The power of protection
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Risk-focused advice practices remain among the most in demand and most highly valued. Premium inflows have been steadily increasing for several years. However, there remains a chronic under-insurance problem in Australia.

Australians are slowly warming to insurance. Latest data from financial research house Plan For Life show total risk market inflows jumped by 11.7 per cent in the 12 months to December 2012, up from $10.3 billion to $11.5 billion.

Individual risk lump sum premium inflows grew by 10.35 per cent to $5.28 billion and individual risk income premium inflows were up 9.64 per cent to $2.07 billion. But by far the largest growth was seen in the group risk sector.

Overall group risk premium inflows climbed by 14.9 per cent to $3.92 billion over the period.

TAL chief executive Brett Clark says one reason for the upswing is that insurance is better understood by consumers today than at any time previously, with the global financial crisis no doubt an influencing factor. But
regardless, more consumer education is needed, he says.

Life insurer NobleOak’s chief executive, Anthony Brown, says awareness among Australians has increased through heavy advertising from direct insurers, while advisers have been better promoting the products.

“During tough economic times it’s nice to have that sort of safety of life insurance,” he says.

Research from Rice Warner Actuaries in December 2012 found that the Australian life insurance gap is reducing and, while increased marketing from financial advisers and superannuation funds can take some of the credit, much of this progress has been due to increased take-up of default insurance through superannuation.

“Group insurance continues to grow through superannuation funds as they continue to provide millions of Australians with a default level of cover, with the opportunity to increase,” AIA general manager for life insurance, Damien Mu, says.

“If we look at the market outlook, Rice Warner Actuaries indicated in January that the retail market will become the dominant channel of insurance while superannuation and group insurance will continue to play a major part, so I think what we are seeing is that we can expect around double digit growth in life insurance over the next five to 10 years.”

Despite this, Rice Warner also found that the median level of life cover would only accommodate about 66 per cent of basic needs and 41 per cent of the amount required to ensure family members and dependants maintain their standard of living.

“We know that default level insurance does not meet the individual needs of every member and that’s not what superannuation default cover is about,” Mr Mu says.

“It’s about making sure that to the best of the fund’s ability they’re able to match a base or default level of cover [for] all members.”

While default insurance has had success in providing blanket cover for more Australians, insurance providers’ advisers need to be prepared for change in order to properly service the industry and tackle continued underinsurance.

Advances in technology, competition and the onset of regulation mean that advisers will need to employ a more tailored approach if they are to provide the outcomes that clients are demanding in an evolving industry.


Underinsurance


“Even as more insurance is written each year – and it is a growing market – the reality is that most Australians don’t have enough life insurance and even if they have a super account, many don’t have the right types of policies,” explains Mr Brown.

“The understanding is getting better, but a lot of consumers don’t see the value in life insurance whereas, funnily enough, they do see it in general insurance, like car and home insurance.”

BT’s head of life insurance, Phil Hay, says insurance needs to be a much greater part of a consumer conversation if the problems with underinsurance are to be overcome.

“I do believe, as a country, we have a ‘she’ll be right’ attitude and it tends to be a discussion that people don’t really want to have,” Mr Hay says.

“Talking about what could happen in the future is not an easy conversation to have with yourself, let alone somebody else.”

Changes to the way in which advice is delivered, such as moves toward comprehensive models, are helping the situation, but more can be done, he says.

“Real holistic advice is really starting to make an inroad but there is so much more that we could do,” Mr Hay says.

“From our point of view, that’s why we’re making sure we’ve got better benefits, fee flexibility and again – about the customer-centric design – making sure the offers are really relevant to the client and to the adviser.”

Macquarie’s head of insurance and platforms, Justin Delaney, says many consumers who are underinsured do not understand what insurance options are available to them.

“There is no doubt that a lot of people aren’t adequately insured and I think that the key really is to make sure that people are aware of what they can have, what they have and what they need,” Mr Delaney says.

“There is no doubt that the average consumer is not very engaged in their insurance contract and I don’t think that’s going to change in a hurry until we actually start to make products certainly more intuitive.

“To solve this issue we need to continue building on consumer awareness and education about the need and relevance of personal insurance as part of the broader issue of Australians taking an active role in their financial future,” says Michael Rogers, AMP director of retail wealth protection.

“Underinsurance has unfortunately been a topic for too many years,” he says.


Industry funds


While insurance has always been available through superannuation funds, the take-up of this form of cover has seen a boost in recent years.

As a default option, it has a blanket level of cover that may not fit the needs of every client and as it is accessed via a super fund it is often given without advice.

