For more than 200 years, life insurance was effectively sold as a bundled up protection and investment contract called a Whole of Life or Endowment Policy.
With the advent of a multitude of new investment options over the past 30 years, unbundling policies as they traditionally stood became more commonplace.
We began to see them predominantly sold purely as a risk product, like property and liability insurances.
In either form, much reliance is placed on the integrity and financial security of the party making the promise to pay out the sum insured when the insured circumstances arise.
Most regulation has therefore focused on the financial security of the insurance provider, and the enforceability of policies, rather than sales practices.
This has largely been left to insurance providers’ self-determination and self-regulation.
A must have?
There is no denying that the average consumer sees life insurance as a grudge purchase: its sole purpose is to fill a financial gap should catastrophe strike.
Being a grudge transaction, it is rare for a consumer to be proactive with this purchase, let alone obtain protection to a level sufficient to accurately satisfy their true needs.
It has long been an adage of the industry that life insurance is sold rather than bought, with it relying on a vigorous sales process.
The early days
As someone who joined the financial services industry as a life insurance agent in 1981 (and insurance sales manager from 1983), I vividly recall the sales training regime: barely a two-week course in product knowledge and sales technique, followed by the compilation of a list of 100 ‘warm contacts’ who would be your first ‘prospects’ in testing your rudimentary skills.
I recall the sales courses were run year-round, and failure rate was extremely high.
I was extremely uncomfortable going out to my list of 100 family and friends. I chose to simply cold call strangers, knowing that I would have to deal with an enormous rejection rate. Despite my meagre results, however, I did survive and was offered a sales management role after my second year.
Fundamentally, the lesson learnt here is that poor knowledge and poor sales skills, when applied to family and friends, are clearly not in their best interests, and when applied to strangers, rarely reap impressive results.
Perhaps as someone in his twenties with no liabilities and no financial dependants, I was lacking the required conviction in the merits of the product. I do, however, know that my training was far from satisfactory and only promoted a transactional, sales-based culture where hefty commissions were a necessary reward in a very hit or miss sales cycle, home to high rejection and product lapse rates.
The current landscape
Insurance advisers have now gravitated from agents of the insurer to representatives of a Financial Services Licensee (where advice standards are more rigorously supervised); however, product and remuneration structures have remained largely untouched from those bleak days.
I Googled “financial advice scandal” and was presented with around 1,800 responses, most with big bank names alongside brands like Storm, Westpoint and Great Southern.
The crux of these problems is high commissions and poor sales practices.
Is it any surprise that after all of this, the life insurance industry (made up of the usual suspects) persists in distributing products the old fashioned way? Is it poor judgement or just poor oversight?
Addicted to churning?
It is little wonder that many in the planning, advisory and brokerage community are “addicted” to the practice of churning. From a client perspective, the churn costs are horrendous; meetings, advice documents, quotes, lengthy application forms, blood tests, medical reports, underwriting assessments, just to name a few.
What is the result? Merely a replica product with immeasurable hassle, all so somebody can reach a sales target and get another 120 per cent commission.
That’s why the Trowbridge Report provides a much-needed review of these sales practices.
Findex, Australia’s largest non-aligned financial planning advice group, has no issue with its recommendations, but feels that they have not gone far enough to expunge the system of poor and outdated practices.
Time for industry reform
We have long said that client best interest, simplicity and transparency should be the guiding principles underpinning any industry reform.
We strongly argue it makes most sense to simply have one clearly enunciated fee for service for advising on and arranging a life insurance policy. If there are hidden benefits, the adviser is failing the client. If the fee is justifiable, it should be clearly visible.
The embedded commission concept reeks of an unnecessary and less than open transaction and would seem to be the anathema of industry reform.
Findex has been actively working with its insurance providers to bring to the market life insurance products that facilitate simplicity and transparency for consumers, something which should be embraced and regulators should welcome.
At a time when most interested observers believe that the Australian population is underinsured, it would seem evident that the best way to achieve the desired level of coverage would be to be open and honest with the consumer.
All in all, we commend the regulators for initiating the Trowbridge Report. What is required now is simplicity with all life policies written in plain language for all parties to precisely judge all the costs and benefits.
All advisers have a legal obligation to act in the best interests of their clients and I fail to see how anything other than a reasonable fee (much like general insurance brokers charge) can satisfy such a test.
Just as the future of financial planning will be non-conflicted advice over vertical integration, so too will be 100 per cent transparency in the advising on, and selling of, life insurance. It is not a question of if, but how soon.
