Poor outcomes in the direct market could turn a whole generation away from life insurance, Association of Financial Advisers CEO, Brad Fox, has warned.
Speaking to riskinfo about the AFA’s 2014 plans, Mr Fox said direct insurance was firmly in the Association’s spotlight, because of the impact an adverse claims experience could have on the perception of the insurance industry as a whole.
“Our concern is about the medium to long term impact of an adverse claims experience; that is, people who thought they were covered having claims declined,” Mr Fox explained.
“We think it’s important to consider whether any criticism of the direct segment will end up casting a shadow across the entire life insurance market place. That worries us, because we know there’s a vast difference in the policies that are being issued via the direct channel and retail products which come with financial advice.
It’s too late to find out about a pre-existing condition exclusion at claim time
“What we don’t want to see is people who don’t understand what they’ve purchased through a direct channel having their claims denied because of pre-existing conditions that didn’t need to be disclosed at the time of application because there wasn’t any formal underwriting. There is a real risk that those customers may come out and say: ‘Life insurance isn’t worth the money,’ and we end up turning a whole generation of people away from seeking life insurance. That’s a poor outcome for everybody.”
Mr Fox said there was absolutely a role for direct insurance in the Australian market, and that pre-existing condition exclusions assisted consumers by making the application process quick and uncomplicated. “But as time goes by, we’ll see more claims on these types of products come through, and there is a question mark over whether they’ll be paid. This is not about insurance companies failing to honour the contract that was bought – it’s about consumers not understanding the terms and restrictions of that contract.
“It’s too late to find out about a pre-existing condition exclusion at claim time.”
The other area of concern for the AFA is the ease with which customers can surrender existing retail or group insurance policies for what appears to be a cheaper version of the same product, offered by a direct insurer.
“As an example, consider a consumer that has a good quality income protection policy that they’ve had for a number of years. They’ve been on stepped-premiums, and they’ve seen the pricing go up, and they think: ‘I’ll ring this 1800 number to see what else is out there’. They do that, and they get something that appears cheaper, so they switch. But there’s no comparison being done between the product they’re moving from to the product they’re moving to. That’s a real concern. Because in the consumer’s mind they’re simply changing from one income protection policy to another, without understanding the massive differences that could exist within the contract.”
Insurance is a contractual promise, but that only holds water when the consumer understands what it is they have bought
The AFA’s view is that direct channels should be required to ask the following question during the application process: ‘Will the cover you’re asking me to quote you on today replace any existing insurance you have?’ “Then, if that answer is yes, they should be on the product replacement level of advice that advisers have to comply with,” Mr Fox said.
“Some would say this is financial advisers trying to protect their patch. I would say, no, this is much more than that. Insurance is a contractual promise, but that only holds water when the consumer understands what it is they have bought. We’ve got to ensure that consumers have sufficient protections in place so that they know what they’re buying, both the strengths and the weaknesses.”
Mr Fox said it was too early to pinpoint exactly what kind of industry response was required, but that there were “valid issues” surrounding the direct market that needed to be considered. “It’s about exploring the compliance and regulation settings that apply across the market, not just to advisers, and identifying what we need to do to put the country in a better position to solve its underinsurance problem, without creating potential problems down the track because consumers don’t understand what they’re buying.”
The AFA’s comments coincided with a statement from the Australian Securities and Investments Commission (ASIC) which indicated the regulator was still concerned about the advertising of funeral insurance products (see: ASIC Continues to Monitor Funeral Insurance Market).
I’ve always been bemused as to how a regulator could squeeze the nuts of one group, while allowing another to follow a loose set of rules. It’s Cinderella versus the Ugly Sisters. Does this make Brad Fox Prince Charming? I hope so.
Good on you Brad as this is a well articulated article which hits at the heartstrings of Best Interests Duty. All parties should be playing under the BID rules not just those who give advice.
Direct Insurance is very dangerous, like a lot of industry super funds or group risk where underwriting is done at the time of claim, explain that one to the consumer. Explain auto acceptance what is that?
