Risk mitigation doesn’t always require risk elimination
In a perfect world, risk mitigation would seek to eliminate all identifiable risks. At its core, income protection mitigates the risk of the client losing their regular income due to sickness or injury. It can help to maintain lifestyle and can provide a retirement savings safety net through a regular contribution to superannuation whilst on claim. Though desirable, complete risk elimination is generally impossible, as any increase in risk elimination can lead to an increase in cost now and in the future.
Through the TAL Risk Academy, we have seen a consensus from advisers that in order to meet their best interests duty, they need to provide advice that eliminates as much risk as possible by providing comprehensive advice and products. Planning for this worst-case scenario is in theory logical, but this logic needs to be balanced against other equally important considerations, including an insurers actual claims experience and affordability of the strategy.
Take for example the benefit period; planning for the worst-case scenario would dictate advising an age 65 benefit. TAL’s portfolio experience shows that 92 per cent of income protection claims are completed within two years of commencing, with only 8 per cent continuing beyond two years. TAL’s statistics also show that a five-year benefit period would provide adequate protection for more than 95 per cent of claimants. This may result in a material long term cost saving compared with a ‘to age 65’ benefit period, but does carry a risk to some clients if the claim goes beyond five years.
Advisers acting in their client’s best interests requires a deep understanding as to whether or not that risk is palatable when balanced against other factors, including cost and long-term affordability. The client’s risk profile and concept of value will help to determine a risk mitigation solution and ensure that advisers are providing appropriate advice based on their client’s unique circumstances.
Understanding a client’s concept of risk and value
Every individual client will have a different perception of how they view risk, and consequently how much risk they are willing to accept in relation to their unique circumstances.
Personal advice requires advisers to have a complete picture of the client’s goals and motivation to mitigate risk, an understanding of their risk appetite and their ability to fund any advised solution.
Risk mitigation is a delicate balancing act that requires client input to ensure that any advice and recommendation is appropriate. Advice is provided on a spectrum, with consideration that some clients have a higher risk tolerance (when considering benefit periods for example) in return for a lower cost policy premium, compared with other clients who would prefer to cover the worst-case scenario and will be willing to pay for that additional coverage.
Using a thorough cost-benefit analysis, advisers can empower their clients with the right information so that their clients can consider how much risk they are prepared to accept as it relates to their own risk appetite.
An adviser’s best interests duty is focused on the advice given based on the client’s circumstances and the product simply facilitates this advice.
Building greater client engagement
When we consider that an adviser’s best interests duty is intrinsically linked with the requirement to provide appropriate advice, we can begin to shift the ‘best interests’ narrative.
By embracing a client’s goals, needs, financial situation and objectives to create greater transparency and engagement, advisers will be better-positioned to fulfill their best interests duty; and will be able to continue to support their clients in choosing products that best meet their individual needs and circumstances.
Scott Hoger, national technical manager, TAL
This whole risk space is an absolute diabolical mess.
The so called “ Level “ premium lie was deplorable and in fact placed the Adviser at great risk of legal attack by a client.
Even naming the premium Level was misleading and providing projected premium tables over 10, 20 & 30 years illustrating the cost benefit of Level versus Stepped premiums was very risky when most company Actuaries would have known they would be lifting the Level rates.
Level premiums should have always been guaranteed level from inception.
The way in which companies have penalized long term loyal clients by hiking their rates through the roof to get rid of business is simply appalling.
It is a disgrace.
Hello Scott , very good article understanding client risk profile differs with each client. Their interpretation and their own personal tolerance differ completely .
this is is something that all need to be aware of as there is no one fit for all.
also understanding claims experience and dealing with claims also give a more in depth understanding when discussing the situations that occur and giving examples to client to inform them of the different scenarios.
thanks again
This is one of the better articles on IFA. Thanks.
So glad I ‘opted out’ of this quagmire of insurance. Hindsight of course will lead the claiming clients to a different conclusion…
Great article and well thought through as usual Scott
” TAL’s portfolio experience shows that 92 per cent of income protection claims are completed within two years of commencing, with only 8 per cent continuing beyond two years.”
Ok so why is every insurer targeting huge premium increases on those policies with ‘to age 65’ benefit periods?
and just as importantly why are no insurers answering this question
Because those 8% of claims cost more than the 92%
Decimating the retail Income Protection market such that it is extrememly difficult to just recommending retail over Industry Fund cover – despite the poorer ratings of the latter, it potentially provides significantly more money over the life of a claim – “Best Interest” is becoming an unfunny joke.
Politicians, regulators and these days I’m convinced even life company execs, wouldn’t know “client best interest” if it slapped them in the face with a sign on its chest. The changes in IP alone support this fully. Simply putrid situation where “client best interest” is used to further the gains of the vested-interest parties and that’s everyone mentioned above.
Let’s take, for example, the average retention of an IP policy because insurers continue to close products which leads to an inevitable “deterioration” in profitability. Really!! What a shock, when you close products to new, healthy clients!! Just received notice of another 15% hike, in less than 5 years amounting to over 100% premium increase.
IP policy premiums should be guaranteed like annuities. The insurer/investors should carry more risk for their terrible (or intentional) actuarial calculations.
So, 92% of claimants are less than 2 years and 95% are for less than 5 years. Over the years, I’ve asked many insurers for their data about “how long are people are on claim for” to assist me in making recommendations (should I stick with age 65?). They say they can provide it, but then just send me marketing information on how many people they pay and the total value of claims (marketing rather than data). So the secret is out: IP to age 65 is a waste of money for the overwhelming majority of claimants.