Life insurance heats up

he Investment and Financial Services Association (IFSA) conference last year (2005) was notable for two reasons. The first was the release of the underinsurance study done by IFSA prior to the conference.

The second was the high level of interest in life insurance shown at the conference. Jim Minto was on the opening stage last year and nearly everyone came away surprised at the number of questions he received on the life insurance sector.

It was a hot topic. And it was great to see life insurance back on top of mind.

This year, IFSA has kept a focus on the life insurance industry with the release of its study on the issue of income protection. Without taking too much away from the IFSA study, it is safe to say underinsurance in this sector is still large, just as it appears to be across the whole living insurance spectrum.

It would be nice to say it is restricted to the income protection sector and life, but it is not. It is across all aspects of the industry. Crisis cover and total and permanent disability cover are both woefully inadequate for the community’s needs.

The debate is now focusing on whether it is getting bigger or not, and what is the industry doing about it other than saying advisers must sell more.

There is no doubt in my mind that the gap is still there and it is pretty big. Last year it was put at $1.3 trillion dollars. In the year just completed, total national superannuation savings totalled around $1 trillion dollars. Life premium inflows are rising, but part of this is about traditional escalator factors rather than a surge in new sales.

The gap is in big numbers and I am not sure if anyone really understands them. In layperson’s terms, however, personal debt levels are seen as rising, although mortgage commitments on the East Coast appear to be stabilising as higher interest rates cool the property market.

The WA property market, however, is hot and mortgages are rising.

Only recently it was revealed that Australians are carrying nearly $16 billion a month in debt on their credit cards, and this includes $1 billion in cash advances.

Again, these are broad-brush figures that probably don’t mean much to the average person in the street. But ask them a question. If they couldn’t work and had to continue to feed the family, pay the mortgage and run the car, how would they survive? That is the big underinsurance question.

At Tower we got a more personal look at this late last year (as reported in Money Management) when we asked a few questions regarding critical illness insurance. We wanted to find out if, by looking at different segments of the market, there were different life-stage issues.

We were somewhat surprised at the health fears. Cancer and heart attack were at the top of the list — naturally — but loss of sight was third across all ages. Dementia was fifth across all ages. And when we talk all ages, we surveyed young singles through to retired couples.

Any of these illnesses has the ability to take a person out of the workforce for some considerable time, putting enormous strains on them, their families, and the budget.

When we asked people of all ages how they would survive financially if hit by a critical illness, most said the Government would come to their aid. Health insurance was listed as second. Personal savings was high on the list, while life insurance was at 14 per cent.

To us, this meant a disconnect existed between belief and reality. The belief in Government assistance, health insurance and savings was totally disconnected to the reality that the first two were not generous and the latter fails to account for home mortgages or long-term illnesses. Health insurance generally only returns a part of what you have paid out. It must be considered a partial cost recovery, not a financial fallback option.

As the UK advertising slogan says: Would you rather lose your house or your mortgage?

Clearly, the industry has a problem. People don’t understand what the products it offers can do and they are clearly not aware of the broad financial risks they take.

I can tell you the IFSA income protection study highlights this. It is all about education and awareness. Unfortunately, this is where the industry strikes a bit of cynicism.

Often, when the industry talks about underinsurance, it is accused of ‘crying wolf’ purely to drum up sales.

I won’t deny selling more life insurance is a key objective of everyone in the industry, but clearly, without it, society will have to pick up the pieces (and bills) if anything goes wrong.

With critical illness insurance, the issue is not only about providing money to pay for new drugs and treatment — it is about letting people get on with recovery without having financial worries.

So education has a vital role, but it cannot be said to be the sole solution.

The industry has got to do a lot more in terms of making it easy to get life insurance cover of some form once customers have been made aware of that need.

Independent financial advisers (IFAs) should have reception rooms full of people who want to buy protection. The IFA should be able to sit down with the client and come up with the right product at the right price with a minimum of fuss. They have been the backbone of the industry in the past and will always remain a key feature.

However, where IFAs cannot meet the market, the industry must look at other ways to close the underinsurance gap. New technologies will allow direct sales. New sales channels are being opened through mortgage brokers, etc. And then there is the issue of in-super cover, where trustees are looking to make sure their members are properly protected.

David Callander is chief executive officer, retail life, at Tower Australia.