I have always said the only thing that matters at the time of claim is getting paid.
Underwriting at the time of claim has no place in Australia.
Its not only direct insurance though, (A) for example suggest that an agreed value IP with financial evidence supplied and accepted at underwriting is not an agreed value contract.
The claim not a partial one does not qualify to be paid even if you qualify for the hours based definition of ten hours, they still want full audited financial evidence.
(A) say that an IP claim will require 5 years financial evidence and if its a trust structure and you cant demonstrate drawings or tax returns in your name or because of distributions we at (A) will refuse to pay.
Even if the claim is under AWOTE and it has been in force 10 years we may not pay. You may turn over $900,000.00 a year you could be the only income producing person but if its not distributed to you then we may not pay.
Insurance is a contract dictated in this case by Politics, the insured a professional, changed definition of occupation from sales to consulting, (A) say then its not your usual occupation we may not pay cause its not your usual occupation.
By definition in (A’s) PDS and on the website under agreed value to make a claim and have one paid you must meet the following: Be unable to perform one duty of your normal occupation, Or unable to preform more than 10 hours a week in your usual occupation or unable to produce an income.
In the PDS it does not say all three conditions must be met it says 1 condition, so (A) just may not pay.
Its not the full story but a contract of insurance it is not. Well done (A) im sure your proud of your team in claims and the underwriter that accepted the business who has simply put his head in the sand.
Whilst (A) have acknowledged financial evidence was submitted at underwriting they now want 5 years past returns. They say they don’t have enough, why didn’t you ask for more at underwriting time? before you accepted as proposed?
Not only that they want 30 years medical history even though a Senior and the most senior underwriter at the time did full medical history and accepted the application as submitted, Then (A) say that after acceptance and the policy is in force they are entitled to any medical history or financial history they want, to asses a claim, so what’s the difference now of upfront underwriting or after when its time to claim?.
Why do consumers pay 20% more premiums for agreed value? when its simply not that? why is underwriting done upfront if they simply have all the info to enter into a contract then decide on a political level they may not pay.
To make things worse the insured has 28 years experience in the Insurance industry and at the time of underwriting was writing 25 k a month new business just with (A), So the relationship has gone so has any chance of the insured getting a claim paid. The benefit should have been $4,800.00 that’s all.
Don’t bag direct insurance underwriting processes till the likes of the above are honoured.
You wonder why consumers dont trust insurance companies or we are underinsured simply because the consumer has the opinion Insurance companies don’t pay.
Mr Kell perhaps its the insurance companies that need all this reform and not the advisers, perhaps if they do not honour contracts you could ban them like you do advisers.
Why do we have thousands of complaints a year about insurance companies? simply cause they put in clauses to reduce the risk, an insured just wants to be insured, no ifs but or what’s why do we need to legislate and force the hands of insurers?
No insurance claim should ever be declined because of politics or silly definitions, non disclosure I agree should not be paid self inflicted I also agree, why do you all think FLOOD had to be legislated into law.
The consumer when they have a loss just want to be paid and so they should, Motor, Car and Liability Insurance should be mandatory as well as business insurance.
Good work Brad. This the sort of comments I wish we could get into the headlines of mainstream press so the public can better understand the value of advice.
Frankly insurance of any type is much too important to ever be sold without advice. Full Stop.
And advice needs to be appropriately remunerated.
Our problem is the lawyers of ASIC( try finding someone with insurance industry experience in ASIC) have become idealogues – they now demonstrate a natural affinity with the folks at the ISN. Lawyers prefer fees to commissions, because thats how lawyers work. Commisions are
” conflicted”, aren’t they ? Do ASIC lawyers ever buy houses ?
As stated above by Brad Fox , every time a direct-policy fails its owners, we will wear it. How even lawyers can think market failure, and its inevitable Budgetary impact, can somehow be a common good just baffles me.
