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The real reasons too many people are underinsured
- 7 December, 2010
- 22 comments
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There are numerous reasons why Australians don’t have adequate levels of insurance cover, but Mark Thompson argues that commissions on life insurance products isn’t a major one.
Mark Thompson CFP
I am a CFP and have been advising clients on all aspects of financial planning for 25 years, but for the past 10 years I have focused on Insurance advice. A recent Professional Planner article on professionalism, which related the history of agent development loans, the demise of “cowboy lifies” and lack of client trust, proposed a simple solution to the problem: get rid of commissions. But the abolition of commissions on life insurance products is not going to solve the problem.
The real reason for underinsurance is that it is bloody hard work for the adviser. Given a choice, we humans prefer to take the easy route rather than the bumpy road. I recall two or three years ago attending a Zurich Life function for advisers. Generation X advisers made up the majority of attendees. The group was tested on a number of topics, with real time results. One surprising result was that providing insurance advice was seen as too difficult. What did Generation X advisers know that Robert MC Brown had not considered?
For starters the insurance adviser needs to school up on a plethora of insurance claims statistics and then work out some way to convert these dry numbers into a punchy presentation. If this process is underdone then the client will end up underinsured; but if given too much input the adviser can see the client run away screaming. A visit to the insurance adviser is about as much fun as a visit to the dentist – you know that it’s going to be an unpleasant experience and that it’s going to cost money.
I am reminded of a scene from a Woody Allen movie where his character is captured by South American revolutionary terrorists. He tries to escape and is punished with imprisonment in an enclosed pit, along with a life insurance salesman. Two weeks later he is released. He looks dishevelled and totally out of it, but the salesman doesn’t have a hair out of place and is still promoting the merits of whole of life with term life rider. No doubt Woody Allen had a similar experience with such a person and thought of the perfect form of torture. If the benefits of appropriate insurance are not presented correctly it can be a “Woody Allen” experience for an unhappy client.
Not all advisers feel comfortable discussing their client’s cervical dysplasia or testicular cysts. Most insurance companies have addressed this by allowing the adviser the choice of either completing health questionnaires themselves or outsourcing the task. Outsourcing can work well until a client has an issue with their health. With complex policies like trauma insurance, the underwriter is obliged to drill down deep into a client’s medical history, more than ever before. What might be overlooked in a death benefit policy may create an exclusion or loading for a trauma policy.
‘It’s not lack of trust or the payment of commissions that has caused Australians to be underinsured. The elephant in the room is the burden of the underwriting process’
A good number of clients have some medical history that requires further investigation. Mental health issues such as depression and anxiety are examples. Obesity, type-II diabetes, et cetera – the list goes on. With large sums insured the client will need to provide blood tests (fasting), a medical examination and maybe an ECG. Once the underwriter has the results, the adviser may have to “sell” a premium loading and/or exclusion for sub-standard health. The day of reckoning for outsourcing all of the health questions is that the adviser now has to go back and ‘sell’ the premium loading and/or exclusion. Had the adviser made some inquiry about health at time of application then the non-standard policy could have been addressed then.
Prior to tele-underwriting the life insurance industry average for applications that failed to complete was around 20 per cent. A senior underwriter has told me that applications that fail to complete have fallen to around 13 per cent for their company. Advisers outsourcing medical investigation and a reduction in requests for medical reports are the main reason for the improvement. Of this figure, around 7 per cent are declined any cover because of medical conditions. This figure would be lower, but for inexperienced advisers trying to insure clients who have just suffered a heart attack or been treated for cancer. Whether or not the rookies learn from this experience or give up on insurance is unknown. My own percentage for applications that don’t complete is around 1 per cent, which is similar to that of experienced insurance advisers.
Another fact about human nature is that most of us are not confrontational. Quite the contrary; we like to be popular. Ringing up a client and explaining to them that the insurance company doesn’t think that they are “normal” or “average” takes a special skill, as well as courage. It is even more difficult if the modified terms have come out of the blue.
Someone stop me now if they can show me that the removal of commissions from this process is somehow going to increase the amount of life insurance for Australian families.
