This happens today through tailoring of financial advice and the selection of products and options and the introduction of “lifestyle” products where the components of cover change with age, marital status and family circumstances. However, ultimately the current standard product with multiple options could be replaced by individually tailored products for each client, supported by tailored product disclosure, recognising the client’s unique personal and family circumstances.
This personalised offer, supported by a personalised and streamlined PDS and marketing material, will enable advisers to demonstrate more clearly the value they add through recommending the particular tailored product most suitable for their clients – and to deliver it in a simpler form.
The debate about commissions versus fee for service has grown louder in recent weeks with the announcement of a parliamentary inquiry into financial products and services, which will look at the role of financial advisers, the general regulatory environment and the role played by commission arrangements. Barring any legislative change in this area, there is likely to be a shift towards fee for service in the risk insurance market, but there will continue to be a mix of charging methods.
We expect a continuing shift from upfront to ongoing commission to align with the servicing of clients. The needs of many clients with relatively simple insurance needs will be met more efficiently with the support of technology so that costs can remain low while standards of advice remain high. Web-based “insurance needs” calculators will have an increasing role in this area of the market. Automatic underwriting will become the norm. Competition from industry funds and employer master trust providers will intensify.
Unless the legislation or tax rules change, we can expect a further shift towards risk insurance within superannuation. The costs of advice through those channels will increase so that well-managed and professional advisers and dealer groups will still be able to compete effectively based on the quality of their advice, their ability to advise on complex family and business risks and the ancillary services they can provide, either directly or indirectly, such as accounting, legal and tax advice.
Underinsurance remains a significant issue in the Australian market. For example, the average level of death cover across the working age population currently represents about 2.9 years’ earnings compared with a reasonable benchmark of around 10 years’ earnings. Even with expected growth over the next 15 years, the level of cover will only reach around 5.2 years’ earnings, so the risk insurance market is nowhere near saturated and will not become so over the next 15 years. For advisers with the right business processes and marketing and distribution strategies, the opportunities in the risk insurance market remain considerable.
Richard Weatherhead is a director of Rice Warner Actuaries.
