Industry reform, the growing trend for consumers to buy insurance through their superannuation as well as online and the use of new technologies are set to take the insurance industry in a new direction.
How will risk advisers fare on the journey?
Great, say insurance manufacturers, researchers and advisers, who confidently argue there has been no better time to be a risk adviser.
The reality is underinsurance is still a significant problem in Australia and conversely presents a significant opportunity for smart risk advisers willing to move with the times.
"Underinsurance is so significant that the opportunity for advisers is really untapped," CommInsure risk advice general manager Tim Browne says.
According to TNS/Investment and Financial Services Association research in July 2006, only 31 per cent of Australians insured their ability to earn an income with income protection insurance and this number has not improved much in the past four years.
While many Australians would argue they have some form of life insurance via their superannuation funds, Rice Warner Actuaries estimates it is only about 20 per cent of what they actually need.
"Advisers will always get people who want to sit down and have a plan because there are very few people that are self-starters and do it themselves," Rice Warner Actuaries director Michael Rice says.
But such an optimistic view of the role advisers can play in the future insurance industry comes with a caveat - advisers will have to be prepared to change, to be on the front foot and to use technology to better integrate with life insurance companies.
"The big threat is advisers that won't change. The ones at the forefront will have a fantastic opportunity," Zurich Australia chief executive of life Colin Morgan says.
Shaping the industry and beyond
According to June 2010 data from Rice Warner Actuaries, most insurance is sold by risk advisers outside of superannuation, accounting for 67 per cent of the retail insurance market.
This is followed by insurance sold within superannuation funds, which accounts for 21 per cent. The remaining 13 per cent of insurance is sold direct using call centres and online.
But over the next couple of years, industry reform and new challenges could change the way these numbers stack up.
"It [Future of Financial Advice (FOFA)] will have a significant impact in regard to where the industry goes," Harrison Financial Services principal Russell Harrison says.
Harrison has been working as a risk adviser for the past 22 years. In the early days, Synchron wrote 70 per cent risk business and 30 per cent superannuation. For the past six years, it has been a 100 per cent risk business.
Harrison says he believes the insurance industry will be significantly affected by the reforms because of the fact insurance is sold, not bought.
He says he fears that if the industry becomes predominantly fee-for-service, the more experienced risk advisers will move out, leaving inexperienced advisers handling claims and influencing how they are paid.
"The biggest challenge is consistent government intervention. I have never been told by clients that they were sold the wrong product or that I got too much commission for it," he says. CommInsure is so concerned about the underinsurance problem in Australia that it is encouraging its risk advisers to actively lobby politicians to get them to understand the value of insurance advice.
"Our big priority the last six months has been to put together a pack to help advisers contact parliamentarians, to help them to understand underinsurance and to open the discussion," Browne says.
The pack has been done in such a way that advisers can match macro-economic data with the client details to help the client understand the big picture and how wider trends can impact on their financial position.
But there are other people in the industry who do not believe FOFA will have much of an impact on the industry. Rice says because FOFA is prospective rather than retrospective, any changes will be gradual.
Further, he says consumer complacency is on the industry's side.
"Life agents and financial planners won't get hammered because a lot of people are time poor with complicated affairs and they want people to sort it out for them," he says.
However, he says under the reforms to superannuation, the industry could be saddled with two remuneration structures. Further, greater disclosure of fees could also raise some eyebrows with consumers, particularly when they see some risk advisers earn a 40 per cent commission on life insurance products, which are paid for in the first 17 months of instalments.
Meanwhile, against this backdrop of uncertainty, insurance manufacturers are reporting a very successful past couple of years.
"The business is in very good shape," Browne says.
He attributes this to an increased focus on all risks associated with consumers' financial positions following the global financial crisis.
Morgan says Zurich too has had a fantastic past couple of years, with business growing by 50 per cent in the retail space.
"This market continues to be underinsured. Insurance is becoming a little bit more sophisticated in accessing technology, which is making it easier for consumers to get access," he says.