If the adviser hasn’t lost complete interest in getting the best result for his “sub-standard” client he may then seek permission from the client to obtain alternative opinions from other insurers. The client will need to sign a letter authorising the release of medical information to another underwriter. Even after this the result could be exactly the same.
Can someone also tell me how to charge a client a flat fee for providing insurance advice, and then continue to bill the client to cover my costs for the additional services, created by unanticipated underwriting problems?
My insurance applications in suspense are like aircraft circling Tullamarine on a foggy morning – they never seem to land. My record for an application in suspense is 11 months from time of application until completion. This new client had asthma, smoked and had Crohn’s Disease. I did a lot of spade work with underwriters, even before the client applied for insurance. The first insurer failed to deliver because the medical report from the family doctor had casually included the word “stress”. Once this issue was overcome, we started the application process again, but with another insurer. This included speaking one-on-one with the head underwriter when she was in town, and getting a handshake on the deal.
This client will only repay me for my time and effort from commission from the second year onwards. And do you think that this client cares one jot that I am paid a commission? He, along with most of my commission paying clients trust me to offer appropriate advice at time of application and even more so at time of claim.
Yes, Generation X Advisers may be on a winning formula. Why bother with the uncertainties of providing advice on life insurance when the alternative is much more attractive? Once a client agrees to proceed with investment advice, there are no underwriters, medical examinations, health issues, premium loadings or exclusions to explain that can derail the deal. Remuneration for investment advice does not have the delays associated with insurance. So why waste time learning the skills to assist clients with life insurance when an adviser can perfect their investment advice and work exclusively in that sphere? Instead of kicking over the bones of dead lifies we should speak to Generation X advisers to see why they aren’t writing life insurance.
Finally, some assumptions need correcting.
The Professional Planner article suggested encouraging our clients to reduce their insurance as they age. However, the age at which a male Australian has the highest insurance need is 49 years and is increasing, because we are older now, with young families, combined with significant debt at this age. Coincidentally, 49 years is the around the average age for trauma insurance claimants, and just under the age of total and permanent disability claimants. Most of my clients don’t live in a vacuum and are well aware of the cost of insurance as they age and it is a frequent topic for robust discussion.
The article took some time on pointing out the evils of whole of life era and their commissions. It assumed that anyone who has come from that era is tarred with the same brush. In my 25 years in the business I think I have written three whole of life policies, one being for myself. It assumed that there were no ethical advisers in the “Olden Days”, and that none have evolved into a higher life form. It is time to let go of the image of applications being filled out on the kitchen table with the TV blaring in the background.
Most of my clients under age 50 have never heard of a whole of lLife policy, apart from the few that grew up on the farm. Most have not had any bad experiences with insurance advisers. Their friends don’t appear to have any bad experiences with insurance advisers. Investment, on the other hand is another matter – lots of bad stories about investment advice. I would go as far as to say that when it comes to trust, insurance advisers are fast becoming the darlings of financial planning world, while investment advisers are still struggling to dig themselves out of the pit created by the GFC, and the scandals created by Storm, Westpoint, and so on.
It’s not lack of trust or the payment of commissions that has caused Australians to be underinsured. The elephant in the room is the burden of the underwriting process, and the knowledge required to provide advice. Insurance is not for the faint hearted. Consult a cross section of the financial planning industry to find out what they think about offering insurance advice. Dig a little deeper, or else you could end up with the scenario described by Donald Rumsfeld: “There are also unknown unknowns; there are things we don’t know that we don’t know”.
Mark Thompson CFP is principal of Mark Thompson Advisory Services, and an authorised representative of Securitor.
Our cost for advising on and implementing most portfolios of insurance for clients will be c$2000 with variance either side.
We hear a lot the mantra that insurance companies are difficult to deal with at claim times. Yet we also hear advisers justifying their commissions in part because they choose insurers who have a good track record of paying out claims. Which is it: do you choose poor paying insurers and if so, why take the commission or do you choose good payers in which case the argument of a lot of work at claim time is likely to be bogus.