But rather than a threat to the risk insurance sector, the industry views it as one way Australia’s chronic underinsurance problem can be tackled.

“There is a broad public base there that hasn’t probably engaged in the insurance discussion that will do so through direct means. Superannuation really has an ability to afford millions of Australians some default level of cover,” Mr Mu says.

“But the important area that we need to focus on is how we grow the awareness and the education so that members can elect to take up the level of cover that they need for their individual circumstances.

“That probably is still a journey that we need to go on in terms of getting more people to take up the appropriate level of cover.”

MLC’s general manager, advice product, Sean McCormack, agreed that insurance through superannuation more generally was a solution for the underinsurance problem.

With insurance through superannuation becoming an increasingly popular option, product offers are becoming increasingly sophisticated, he says.

“This is one of the ways that, as an industry, we’re tackling the underinsurance issue,” Mr McCormack says.

“There is just a higher level of cover available as a default through superannuation funds and that’s going some way – in combination with education and advice – to close the underinsurance gap. I’m not saying we’re there yet, we haven’t closed the gap, but certainly the level of coverage through superannuation is one of the key drivers of growth.”

Mr Mu adds that the increasing development of life insurance will help many people to gain more comprehensive cover, suited to their needs.

“What we are seeing across the market is that death and total and permanent disability (TPD) continues to grow,” he says. “Income protection, while it’s always been very prevalent in the retail market, is starting to grow in the group insurance space as well.

“I think the market is recognising that death and TPD life insurance is critical, but when you looking at protecting yourself and your family in the event of an unfortunate injury or illness, income protection is very important.”

CommInsure’s segment head, industry funds, Frank Crapis, says funds will be looking at their insurer to help them differentiate from their competitors and will be seeking further product development to align with member needs. This will include greater focus on claims and underwriting processes in an effort to enhance the member experience.

“We’re also starting to see greater demand from our clients for marketing support and member communications,” he says.


Direct insurance


With consumers becoming more aware of insurance, take-up of direct insurance is on the increase.

Plan for Life data from July 2012 indicate that direct insurance is experiencing a boom, with an annual new business growth rate of 20 per cent, and it is expected that 40 per cent of new insurance business will come from direct channels by 2021.

Despite this boom, Mr McCormack believes it is not a worrying trend for the risk advice industry.

“There will always be a place for advisers and you know the best way for a customer to get the most comprehensive insurance solution possible is to seek advice,” he says.

“But we need to recognise that not every customer out there wants to deal with an adviser and therefore, for us, it’s about making sure we have a range of solutions that are there for the customer.”

While Mr Hay agrees the take-up of insurance through direct means is overwhelmingly a positive for the industry, he does harbour some concerns.

“If a client has financial advice through a financial planner they’re twice as likely to have an appropriate amount of cover,” Mr Hay says.

“I don’t think you can underestimate the power of a financial planner and what they can do for their customers in terms of their future financial position.”

With insurance typically seen in the industry as something that is sold by advisers rather than actively purchased by clients, Mr Brown says the role of the adviser is not likely to decline.

“It’s absolutely sold and not bought,” he explains. “It’s one of those low interest categories that people kind of know they need but it’s actually a bit of a pain to access so it’s good to have an adviser help you through that.”

“A lot of advisers are more moving into holistic financial advice so many [independent financial advisers] are moving away from the pure specialty of risk advice and providing a more holistic service. Some of that is driven by a need for change in the industry and putting the client first.”


Technology


While the old mantra that life insurance is “sold and not bought,” holds true, technology improvements and an increasing awareness that goes with them is changing this industry dynamic.

According to Mr Rogers, the traditional model of product development within the industry is changing on account of more advanced technology and greater client demand for it.

The old norm of product development through an iterative process of adding benefits and features to existing products may no longer be good enough.

“The recent trend has been toward making structural changes within policies to make them more functional and affordable,” Mr Rogers says.

“An example of this is the ability to link insurance inside and outside superannuation so as to gain the maximum tax-efficient use of premiums as well as the certainty of release.”

There is a trend towards creating products that evolve to meet a customer’s future needs, guarantee future insurability and forward underwriting capacity, he adds.

While this forward-looking perspective is apparent in the industry, innovation is based on client demand, according to Mr Rogers.

“You can sit around and hypothesise [about] what kind of medium you want to use, but consumers will demand it whether it’s communication through social media or whether it’s digital,” Mr Hay says.

“If they want 24-hour access then that’s exactly what we’ve got to look at to make sure we build those opportunities.”