But I also have a gripe with the AFA – nice to see you in the debate, but the AFA is a bit late. I and others have been on this case for 2 years, but I did not notice the AFA warming up the motor until recently
I totally agree with AFA position on direct insurance. Sadly, the bad experiences are always shared widely, the positive ones not so.
Exactly Mark how can there be such a different set of rules in place. On one hand we are trying to improve the client confidence and build trust in the public arena using the same product providers who are working on destroying any inroads we make….. it’s bullshit!
The commoditisation of any highly valuable service or product often results in a poor outcome for the end buyer. The reason is because to be able to deliver a meaningful outcome requires, accurate advice and clear,concise understanding.It also takes time, understanding and competent delivery.
The first year lapse rate of up to 40% on direct business shows either the inherent lack of understanding of the consumer as to what they have purchased,or highlights the transient nature and lack of commitment to the product or lack of understanding of the need and the value of protection.
Brad is correct in that the public’s perception of what Life Insurance delivers will become tarnished as a throw away product, rather than the incredible value it can deliver to families, businesses and individuals if implemented in the correct manner, with adequate understanding and process.
The perception of “cheap and easy” often results in disappointment.
Agree wholeheartedly Brad with your sentiment. Here’s an example from an NRMA policy that was being telemarketed to clients of mine over 60 years of age just last week – they were repeatedly contacted by the tele-marketer. They were being sold on the fact they’ll pay much less than what they’ll get back. Over $5,000 a year premium they were up for $100,000 life cover. The client would never have been paid out under the policy due to pre-existing, yet was none the wiser.
Pre-existing Medical Conditions
The Fast Track Cover option does not cover Pre-Existing Medical Conditions for the first five years from the start of your cover. A Pre-Existing Medical Condition is one that has led you to seek a diagnosis, advice, care or treatment from a medical practitioner in the five years prior to you taking out cover.
Please note that we also consider the following to be Pre-Existing Medical Conditions for any stroke, haemorrhage or heart attack related death if they occurred in the five years prior to the start of your cover:
A body mass index of 40 or higher.
Systolic blood pressure over 160 mmHg and diastolic blood pressure over 100 mmHg.
Total blood cholesterol over 7.0 mmol/L.
Diabetes with any one of the following: proteinuria, kidney disease, retinopathy, neuropathy or admission to hospital for treatment.
I agree whole heartedly with the comments and the article. A further problem is that the cover that people are forgoing to rely upon group cover in super has precisely the same consequences, yet this is being encouraged by the regulators ?
Funeral insurance used to be sold by furniture debt collectors, who did not know (or did not want to know) that the policies were issued with exclusions when the clients failed to answer all the questions. Nothing seems to have changed.
It takes us, as knowledgeable advisers, an age to complete the compliance for each case we place, during which time the client and his family run the risk.
We need to find a way to arrange cover for each category of risk. A way that is not hindered by rediculous compliance that keeps the client at risk before the cover is placed.
Online is fulfilling a miniscule portion of this, as they seem to be able to skirt around compliance to arrange a coffin.
We need to go back to the drawing board so that sales can be made when the hot button is pressed, not after it has cooled or after the client is dead or disabled.
Currently selling insurance is like us going to a travel agent to arrange a summer holiday, but you have to wait in line until the winter has set in.
This is a great article and nice to see coming from AFA. I’d be prepared to consider joining their organisation on the back of more sense like this.
I reference my reply last week to the “Insurance Industry should rethink ‘Bought not Sold Mentality’ and note that there’s another article plus a poll on the same this week. It’s an extension of the same issue and they’re interrelated. I advocated that we need to become Practitioners and the Regulators need to realise the importance of this. But I also agree with some of the sentiment here in that the Product Suppliers need to be held accountable for the products that they provide and this is where a greater focus of the regulation should be turned. It’s not good enough to say to a customer that they chose too cheap a vacuum cleaner for their floor once they come to claim because we can’t help them to choose a better one on the 2nd attempt. There is no second chance.