Most of the work done at claim is between insurer, client and medical specialists. Seriously, what can the adviser add? They have no medical training whatsoever.
Re Pat’s response and in particular 2 of [his] statatments; ‘I have had one client take a knock back due to weight issues as a sign to turn his health around’ and ‘Of all the claims we have managed, none have resulted in excessive costs’ that is so far off the mark for our practice and others that I spoken to that I am astounded. Pat practice is truly lucky in this respect. I also wonder what is Pat’s fee for service in lieu of commission. Does it work out to be more, less or the same. Numbers Please.
Interesting defence of commission.
The advisers in our firm have been writing commission-free, agreed fee risk advice for cumulative 15 years.
When appropriate, which is most of the time, we write rebated, level premium policies. On average, over a 10+ year timeframe, the cumulative savings, even including upfront and ongoing review fees are in the tens to hundreds of thousands of dollars.
We work closely with the insurer and client during the underwriting process. We have assisted clients with claims.
It makes no sense to:
1. Make risk a specialist case for commissions just because it is ‘sold not bought’;
2. By relying on commissions, you significantly undervalue your service;
3. Related to 2, you completely devalue your service if the client is declined as you will not be paid. And, given the preference to extrapolate from single anecdotes, I have had one client take a knock back due to weight issues as a sign to turn his health around;
4. Of all the claims we have managed, none have resulted in excessive costs;
5. Because our clients EXPECT us to charge a pure fee-for-service, charging fees for all work – application – review – claim, is not a surprise to them as they see value in what we do, whether it is the widow or disabled client.
I could go on, but your article simply fails to account for the excessive burden commissions place on the cashflow of clients.
We have compared many, many scenarios, and, in most cases, level premiums without commissions roughly equal stepped premiums with commissions. By structuring a level premium policy, when appropriate, and rebating the commission, the only additional costs is your fee for valuable service. In year 2, 3, etc, the level premium policy becomes considerably cheaper.
Robert Brown was spot on, and all those defending commissions are simply defending their remuneration, not client best practice.
Hi Mark
Great article.
The one area I would like to add is “claim time”.
I am sure I speak for all “specialist risk advisers” when I sat that this is the absolute core of what we do…delivering the cheque.
Our two adviser practise has now paid close to $11 million in claims and we do not charge a claim management fee as it is part of our service offering that we promote at our first appointment.
An average claim can take anywhere between 20 to 30 hours…time that is not charged to a client but is absorbed through the payment of a renewal commission.
This is the power that we bring to the table.
Here Here Mark.
Top article. You nailed it to the tee.
Being a Risk Specialist for over 27 years, I fully concur with everything you stated. Life writers cop “crap” from every direction, and excuse the pun, to my female counterparts, but you need to have “balls” to be one.
My philisophy, that I instillto my client’s, which is old and corny, but a reality, “WHEN YOU DIE YOU DEBTS SHOULD DIE WITH YOU.”
Long live the Life Writers.
Some very good points made in your article Mark, apart from you making the comment that people are tarring all insurance advisers with the ‘old lifies’ brush but then go on to do exactly this to investment advisers with your flippant comments about the GFC pit, westpoint etc.
A good article – I agree – but there has to be a better way than the present insurance malaise around underwriting / commissions / chronic underinsurance.
* Despite decades of the commission status quo Australia’s underinsurance is not a good look for the industry.
* Take the dealer and planner out of the policy and the premium halves. Result – more sum insured.
* The premium is inflated due to the commissions. But the client has to pay for the next umpteen years at this inflated rate.
* After all the work is done… underwriting refusal most often results in zero commission.
* After all the work is done….. sub-standard outcomes most often results in more commissions.
* Group life covers are available to the general public nowadays with little or even no underwriting. Sure – not the best policies but might help with Australia’s nil or underinsurance problems. No commissions here. And no underwriting delays either.
* In the cold light of day, current practices make little sense and are a product of the 60′s selling life insurance.
* Advisers can’t get around to all Australians no matter – we need a default group arrangement – via Super at National group rates with automatic high levels of sums insured.