Technology has impacted the industry in three ways, adds Mr Mu: by simplifying access to it, by increasing information on it and by promoting its benefits.

AIA’s consumer-focused market research revealed that participants say they know they need life insurance but they need access to it in a way that’s easy to understand and easy to obtain.

“I think technology plays a really important part in the awareness, promotion and education and accessibility of insurance,” he says.

Mr Delaney, meanwhile, says online channels can go a long way to further the take-up of insurance in Australia.

“I think that initiatives such as Lifewise from the Australian life insurance industry and [Financial Services Council] have certainly been strong initiatives to try and improve consumer awareness and help them understand what’s available to them in terms of life insurance,” he says.

However, with margins increasing across the risk insurance industry, the biggest impact of technology has been on efficiency.

According to Mr Hay, there has been some margin compression in recent years but Mr Mu believes that, if anything, margins may be increasing, partly due to the benefits of technology.

A majority of the adviser community now wants to deal with MLC in an online capacity, adds Mr McCormack.

“Seventy to 75 per cent of new business comes through our Riskfirst technology – which is our online underwriting engine – [which] produces efficiencies within the adviser’s office,” he says.


Competition


With the risk insurance industry continuing to boom, the market is fostering increased competition between product providers.

Plan For Life’s 2012 analysis of the risk market found the top two underwriters in individual risk, AMP and NAB/MLC, saw their market share decrease slightly despite modest growth.

Solid growth from the likes of TAL, CommInsure, OnePath and other smaller providers means the gap at the top of the market is decreasing.

“Retail risk insurance has always been a highly competitive space and consequently life insurers are always seeking to gain a product advantage,” Mr Rogers says.

According to Mr Mu, some product providers will seek to match or better the product created by another company, which increases product costs but delivers very little in terms of enhanced offerings.

With the retail space particularly competitive, this “copy and paste” approach is more common in this segment of the industry.

“Competition is healthy, obviously, to make sure that people continue to innovate and maintain a very high level of service and quality,” he says.

“Where it can be a detractor, I think, is where competition impacts the industry to the point where it loses its focus on delivering genuine customer value. What I mean by that is that competition can drive costs that are not necessarily going to deliver value to the end customer.”

Competition has also led to increased pressure on pricing within the risk insurance industry

Mr Rogers says that within the retail market in particular, lapse rates and discontinuances have been widely reported.

“Undoubtedly, the single biggest driver has been the impact of the global financial crisis,” he says.

“When under financial stress and being forced to make tough budgeting decisions, people sometimes choose to cancel their insurance because they see it as a discretionary spend. Retention remains a key initiative for most life companies.”

Asteron Life executive general manager of product and service, Sean Carroll, says the industry is experiencing aggressive behaviour in pricing. In the short term, this is about growing market share but in the long term it just destroys value, he says.

“What’s good for one company today won’t be good for another company tomorrow and there’s no consistency,” he says.


Product innovation


According to Mr Carroll, we are in a world of “product development one-upmanship”, with product providers continually and incrementally increasing definitions in policies.

“For many years that’s what product development meant but it’s not innovative and over time it just creates complexity and chaos, and it means customers don’t truly understand what they’ve got,” he says. “It makes it harder for advisers to understand what they’ve got and it makes it harder for manufacturers to manage as well.”

Historically, says Mr Clark, there has been quite a degree of innovation in the advised part of the market (as opposed to the direct to consumer area), making those offerings more feature-rich to cater to adviser demand.

Consumers in that area tend to be more sophisticated, with more complex needs, and advisers provide feedback to insurers helping them meet those needs.

However, in the past couple of years product innovation has moderated but there has been greater innovation in the area of product delivery, according to Mr Clark.

“Technology has been a theme of the last three, four and five years, specifically aimed at fulfilment and interaction between an adviser’s office and the life insurance business, enabling life insurance transactions around the point of sale more efficiently,” he says.

Michael Browne, general manager for business services at CommInsure, agrees that technology is changing the delivery of advice. “Mobile and visual technologies are removing locational barriers to the delivery of advice and significantly reducing the cost,” he says.

“I had the fortunate experience recently to visit an offshore organisation where advice was also given via video conferencing. What struck me was the efficiency of this process, with many more clients receiving advice and products implemented per week.

Mr Clark says the real innovation of the past few years, however, has been in the group risk space catering to super funds.

“Industry super funds, and super funds more broadly, have caught on that life insurance offers to members is critical,” he says.

“Credit to them that they’ve invested the time and energy and focus in ensuring what we’ve seen as an ancillary offer has got a lot of attention and as a result there has been lots of innovation in product and delivery.”

 

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