The key to resurrecting ‘sick and poorly’ insurance industry

*This article is produced in partnership with Zurich Financial Services Australia.

Australia’s retail life insurance industry appears to be in decent shape, pulling in approximately $9.4 billion in annual premiums but, upon closer analysis, the industry is under pressure.

Although in-force premiums are large, the growth rate has been very low, and that growth has largely been as a result of price increases and not new clients. Whilst new business is growing at around 8-9 per cent per annum, the current level is not large enough to sustain the industry long term. This is concerning for many reasons, the least of all being Australia’s well documented underinsurance problem.

Based on a recent report by NMG Consulting, over 20 per cent of Australians over age 35 are underinsured, with a total of 3.4 million consumers underinsured for income protection and 1 million underinsured for death and total and permanent disability (TPD) cover.

Amidst the industry’s problems, which also include ailing adviser numbers, rising claims and concerns about the sustainability of products like individual disability income insurance (IDII) and TPD, there are encouraging signs of improvement and plenty of opportunities, according to Zurich Australia head of adviser channel Kieran Forde.

For starters, new business volumes are on track to hit $340 million this calendar year, which is still significantly below where it needs to be for a strong, sustainable industry but heading in the right direction, he told the Professional Planner Shape of Advice podcast.

“Incomes are rising, [the] cost of living is rising, and debt levels are high so the need for life insurance is stronger than ever,” Forde said.

“There’s lots of opportunity for those advisers who have chosen not to deliver risk advice…and also some of the advisers [who are] writing very small sums.”

Of the approximately 15,550 registered financial advisers in Australia, Forde estimates that only a third provide risk advice. Of that third, 10 per cent – roughly 500 advisers – are responsible for half of all new business in the market.

“There is growth and we’ve seen that growth because the regulators haven’t done anything [recently] that has slowed advisers down, so they’ve had a chance to sort of regroup, focus on their own businesses and make themselves more efficient,” Forde said.

He is also excited about the prospect of the government’s proposed Delivering Better Financial Outcomes reforms paving the way for a new class of adviser (NCA) to provide affordable, scoped advice on financial matters such as the value and importance of life insurance, spanning income protection, TDP and trauma cover.

Research by the Council of Australian Life Insurers shows that 46 per cent of people want tailored advice to help them decide on how much life insurance cover they need and the products best suited to their needs.

The proposed DBFO reforms could invite life insurers and advice licensees to hire NCA’s, in doing so, help close the advice gap.

Quite sick and poorly

For Katherine Hayes, a director and financial adviser at specialist risk advice firm Hayes and Co Insurance Services, current operating conditions are ideal for risk specialists due to the demand and supply imbalance, although the industry’s broader issues are constantly in the back of her mind.

“There are more clients than you can poke a stick at and there’s so many advisers who don’t want to touch risk advice,” she told the podcast.

“As an individual practitioner and as a business owner, I’m not feeling any crisis, actually it’s quite the opposite, however, that doesn’t stop me from having concerns for the industry as a whole.”

She did concede the industry is “quite sick and poorly” and in need of good attention.

“If it wasn’t for the new class of adviser proposition that’s going through, I would be extremely worried about the future of the industry,” Hayes said.

Hayes attributes the industry’s woes to a decade of regulatory headwinds, starting with the 2014 Retail Life Insurance Review, led by actuary and consultant, John Trowbridge.

The findings contained in Trowbridge’s final report culminated in the life insurance framework (LIF), which capped life insurance commissions at 60 per cent upfront and 20 per cent ongoing.

Following the industry’s disastrous appearance at the Hayne royal commission and the introduction of higher education standards thousands of advisers, particularly risk specialists, exited the industry.

Then, in 2020, the Australian Prudential and Regulation Authority took unprecedented action to improve the sustainability of IDII by forcing insurers to overhaul product design and pricing.

“We’ve seen a whole cohort of people leave the industry and I think we’re expecting another 1000 advisers to leave the industry before the end of the year,” Hayes said.

“The education reforms do tend to affect [risk advisers] more because you’re having to up your study in all areas not just the one that you practice.

“We’re not seeing [new] advisers come through either, so we’ve got an ageing [adviser] population without anyone coming through to replace it and that’s a problem.”

A lot hinges on getting the NCA reforms right because of the potential to channel talent to the industry and fill the advice gap, according to Hayes.

“Some of those will go on to become full-service advisers, maybe some risk specialists,” she said.

Hayes does not see the emergence of NCAs as threat to her business or other risk specialists, provided there are clear boundaries and guardrails around what they can and can’t do.

Under the proposed reforms, this new category of adviser will focus on simple, limited scope, product-based advice, which is markedly different to the comprehensive, strategic advice and ongoing service provided by risk specialists like Hayes.

Arguably, NCAs could be described as “product information facilitators” or “agents,” Hayes said.

Forde believes life insurance companies have a critical role to play in attracting talent to the industry and helping replenish adviser numbers.

From an insurer’s perspective, there’s a strong case for employing, educating and training NCAs to better support customers. Such a proposition would not “encroach” on advisers but, instead, lead to opportunities to partner with financial advisers to assist more Australians to get and maintain adequate life insurance cover.

“We’d have a fair bit of work on defining where that [advice] starts and stops but I think for simple advice [for example] small sums insured where it’s not overly complex, I think insurers would have a role to play,” Forde said.

“Where it gets to a certain level of complexity, then you know, referring out to our professional adviser network…can work really, really well [as a] partnership between insurers and advisers.”

Not only could greater collaboration between insurers and financial advisers make the path to introducing NCAs smoother, but it could create a talent pool of future risk specialists and a pipeline of potential full-service clients who may require more complex advice in the future.