BillB’s comments are right, this is the first real sign of noise from AFA on the issue and FOFA’s been choking us for a bunch of years. Insurance is way too important to play with. The issue is that errors; wether caused by ill-informed client’s “shopping” their needs, dodgy Practitioners lining their pockets, Product Providers hiding behind “small print” or “pre-existing” clauses or any other cause, are too late to fix by the time we find them… But any error is going to blamed on the industry as a whole and be used in judgement of us… It already is.
Jossell has hit the nail with the other big issue which has also had limited air play in the reform debates; Insurance in Super. This is also being encouraged by the Regulators and not addressed well enough by the industry. This is equally as dangerous as Direct Insurance because it leads to the same poor client outcome. FOFA regulations have now stipulated that Product Benefits must align with SIS regulations for Super. Why for goodness sake? Why did it not stipulate that Super could be a vehicle used to fund protection needs? Super and Insurance, whilst linked and related, are diametrically opposed. One is to provide a retirement and the other is to get me there in the first place… I know which is more important in that scenario because I may not live to be old. The decision needs to be, can we use our Super to fund our protection or not? If the answer is yes, then we need to be able to use it to fund it properly. If the answer is no, then we shouldn’t be. This is what the industry bodies need to be emphasising with the Regulators. I realise they’re complex issues and not that simplistic and I realise that without Super a lot of clients would have no capacity to fund their protection but believe that we need to go back to the drawing board and start by looking from the perspective of the required outcome rather than the means of getting to the outcome first.
The point is that it is the Client outcomes that we as an Industry as a whole, are, will be and always have been, judged upon. It’s not the price at the time it was bought, it’s not wether the client chose incorrectly or replaced a good product with a cheap product, or was given bad advice, these are symptoms. Forcing a Direct Product Provider to “ask” a client if they’re replacing a product, forces them to say yes or no and not necessarily tell the truth. Fixing a symptom like this one wont fix the problem of the product being inappropriate or the outcome of the client blaming the Insurance Industry for ripping them off in their hour of need. Direct Insurance does have a place in the industry as does Cover within Super, but they’re very dangerous to the unsuspecting and very judgemental “Joe Client.”
It is very encouraging to read articles such as this one because they show that we’re starting to get the right issues on the table.
Agreed. Not at all about advisers trying to “protect our patch” but fair’s fair… If there is truly justification for us being so highly regulated then it should apply across the board, not just to one group. It amazes me that consumers are still so suspicious of Financial Planners, but will buy a policy from someone over the phone, whom they’ve never met and will most likely never speak with again.
The up side is that many many more Australians who would have never consulted an Adviser will have some limited Life and living benefit cover. The bad news is that the Direct insurance adverts must be made to explain to the average punter that existing medical conditions WILL NOT be covered. They fail to mention this critical factor. Life insurers have worked so hard to build up their Claims reputations and Direct insurance is a real threat of cutting this off at the knees.
Good article which brings up some great valid points. Although I think it is a bit one sided.
Of course financial advice is important. As an adviser it is important that people understand what they are purchasing. But the article portrays a one sided view that all group polices are worthless. I have seen many many times claims that have been paid to members of superfunds (death TPD and IP) where the member didn’t even know they had insurance. If they didn’t have a default policy they would have got nothing. Not everybody thinks about seeking advice or even protecting themselves – so is the harm of a default policy really greater than the benefits it has provided?
Also group insurance can be underwritten before claim if the member chooses to change their default policy. Hence they can see what they are getting in for.
I wonder how much insurance a retail adviser writes to group super policies. None – if it’s not on their APL. Are they really being in the best interest of the client in that case? Or are the looking at the 23% commission on the premium? You state in the article that it can be cheaper to get advice rather than pay an flat upfront fee? Really? How much time does it take to do a comparison?
Of course group policy definitions are different – but most funds tailor their policy to the main category of worker in the fund. You need to look at each case individually before you discount group policies altogether.
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