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Sovereign Increases commission for advisers

Market Comment

 

"For mature advisers with a decent book of business, upfront commission exacerbates their tax problem.  Younger, less experienced advisers might be swayed."

 

David Whyte formerly Director of Fidelity said that Company reduced upfront commission to 124% during his stint on its board and increased its new business market share over subsequent quarters by 10%.

 

“Sovereign offered an extra 10% commission to advisers and their new business market share retreated 10%. So operational support, quality of underwriting, systems management support, and product quality, all came into play asinfluential support factors, as well as commission levels.”

 

Graeme Lindsay, of Strategy Financial, said there had been criticism in the marketplace from people who said insurers were paying too much commission.  "The inference is that advisers are demanding it.  I don’t think they are.  It’s insurers scrambling for market share, trying to buy business.  Professional, competent advisers don’t respond to commission bribes.”

He said it was an unnecessary move that would increase instability.  “There’s no need for this. Advisers are there to do what’s best for their clients. This skews the market. I don’t respect it.”

 

Southern Cross’ biggest health insurance payout last year was for a spinal surgery costing $160,000, its latest statistics reveal.

 

Another spinal surgery cost $151,000 and $100,000 was paid out for a larynx removal.

 

Cancer, heart disease and spinal conditions were the causes of the highest health insurance claims paid by the association.

All of the patients who made the top 10 highest claims were aged over 64. The oldest was 76.

 

Chief executive Peter Tynan said it demonstrated the value of insurance. “No one wants to be ill but, if the unexpected happens and you need timely access to treatment, it can be very comforting to have the financial aspect taken care of.”

 

Those aged under 30 put in a high number of claims for tonsillectomies and dental procedures, for women aged 20-39 endometriosis surgery was common and for people over 50, hip and knee replacements, cataract extraction and skin lesion removals were in high demand.

 

A survey carried out by Southern Cross last year revealed that 79% of New Zealanders thought they would have to pay for some of their elective healthcare in retirement. But only one in five had started saving and many thought that savings of less than $10,000 would be sufficient.

 

Why insurance advisers should care about the Credit Sailsreport

Friday, April 5th 2013, 11:34AM

 

In March via the Commission’s website, the Commerce Commission provided guidance relevant to many financial service providers and advisers in a release titled, “Lessons for finance sector from Commerce Commission investigation into Credit SaILS.”

 

Insurers and advisers might have ignored the report because it is about an investment product. A quick glance shows you that the report quickly becomes technical and this further serves to obscure the fundamental issues of consumer protection. In fact, the report is a good reminder that the client is our main concern.

 

The Commission released a number of comments. Some of these were specific to investment products and are not included here, but many are directly relevant to insurance products, and at a conceptual level the Commerce Commission has little interest in the distinction, their function being consumer protection. Here are the most important items.

 

“All information conveyed must be accurate”. It’s embarrassing that this even needs to be stated – yet there it is.

“All key terms must be disclosed up-front”. Anything significant about the offer – its upside, downside, costs, term etc. – needs to be highlighted early on. Interesting – how many times do you see key terms buried at the back of dozens of pages of policy documentation?

 

“It is possible to mislead by silence”. What you leave out or obscure can mislead, as well as what you choose to say. Ensure that all relevant information is provided. It is not enough to simply make sure what is presented is true.

 

“Give prominence to representations that investors will care about. The risks were found on page 42 of the offer; a position so unbalanced and lacking in prominence as to be misleading.” At which point I wonder, if it requires reference to four separate parts of a policy document – a clause, several definitions, exclusions, and the claims process sections, for example to work out if a claim won’t be paid, that might not give sufficient prominence to an issue.

 

“Use plain English, not technical jargon”. Being familiar with our own business we can fail to see what is confusing. I’ve shown different policy documents to consumers and the reaction is almost always bad. Most find them too hard to understand. Most insurers in New Zealand have some parts of their policy documents that would fail this test.

 

“Financial advisors are a critical source of information…”. What you say makes a difference – and the case of Credit SaILS the Commission pointed out the importance of the issuer of the product ensuring adequate training otherwise you may unintentionally mislead.

Although you can’t make insurers change single-handedly you have a very important part to play: your advice process can make up for the deficiencies in their policies. You can also tell them that they need to improve documents.

Fidelity Income Protection Insurance

Changes to the wording make it easier to issue policies, but advisers should be careful about proof of income.

 

There is a trap for advisers in the definition of Monthly Benefit in Fidelity's Income Protection Contract.

 

The problem arises where the cover is issued without financial evidence based on the applicant's declaration of income.  Fidelity will issue up to $120,000 per annum without evidence.  So, if the applicant claims to be earning $100,000, Fidelity will issue $75,000 or $6,250 per month.  At claim time, the client is required to 'substantiate the monthly benefit', and Fidelity will only pay 75% of proven income at issue.  So, if the client cannot substantiate what his/her declared income was at the time of commencement, the claim will be reduced and the client's expectation will not be met.

 

Fidelity is doing nothing wrong – they're trying to make it easier to issue a policy.  The problem will arise if the applicant misstates his/her income and Fidelity issues, based on the income declared in the application, but reduces the benefit at claim time.

 

Accordingly, so as to avoid being on the wrong end of a Professional Indemnity claim, we strongly recommend that advisers ask applicants to prove income at issue even though Fidelity don't require proof.

 

Graeme Lyndsay runs Strategy Financial which provides research to advisers on insurance products.  The comments in 'Strategy Thoughts' outlines his view on recent product and policy changes.

 

Life Insurance Trauma and Death Statistics

 

Insurance advisers have to tell people that risk is real and they should do something about it.

 

Telling stories and connecting with people about how risk works is a vital part of that process - probably the greater part of it. But every now and then you need to need to show some steel: a cold hard fact provides great strength to an anecdote and is the only way to reach your more analytical types of people.

 

Fortunately there are some great resources out there to help you. Government and voluntary sectors work hard to alert people to the risks of heart disease, cancer, obesity, and so many of the other things that can lead to poor health, disability, and death.

Their resources, being independent and completely without interest in your sales process, have rock-solid credibility.

 

Here are two from the Heart Foundation website:

 

  1. Cardiovascular disease (heart, stroke and blood vessel disease) is still the leading cause of death in New Zealand, accounting for 40% of deaths annually.
  2. Every 90 minutes a New Zealander dies from coronary heart disease (16 deaths a day).

 

There are many more. Learn some by heart or put them in a note on your Smartphone.

 

They also have a link to a very cool site: http://www.knowyournumbers.co.nz this has an interactive calculator so that, if you are the type of adviser that likes to take people through presentations, you can demonstrate the client's risk of heart disease.

It's bigger than you think. Take the test yourself and then decide if you have enough Trauma cover. I bet you don't.

The Cancer society points us to this page: http://www.health.govt.nz/publication/cancer-new-registrations-and-deaths-2008 which explains that there have been 20,000 registrations of new cancers in a year and that cancer accounts for 29% of all deaths.

 

There is also a link to educational resources and calculators to enable you to assess your risk and change behaviour to reduce it. Another powerful tool.

 

Both sets of calculators achieve three things: they add credibility through a third party endorsement, they quantify risks, and they set up the underwriting process well by asking general health questions.

 

It's also good to remember what they do: they frame the issues positively.

Yes, it happens but there are things you can do now, and in the future which will make it manageable. Insuring will give the financial resources to enable that.

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