"Technology is the reason for growth. Technology is making a massive impact. The last 12 months we have had automated underwriting and quoting, with close to 40 per cent of applications coming in a paperless way."
Zurich has also started to invest in mobile technology such as iPad and Smartphone. It has assessed that 45 per cent of consumers and advisers use Smartphone technology.
"We have invested quite strongly with that. We were one of the first to do it," Morgan says.
The threat of banning commissions and volume rebates
The banning of commissions is not well supported by many in the insurance sector.
"Commission is a perfectly reasonable way for advisers to be remunerated, but not the only way. A fee is equally reasonable and perfectly okay," Axa financial protection general manager Michael Rogers says. The primary reason the industry is against eliminating commissions is because it reduces consumer choice in terms of the way they can pay for risk advice.
It is also feared the elimination of commissions could cause a nasty chain reaction. It is argued it could make seeking financial advice even less attractive if consumers are faced with only one remuneration option. Further, it could mean the more experienced risk advisers leave the industry.
"If they ban commissions, the industry will lose a percentage of its top risk specialist advisers. Those who have been in the industry 30 years-plus will just walk away," Harrison says.
Morgan agrees: "If you look at how advisers structure their businesses, a lot specialise in risk. A lot will go out of business or have to join a larger group."
Zurich has assessed that up to 25 per cent to 30 per cent of advisory practices could go out of business if the industry moves to fee-for-service. Zurich also recently funded some research with end consumers to gauge their opinions on the elimination of commissions.
Conducted by Loyalty Zone, a consumer research business, 79 per cent of the consumers surveyed said commission was a fair way for risk advisers to be remunerated.
Secondly, and perhaps more importantly, the research found 57 per cent of consumers would be less likely to seek insurance advice if commissions were banned.
It is feared this could further exacerbate the underinsurance problem and not make insurance companies drop premiums. Rather, insurance will become more expensive as the fees charged will have to reflect the full extent of work behind the service.
For example, Harrison says he recently spent 16 hours liaising with other professionals such as solicitors over a death claim and didn't charge any fees for it.
"I have never been told by a client that they want to pay a fee and they are concerned by the commissions we are receiving," he says.
Rice believes it is unlikely insurance commissions will be banned, at least for the time being.
"I think the drivers are not the same as in superannuation. The amount you pay every year [for life insurance] is not significant. You haven't wiped out your life savings if you get the wrong life insurance," he says.
Browne says: "Hopefully commonsense prevails."
While the industry is fairly united against the banning of insurance commissions, it is not so unified on the issue of volume rebates, which influence purchasing decisions and what products are used.
"If you give a volume rebate, it will distort the flow of money based on the remuneration to an adviser. I think they should go," Rice says.
Meanwhile, Morgan says while some volume rebates should go, some should stay because they are genuine.
Buying insurance online
Online capabilities do not appear to pose a threat to risk advisers. "It is no more of a challenge than in the past. It has come up in the last five years and will cater to a small area of the market. But consumers are sold insurance, they don't buy it," Harrison says.
Certainly the sale of insurance online has grown recently, but it tends to be in the areas of funeral plans and accidental death cover.
"If you look through the numbers it is predominantly funeral plans through call centres and death insurance," Rogers says.
He says there has not been much of an impact on Axa's business because it does not sell these products.
And while there are no limitations on selling insurance online, the complexity of insurance products and the difficulty for consumers to work out what products are give advisers a natural defence against the growth of online sales.
"In the direct world, if you had a look at the channels insurance is being sold through, all the growth in direct is through call centres, not online. It is not people going online," Rogers says.
Zurich is more actively pursuing the potential of online capabilities with the launch of its online quoting system later this year. Morgan says it currently has more than 2000 advisers downloading the application, but it is too early to track how many quotes are coming in through mobile means.
