Covering the insurance spectrum

The life insurance sector has progressed significantly in recent years and, as the industry changes to meet higher levels of consumerism, it is poised to grow and develop further. There have also been some strategic changes emerging.

At the very core of the future remain the fundamental consumer goals and social policy aspects offered by life insurance.

This is a product that helps the living and the dependents of those who may have died. It provides some self-determination and control to people to reposition their lives after adversity.

Social policy perspectives

It is good social policy to have people saving for their own greater comfort and self-determination in retirement. Additionally, it should be good policy to have people protect themselves and their dependents from adverse health related outcomes.

If we are to encourage the building of wealth, then surely we must look equally at preserving it.

If we don’t, then it falls on governments, taxpayers and the community and social agencies. These services generally only supply basic levels of support.

It is therefore good social policy to have consumers determine their savings and life insurance.

It saves the taxpayer and others and gives people and their dependents some dignity, the ability to make choices and a degree of financial security.

What do people need?

Firstly, they need awareness.

To many, especially those living alone or without children or partners, pure life insurance is less valued because they don’t feel a need.

Those who have dependents, families, businesses, partners and spouses do need life insurance — at least death cover — to help clear liabilities and provide a financial base for the family going forward.

Personally, in my 20s, someone close to me suffered from the sudden death of a husband at a young age. They had inadequate life cover.

The wider family helped, but the widow still had to work three part-time jobs and struggled to raise her three children. Eventually she got on top financially, but it could have been a lot easier had she and her husband understood the value of insurance.

And it can, and does, still happen. The average mortgage in Australia today is close to $340,000, and many people have nothing like that level of life cover.

Today, some degree of life cover is generally provided through superannuation. And it is getting cheaper.

This type of cover continues to reduce in price as our overall mortality rate improves. All the more reason to have it. It is even more affordable.

However, generally not available in super is critical illness. There appears to be little knowledge of it (often referred to as trauma or crisis), yet on explanation its value is clearly recognised.

The industry can’t agree on a single consumer friendly name for this product, so little wonder consumers don’t understand it.

This was brought home to me barely hours ago. I had just met a superannuation trustee who had never heard of it. This is an issue for the industry, and we need to deal with it and explain it better.

It is a policy for living clients, as it pays immediate benefits with a lump sum that allows people the opportunity to pay off debt and give them life choices that come with that situation.

It is really amazing few have this cover. It is more expensive because it has high value and claims experience is significant. That tells us people are gaining real value from it. Expect it to continue to increase in price as its use and value is seen to build, but it will remain affordable I believe because insurers will offer versions that provide the key parts of the cover at more affordable prices.

Income protection (IP) cover is generally provided through superannuation, but the benefit payment period is often limited to two years. Income protection pays an income when the claimant is unable to work due to illness.

Again, few appear to know much about this type of policy. Some recognise that it is in their super scheme but very, very few would know of the two-year benefit limit. If this comes as a surprise to you now, imagine what it would be like to have cover runout after two years.

Individual super members perhaps should consider buying top-up cover, which begins after the initial two-year period.

Super members need to think whether they need cover for periods over two years and up to five or 10 years. Or even cover until they are 65, when they normally stop working. Making super tax-free at 60 can reduce the cover period for some.

The life/super industry challenge

* It must give people information. It is a priority and a challenge.

* Available advice. It is a hot topic, but must be addressed — consumers need it and want it.

* Accessibility. Given the above, people must be able to buy life cover easily.

FSR: an issue

An unintended outcome of Financial Services Reform (FSR) is that it has reduced access to advice — especially for middle Australia.

Despite the industry disputes over advice, it is important for consumers to be able to ask questions and get sound answers. It is equally important for life and super.

The industry is still trying to work out what is valuable to the consumer in terms of disclosure. The consumer must have access to relevant and detailed information on material issues including conflicts and remuneration if they are to make up their minds.

But existing, more prescriptive analysis and disclosure has created the need for advisers to focus on larger value consumers. The cost per consumer has increased, and middle Australia is missing out.

Unless everyone can provide ‘less’ but more valuable information, the consumer may turn off completely. The paradox is those who need the greatest level of advice are least able to access and afford it.

Both major political parties continue to support disclosure simplification, and this remains an area where there has been progress, but more is urgently needed.

Informing on life products

This is generally not a good report card for the industries and it is a critical priority.

There has been insufficient communication of the benefits and features of products — both within and outside the industry. This is certainly on my personal radar.

The ongoing underinsurance story

Underinsurance in life insurance is enormous. The Investment and Financial Services Association commissioned research in 2005 that put it at $1.3 trillion in death cover, and this was only for families. The good news is that this alarming number has rung bells in the life and super industry.

More recent research dealing with IP indicated people have only about 20 per cent of the cover required. As mentioned, very few realise their in-super cover is only for two years.

And, as mentioned, the low-level of 2 to 3 per cent of Australians with critical illness cover reflects a lack of understanding of the product and its benefits.

Getting life cover

At present, there are three main ways to get cover:

1. through workplace superannuation;

2. through an adviser; or

3. through a bank or business that offers life cover to customers.

Workplace super is in a very strong position to provide increased cover both in-superannuation as well as being able to offer members added protection.

It is pleasing to hear of reports of super members seeking extra cover.

Independent advisers will continue offer this service but, it is sad to say, not enough financial planners are involved yet. Getting more in-super life advice available is clearly a priority.

Post 2005 — where are we now?

My wider industry scorecard is as follows.

By mid 2006 there had been:

* good general recognition of the underinsurance issue;

* good early response by workplace superannuation providers and trustees to informing members and offering increased default cover levels;

* ongoing FSR constraints on the availability of advice; and

* and insufficient financial planner involvement in life insurance, but interest is building.

My early 2007 scorecard is:

* continued offers by workplace superannuation trustees to lift default cover levels — and well done to them;

* more evidence of access to top up cover for workplace scheme members — again well done;

* FSR still holding everyone back to a degree;

* life companies now investing in new underwriting technologies to make products easier to access; and

* and there is still not enough financial planner involvement.

Speaking bluntly:

1. while the scorecard has improved, it is not good enough yet;

2. the underinsurance gap is still far too wide;

3. the information gap about life insurance remains huge;

4. selling life is changing and the fact that superannuation members are calling unprompted to discuss additional cover is a highlight. The industry still needs to inform and motivate purchasers;

5. access is still too limited; and

6. disclosures are still too restrictive to benefit enough consumers through greater provision of advice.

Where to?

The good news is that:

* the underinsurance issue is now a lot more widely talked about;

* trustees and super providers are being proactive;

* all life companies are investing in new ways to help the consumer get cover; and

* the once ‘poor cousin’ life industry is again attractive, and this is encouraging investment and competition.

All of this is good news. Consumers, once they recognise the need, will feel the desire to do something about it. The industry must respond positively to the challenges and opportunities.

Jim Minto is managing director, Tower Australia.