The real reasons too many people are underinsured

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.

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.