Axa's strategy is to remain a wholesaler rather than go down the path of competitors such as Tower, which bought Insurance Line in 2008. This is not to say it is not looking to expand in the area of no-advice insurance sales.
"Where we have advisers who can see the role for simple no-advice insurance products, we would like to provide," Rogers says.
Axa is currently one of the three providers offering simple online insurance for iSelect.
Online and call centres are particularly appealing for do-it-yourself investors and insurance manufacturers recognise this is a group in their market.
"We need to respect that some clients would prefer to do it themselves. It's just a natural evolution. The best client outcome is when advisers advise on all client circumstances," Browne says.
Buying insurance through a superannuation fund
Insurance has always been available through superannuation funds. As such, it is not seen as a new challenge to the sector.
In fact, buying insurance through superannuation is regarded as a sensible strategy by the insurance sector and a good example of the role financial advice can play in best servicing consumer needs.
"In our business, we see that aspect of the business growing substantially, particularly as insurance providers are now on platforms," Rogers says.
He says the growth year-on-year for insurance sold this way is 32 per cent, but recognises this is coming from a very small base.
Certainly the growth in insurance accessed via superannuation reflects the greater choice available to consumers and advisers. With the improvements made in wealth management platforms, full retail insurance products are now available through superannuation. "Implementing it is so much easier where before it was a lot of paperwork," Rogers says.
However, Harrison says the real problem with accessing insurance via a super fund is that there is often no advice given.
As a result, he says clients often have no knowledge of how much life cover they have and the amount of cover they have is not related to their needs or requirements.
According to research conducted by the Australian Institute of Superannuation Trustees in 2008, one out of two industry fund members are underinsured by $100,000 or more.
Further, another report conducted by Lifebroker on life insurance in 2010 found more than 50 per cent of the 1000 people surveyed did not know how much insurance cover they had in superannuation.
"For us it makes no difference whether it is bought through an adviser or super funds because they go through an adviser anyway," Rogers says.
"The difference is to the individual because of the tax treatment of superannuation. For us it is exactly the same. The impact is for the consumer."
When Cooper announced MySuper in July last year, commissions paid to advisers were to be banned.
But Rice says by expanding this to include choice products, it could see more advisers advising on choice products and self-managed superannuation funds rather than award superannuation.
Reinventing itself
While the aforementioned changes in the operating environment of the insurance industry may pose challenges to the industry, some argue they represent a great opportunity.
In this context, the challenges for the industry remain much the same as before.
"Underinsurance is the biggest concern, not how people pay for it [insurance] or access it," Rogers says.
Making it more difficult and complicated for consumers and advisers to access insurance products remains a significant threat. The opportunity is then to get good risk analysis and advice in front of more Australians for a simpler and lower price.
"I have a very strong belief that most Australians are better served by getting personal risk analysis and advice. That need is not going away," Rogers says.
There is recognition the insurance industry will have to actively evolve. It is going to have to become better at advocating itself and the need for good risk advice.
"Advisory practices are going to have to reinvent themselves to a degree," Morgan says.
He says technology will play a major role in this evolution.
"We will see the most successful practices invest in technology and how they integrate with life insurance companies. The investment market did it years ago with platforms," he says.
He says Axa has enjoyed great success in the area of income protection, predominantly sold through risk advisers. But with nine very good insurance manufacturers in the market, he says the market is constantly evolving to new opportunities. One of these, he says, is selling life cover online to first home buyers.
Fortunately for risk advisers, the overarching trend is a shift back to the principles of advice.
"Selling a product is the outcome of advice. What product is selected is a by-product. How advisers get paid is not actually going to change that," Rogers says.
Should the industry move forward on banning commissions, this will pose a significant structural challenge for the industry, whose systems are not equipped to operate in an environment where fee-for-service is the norm.
Rogers says Axa has certainly had a good look at the business to see the changes it would need to implement to make fee-for-service possible. It is a case of preparing for the 'what ifs', while also keeping an eye on the future. «