Advisers can then work around this and fill in the gaps for a fee and collect an ongoing fee for a claims service which can go into full support if the client may / will claim.
There, problem fixed.
Well done Mark. Great article that tells it as it is. People do not take into consideration the benefits like a 14 year I.P. claim that now tallies over $600,000. Another that in three years totals $140,000, both ongoing, and yet another Trauma claim for a quadraplegic of $250,000. Can the legislators put a value on these protection benefits. Cumulative commisions on these three claims would be less than $1,500.
It is important and rewarding both personally and for the client to assist with the claim process.
With regard to underwriting my experience and belief is that it is a direct responsibility of mine to work with the client with the personal Statement, not pass it off to a voice on the phone. The proposal is an opportunity to build on and cement a relationship.
With the introduction of Electronic applications the software teases out answers efficiently and so speeds up completions when directly compared to paper apps. My suspense is constantly at less than half of the “Paper” days but production has increased.
Final comment is re the old Whole of Life (what a great estate planning tool) or endowment policies. Just this week a client had an endowment Super mature $5000 sum ins $105 per annum premium for 41 year with a compound return of 8% Tax free. Not bad for a maligned product, I wonder how many investments would better that over that period whilst offering protection all of the time.
Once again Mark well done, a great article.
Great article although you haven’t addressed how to overcome the other elephant in the room. If I reccomend XYZ Insurance who want $100 per month versus ABC Insurance who want $80 per month for an equivalent policy, the adviser will get paid less. Furthermore, If I switch the client’s insurance, I get another upfront versus the trail. You as a risk industry need to work out how you will manage this conflict. Don’t fool yourselves that this will go away. It may be too hard for regulators – but Industry funds will launch an attack. Maybe the industry needs to work out how to include a fee for service in the premimum base..
There is no elephant in the room. In today’s world of online quotes, television advertising and general improvement in information gathering, clients are sharper than ever.
If you keep recommending inflated price policies, then you will lose business. Simple.
It is no different to saying “Accountant can charge $200 for a tax return, or he can choose to charge $300. If he chargs $300 for the return, then he makes more. Why would he charge $200 if he can charge $300 and make more!”
Answer: For the simple reason that clients may not be convinced of the value of paying more for an equivalent service they can receive cheaper elsewhere. It is no different with insurance.
And if you are doing the job right first time, and giving the client to best value possible upfront, then how can you justify re-writing it next year for a more expensive, lower value policy? You are assuming the client is a moron and would blindly accept that.
Our SoA’s show transparantly all the policies available, and their research software comparisons – both on price and policy definition strength. When it’s there is black and white you’d better have a bloddy good reason to recommend the $100 policy if the $80 policy is just as good.
Well done Thommo
A heart felt piece and a good insight into life insurance and the intricacies thereof.
Yes we get paid commission on sale of insurance policies, and yes there is a lot of work involved in explaining and setting in place, but I have never had a client say to me at claim time “gosh this is too much I don’t need all of this” On the contrary they are very grateful for the time, effort, and care shown to them to get it right.
Mark, good insight into what happens “behind the scenes” with the insurance process. We provide a comprehensive financial planning process – flat, agreed fee for service for all initial and ongoing advice. We do take commissions on risk products. Why? Because adding an extra couple of grand to the bill to process a client’s insurance would not be attractive for them, in addition to paying premiums. However, long after the investments are put in place, budgets are finalised, savings plans commenced and new holding structures put in place, insurance policies are still in suspense. I would say that on average it takes 2 to 3 times the time and effort to put an insurance policy in place than it does for any other investment work.
That is why we’ve carved out a nice niche taking on the risk work for other planners – they pass the undesirable, and for the inexperinced the unprofitable, work to us.
I was abused last week by a screaming, irrational “client” who does not concur with the GP and 3 specialists she’s consulted with regards to 3 different ailments that she has any relevant medical issues. That is why she failed to disclose them in her application. Somehow her decline is our fault, and was in tears that forever she will need to disclose that she has had insurance declined.
