After almost 15 years in the advice wilderness, insurance firms are once again turning their attention to consumers – or they should be, according to Tower Australia CEO, Jim Minto. Minto says the insurance industry cannot afford to ignore the tidal wave of consumerism that is swamping all sectors of the finance business.
“Consumerism is alive and well across the entire financial services industry and customers are looking to access financial products, including life insurance, in a variety of different ways,” Minto says. In response, Tower has sought a wider distribution network including alliances with providers who sell risk products direct to consumers.
This change of focus, Minto says, is in line with the strategies identified in IFSA’s Life Insurance Headland Statement, published earlier this year.
The industry will continue to work on simplifying the language used in order to enhance awareness and understanding of life insurance products.
Furthermore, the industry will continue to design product lines that Australians can appreciate and understand. The industry will continue to streamline the administrative processes to make it easier for Australians to apply for life insurance products and for financial advisers to work with life insurance companies.
The IFSA paper laid out three principles for attacking the country’s widely reported under-insurance problem: building awareness, lobbying for support from government and other groups to increase participation in life insurance products and simplifying insurance legislation and the products themselves.
Minto says that industry wide, some progress has been made on the first two principles and many providers, including Tower, are currently developing a range of consumer-friendly products to address the third strategy. One example of unnecessary complexity is critical illness cover, which is also known as trauma or crisis insurance.
“They’re all the same thing but few consumers would understand that. The product has a very low penetration level in Australia compared the US and Europe,” he says, because the products are unnecessarily complex.
Changing the Strategy
Re-engagement with consumers, Minto says, is essential for the insurance industry which has concentrated for over a decade on servicing financial advisers rather than educating the public.
“Fifteen years ago life companies had their own tied distribution forces. They advertised on television, in newspapers and magazines. There was, in fact, more public awareness of the value of insurance then than there is today,” Minto says. “Then the life companies outsourced their distribution to third-party advisers and the public marketing effort stopped.”
Consequently, consumer awareness of the importance of insurance fell away and life companies competed for the attention of advisers by offering increasingly complex products with higher rates of commission.
Minto is not advocating a return to the tied distribution forces of old but he says if life companies adopt a more consumer-oriented approach, financial planners should find their clients more willing to listen to advice on life insurance.
Even the long-standing insurance bugbear of high and hidden commissions has crumbled somewhat since the introduction of dollar disclosure under Financial Services Reform. For fee-based advisers this has meant the ability to simply dial-down an insurance commission to zero if they wish.
“You could sell our products with no commission and charge a fee; advisers have been able to do that for a while,” Minto says. He says while it is hard to judge the proportion of advisers across the industry who do ‘dial down’, the fee versus commission argument has permanently altered how insurance is sold.
“There is much more negotiation going on around the commission between advisers and clients. In effect, it is becoming more like a fee,” Minto says. “It’s becoming a value discussion. If the value is delivered and the customer is happy to pay the agreed price then everything is okay.”
The Insurance Gap
In 2005, Australian parents with dependant children were underinsured by $1.370 billion dollars of life cover.
It has been estimated that the average level of cover provided through superannuation represents just 20 percent of the needs of the average Australian.
Nearly 70 percent of people in small businesses are not insuring their most important asset – their income.
*Figures are taken from IFSA Securing Australians’ Financial Wellbeing, Life Insurance Headland Statement, 2007