Robo-advice for risk insurance advice is less developed than for wealth management, but it is already here in some guises e.g. automated assessment tools from QuoteMonster and Strategi. Many businesses in New Zealand are actively investigating robo-advice initiatives for the consumer insurance market. These initiatives will produce services that support human advisers and that also replace them. That and proposed changes to laws are a substantial threat to advisers and also present significant opportunities. I briefly consider the key factors that will drive change in the risk insurance advice sector and a possible response.
Fintech future
The fintech sector has grown enormously in the last three years – $19.1 billion was invested in the sector in 2015 worldwide. There is no doubt that technology will have an increasingly significant impact. It already has in many other sectors, the impact of Xero on accountants’ businesses being just one of many examples.
Financial advice is a natural target for digital disruptors because much of the advice process can be easily reduced to algorithms and online processes. An example is PolicyGenius in the US, which provides online, end-to-end, personalised robo-advice on risk insurance.
Younger consumers are not only comfortable engaging with service providers online, most now expect to. This was highlighted in Minter Ellison’s report on robo-advice prepared by its Millennial staff. While younger consumers currently have relatively little to invest (slowing uptake of robo-advice for wealth management), they are a key market for risk insurance.
Current model
The current advice process is outmoded, often comprising multiple face-to-face meetings. There is no clarity on what an adviser is paid or what impact that has on adviser behaviour. The lack of confidence this causes is reflected in consumer surveys.
Consumer insurance advice businesses are often small, relying on outsourced service providers like dealer groups and compliance consultants. One consequence is that there are no consumer brands in the insurance advice sector and limited consumer awareness of the benefits of insurance advice. Insurance advisers have the option of getting licensed now but, of the 56 qualifying financial entities (QFEs), only two are insurance advice firms, both focusing mainly on businesses. Overall, existing industry structures and models haven’t responded effectively to previous regulatory change and aren’t well-placed to respond to upcoming challenges. In contrast, larger businesses that face disruption (like banks) have, recognising the risks, embraced technology and innovation. They’re better placed to benefit from regulatory and technological change.
Risk
New financial advice law is likely to be in force by late 2017 and will be a trigger for major change. That’s not just because robo-advice will be permitted (true robo-advice could be provided under the current regime). The removal of the class/personalised advice distinction will make it easier for product providers to provide personalised advice services enhanced by efficient robo tools.
The key risk for the advice industry is that it doesn’t adapt, becoming a marginalised channel, out-competed by product providers and new entrants. But adaption that consists of doubling down on the existing model with cost cutting and a Facebook page is unlikely to work. Wearing polo shirts or offering Starbucks to attract Millennials definitely won’t.
A possible response
Risk insurance is complex and consumers should ideally have advice. Product providers and tied advisers won’t necessarily provide the best advice and the ‘consumers’ interests first’ standard won’t change that. Actual and perceived independence is the unique selling proposition that will allow advisers to distinguish themselves from other advice channels. But to achieve that, advisers may need to move to an upfront fee model or full fee disclosure, which will be easier as the efficiencies of innovation bring costs down significantly.
To continue to compete on service, advisers will need to embrace substantial, rapid and sometimes difficult change. That probably means operating as a true corporate and at scale, with front end services increasingly delivered online or by relationship managers using robo tools, and with a client’s key relationship being with the business, not individual advisers. Such businesses would have sufficient resources and capability to promote themselves effectively to a mass market, to operate more efficiently and to innovate.
The future is bright for risk insurance advisers who embrace change and real innovation.
Simon Papa is director of Cygnus Law. This article was originally published on Good Returns (New Zealand).
People need to be very clear about the fact that Robo Advice and Digital Advice are completely different things! One replaces the adviser, one enhances what an adviser does. Xero is an example of Digital Advice, Policy Genius is an example of Robo Advice. Xero didn’t replace the need for Accountants, but Robo solutions do.