insurance and the requirement for individual cover has vanished. The market has radically changed. 

Other possible futures could be constructed, and in different parts of the world key variables like population size, density, and regulation will drive different outcomes. 

 


Car Insurance Industry To Vanish? Or Change?

Will the car insurance industry be gone by 2030, as Tamsyn Parker at the NZ Herald suggests in this article. Well, maybe.

But first, imagine everything we have to do with roads, cars, and transport, remains the same, except the cars are all driver-less. Then imagine there are very few accidents. I still don't see a future in which there is no car insurance industry, but rather one which is radically changed: many fewer loss adjusters and panel beaters for a start. But rare events - like an accident in an environment where 99% of accidents have been eliminated - are likely to have greater financial consequences and you will still want some cover. Life insurance is like that. Compared to 150 years ago early death has been almost eliminated. But far more people today have insurance than back then. 

But the problem with that kind of futurism is that rarely does only one thing change, we think it is important not to think of one change on its own. Uber, Lyft, and other ride-sharing companies have a different goal: they want to change the nature of transportation from privately owned vehicles which currently dominate, to a more efficient model of shared or corporate ownership where you only pay for the service when you use it. In such a circumstance the nature of insurance has changed again: such companies will require big liability insurance and the requirement for individual cover has vanished. The market has radically changed. 

Other possible futures could be constructed, and in different parts of the world key variables like population size, density, and regulation will drive different outcomes. 

 


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. 


Common Advised versus No-Advice Underwriting Issues for Life Insurance

Alan Rafe, CEO of Quality Product Research Limited (disclosure: I own half of that business) recently produced a discussion document and talk comparing advised+underwriting and non-advised/no-underwriting processes. You can get the full presentation below. 

 

It is interesting to note the recent ASIC report which highlights that products sold by advisers are more likely to have claim payments made. 


Australia: Commission Restriction Becomes Margin Restriction

In Australia, Kelly O'Dwyer has announced changes to rules restricting commissions to ensure that direct sales cannot avoid the cap. Joanne Mather at the AFR reports:

The government was worried that some companies would try to dodge the cap by, for example, using mass customer databases to pitch policies while claiming not to be providing direct advice. 

"These reforms cover all life insurance sales involving advice, regardless of whether it's personal advice or general advice," Ms O'Dwyer will tell a conference of the Association of Financial Advisers (AFA) in Canberra.

"There is absolutely no carve-out for direct sales and the government will ensure future sales methods designed to specifically avoid the reforms will be captured including those where no advice is provided to the consumer."

Do check out the full article. Link


Advisers Quick Guide: AMP's KiwiSaver Essentials

AMP's KiwiSaver Essentials was a smart way to offer a basic bundle of insurance to KiwiSaver members. Without requiring a lot of health evidence or burdening the client with a pre-existing conditions exclusion an offer was able to be made. How? Because of three factors that combine to reduce selection risk: an in-work test, low fixed benefit amounts, and a limited enrollment period. 

For advisers coming across the KiwiSaver Essentials product the key points you should probably retain are: Yes, pre-existing conditions are covered. The main difference between Essentials and Lifetrack is the IP benefit which is limited to full-time workers (30+ hours per week) and 13 week wait with a 2-year benefit period, and covers sickness only.


The Insurance Industry Has Problems But It Is Not "Dying"

The New Zealand Herald has a piece titled "New Zealand's Life Insurance Industry is Dying" written by Tamsyn Parker. I am sorry, but I have to disagree.

While it is true that there are some significant problems, some of them are well described by the NZIER report to which Parker refers, the industry cannot be said to be 'dying.' 

The NZIER report is based on FSC data and overall is a solid description of some facts about the industry. It has not been able to lift the proportion of people insured. Most of the growth in the industry stems from a combination of rate-for-age increases and inflation indexing. Costs appear to be high and do not reduce much with scale. These are all true.

Some aspects of the report are difficult to interpret without understanding some oddities of the insurance industry. When NZIER points out that the value of net new business is much lower than the loss of existing business they describe a phenomenon which will nearly always be true of a market dominated by products with rate-for-age pricing. The method of reviewing the FSC stats identifies administration, marketing, and commission costs together as what remains after deducting claims costs. In most places in the report they carefully label this basket of costs, but the casual reader falls easily into the trap of reading 'distribution' costs as the same as 'commission' when only about half of those costs are commission, and that is only an estimate. The comparison of commission to total in-force premium is a simplification which has the effect of making an insurer with little new business look very efficient, and one with little in-force, as very inefficient.

Some parts of the industry appear to be in great health. Bancassurance has been growing rapidly, now accounting for about a third of all new sales. Direct insurance likewise, albeit off a low base. Group insurance looks flat. The number of people with private medical insurance (not part of the NZIER review, but definitely part of the wider sector) has been falling for some time - and has been grateful to just flatten out. Take a longer view and the growth has been, even in aggregate, quite remarkable:

Comparing premiums with GDP, excluding group insurance:

Item  March 2006   March 2016   Change 
 Premium in-force at the end of period $000 $1,241,445  $2,309,463  +86% 
 GDP (nominal) $million $41,286  $65,074  +57%  

Comparing products with population

 Item March 2006  March 2016  Change 
Products in-force at end of period     3,086,123      3,740,936      +21% 
Population (mean in period to June 2015) 4,160,600  4,554,700  +9.4% 

Which means that the number of policies or benefits has risen. NZIER rightly points out that there is no easy way to understand how many policies relate to actual people. It could be that many of the same people have added a benefit while many people remain uninsured. We know that is a problem from other research (such as the Massey University paper prepared for the FSC a few years ago). Look a little closer and you can see that the product mix is changing as well. The growth rate for life cover alone was a lot closer to population growth, but number of living benefits (income protection and trauma) more or less doubled over the decade. In that context the insurance industry has fewer problems than, say, dairy farming, and no one thinks that is 'dying'.

The industry has problems, but quite specific problems, definitely not a general malaise in which it is dying. Costs are too high. Grappling with a combination of 'no advice' sales, underwriting complexity, and increasing demands for the professionalization of advice from the regulator, there is plenty of work to be done.

Goodreturns has some commentary by Susan Edmunds in this Goodreturns article.

Links for reference data:

FSC Statistics 2016

ISI Statistics 2006

RBNZ Statistics 2016

Statistics NZ Historical population estimates tables.


Should you buy the insurance with the ticket? the parcel? the new electronics? Rarely, it seems

This article from thisismoney.co.uk gets under the hood of many short-term travel, parcel, and warranty insurance products. You should read it. I have several colleagues in this industry who are convinced of the value of 'micro-insurance' of this type to re-start the engine of growth in the industry. But not if the policies are all this bad. The other thing that struck me was the use of long documents almost designed to have the consumer skip over them. Take this example: 

"[in the]...terms and conditions 40 items are exempt, including electrical goods, antiques, jewellery, food and anything made from metals, ceramics or glass. It means barely any items will be insured under the policy. Its website does ask for details of what will be included in the parcel, but it won’t stop the customer buying a policy if they list an item that’s excluded"

Well, that simply is not good enough. The reputation of the insurance industry will remain low and continue to fall with sales practices such as that.