Fee for service, this would have cost the client lots of money to be told she will still be uninsured. THis way, it has cost me lots of time and money (she refuses to pay our small flat fee for policies that don’t proceed) for her to still be uninsured.
So fee for service in insurance perhaps does have a place – to protect the advisor from their clients!
Well Done Mark.
Your article is right on the money. In the last 5 years I have not had one client have an issue with the commission I receive. In fact it was not even an issue for discussion as the client could clearly see the value in having me in their corner. Any Risk Specialist would say that they generally run at a loss to bring a client on and only make a profit in year 2 or 3. However, I have a lot of colleagues in the industry who are Investment advisers(they call themselves Financial Planners, but don’t do risk)and they have an issue with every client over the fees they charge for SOA’s, Implementation and ongoing.
Well said Thommo, I have worked for major bank as CFP and now on my own and I am an X’er. While investment markets are good no-one sold risk. Now everyone is selling risk- loan brokers plus. Have a look at Aussie Home Loan- now have Aussie Insurance. Nothing wrong with this apart from – the quality of the insurance policy and the amount of insurance recommended and ownership etc etc that is questionable.
I totally agree with this article, and with 20 yrs in the life business it could have been me writing this article. Well done Mark.
I have often said that i could write a book on the frustrations & wasted time spent getting clients insured and the ongoing service requirements to keep them insured, maybe I will but it wouldnt be recommended reading for a gen X adviser or the next intakes of 2011. Ian
I’ve been a planner since ’86 & CPF since ’99 and cut my teeth on insurance.
I completely concur with what Mark has to say.
As a country adviser we operate as GP’s
ALWAYS addressing insurance needs as apart of the financial planning process.
The known unknowns:
A/The WOL/endowment policy is much maligned
because it’s not understood.
B/It still has a place in estate planning.
C/ Most were sold when there was no other
contract available. So criticism is futile.
D/ WOL commission was set by the institutions
not by the advisers or agents.
E/ We were not able to change it, and
technically it was in breach of the agents
agreement to rebate commission.
Most of the people commenting on this have NO Idea about any of this, “they don’t know what they don’t know”
My father was an agent for approx 40 years.
It is an art to explain the need for insurance so that the client understands the need and it takes time.
This is best learnt from an experienced planner. I learnt from the best and when the clients thank you, you know you’ve done the job properly.
This debate about commission is about political appeasement and has ZERO basis when on the ground talking face to face with the clients, let the critics first watch & learn.
Peter Newton CFP
How true this is, but the real reward comes when you can face the family of a claimant and reassure them that although Dad may never work again , family life will go on much the same financially.
The mortgage is paid, the income continues and they can focus on making life for Dad as good as it can be.
GenX should not forgo the chance to be heroes
Well said! I think Mark really hit this one one head. I’m a Gen X’er and insurance advice covers about 90% of my financial planning work – It’s something I’m passionate about and a few years ago I came to reaslise that I would either have to outsource the process from A to Z or specialise on insurance due to the level of work and knowledge required in order to get the best outcomes for my clients. I truly hope that Mark’s comments are taken to heart and that we can remove this whole commission debate from the realm of insurance products.
This piece is fantastic.
Not because of my desire to see commissions remain but because it gives a wonderful insight into the demands of the valuable effort we provide.
It also makes clear the reality that making fee for service the only option will leave the vast majority in our wider community short-changed.
Hi Mark,
Thanks you for taking the time to write this article. I agree with what you have to say. As a 32 year veteran, I am proud of the fact that my clents are adequately protected [in most cases]. I think Estate Planning is an area we, as an industry, do badly. Sometimes even I think “it’s just too hard” but, let me tell you, if they take out commission, I am wondering why I would bother!
Cheers – John
Great article Thomo.
Hi Thommo,
A bloody good article indeed. I only advise on risk and love it. I hold my clients hand and dig deeper with the personal statement and it gives me many opportuinties to discuss possible outcomes so they are not shocked with sub standard rates.. My nursing background does help somewhat.I am totally with you on the hard work and commission part and good on you for writing such a great article.
Cheerio,
Karyn