Spiro Paule, chief executive officer, Findex Group
Graham
I have been in the industry now for 40 years. I have generally found that small business people & the mums & dads with a family generally struggle to make ends meet. To now start to charge a fee for service, I believe, will send them out to find a way to avoid this extra impost, or simply not insure adequately or not at all. They will look to direct television ads, cop no service, have no advice support. The under insurance in this country is already disasterous, To further exasperate this is ridiculous.Guess who has to support these people when death or sickness or disability come their way? Yes the Government, using tax payer’s money. We need to be encouraging more people to come into the industry. The human care can never be replaced, the friendship & genuine assistance is vital when there is a loss.
We need to ensure that either “fee for service” or “commission” should be left up to the representative or practice.
If someone is doing the wrong thing, deal with that individual, Everyone should not be punished because of a few.
The direct insurance organisations & super fund insurances are the ones that should be challenged. Our reps & brokers generally do a great job
Mike, from the information available it would appear that most of your business is focussed on Financial Planning, so I understand why you only have clients paying you on a fee for service basis. Please don’t muddy the waters by suggesting that people are happy or would even contemplate fee for service for Risk only advice! It’s fanciful and ill informed to say the least!
On the whole this is a great concept and article but it fails to offer a format or even a vague suggestion for fees. Mike Kendall’s summary is even more insightful as it really highlights the hole in the article with his coment of “…clients that want to pay me a fee.” What about the clients who don’t want to, or more likely, can’t? Who’s to cover Mr & Mrs Joe Suburbia who’s a Chippie, or a mechanic or such, working for $65k with a $400k mortgage and 3 kids? If they’re lucky Mrs can work part-time. If they’re less lucky, she can’t, or one of their children has higher needs etc. What about the 20 something Electrician who has to have IP for his contract or the Hairdresser who only wants a basic IP and $50k trauma? This is a sector of the market who needs cover but will only be able to afford somehting really modest. Are they to be relegated to direct insurance only? How do they pay Advice Fees? My limited understanding was that this is a sector of the market that the legislative changes has directly sought to protect.
My questions are how much is a standard fee? How much is the fee to assist with a claim? Is that included with the standard fee? Is this an annual fee? Or what is the “review fee?” How many of the clients that “want to pay a fee” are on an annual fee and how many pay once off? How many of these happy people are also receiving holistic advice and how many are getting risk only? How many are paying their fee from their product and how many are paying from their pocket?
I’m an advocate for change and transparency and increased simplicity and moving the industry to the new level. I agree, it is a “grudge purchase” but in our modern society it’s a “must have” and we need to find a method to deliver quality for a sustainable cost or risk direct insurance becoming the “eaiser, simpler solution. So Fee for service options, the Trowbridge suggestion and a lot of other suggestions such as hybrid models all have merits and all should be investigated thoroughly and openly.
I’m looking forward to your next article with working models showing the sustainability of your suggestions. I’m also really looking forward to the release of Trowbridge’s models too.
Interesting analogy Spiro. You should be congratulated for building a successful business over a sustained period of time. Whilst I am not familiar with the workings of the Findex Group, I understand insurance advice is part of your offering. It would be interesting to determine what level of ‘advised’ insurance is provided through your business. The reason I raise this point is because I recall one of the NAB/MLC Licensees, (Godfrey Pembroke I believe) who adopted the same position 4-5 years ago. A true fee for service insurance model. The only failing I believe was that their overall sale of advised insurance was insignificant when compared to other business models.
Don’t get me wrong I am all for freedom of choice, I believe Advisers should be able to choose their business model and clients should have an option to choose how their Adviser is remunerated. However if we acknowledge the significant ‘under-insurance’ issue that exists in Australia and the short-comings of a fee for service model then we need to consider alternatives that will ensure more Australians are insured!
I can just see it now. Financial advisers carry all the risk of advice, years of education, compliance, auditing, investment, putting their homes, livelihood and reputation on the line to get paid a general insurance brokers fee!
In 2004 I started operating a Fee for Service and I can tell you what clients thought of it back then. Nothing has changed. Clients want what is in their best interest without doubt, but they want it for the least cost available.
So they’ll engage a financial adviser to provide them with everything they need, and then they go to the bank or iSelect or a union run fund, or some other organisation who charge nothing and get paid a commission.
They don’t want to pay a fee for advice!
All still underwritten by an insurer!
Is there an irony here somewhere?
Plenty more to say, but enough for now. Why is it management always see things differently from advisers who work for their income?
So, out of 34 years in the industry a whole 2 years actual experience in actually providing insurance to clients…not to mention back in the day when it was NOT insurance but door to door selling of policies that don’t even exist today!
I love how people like Spiro trumpet themselves on how they have been at the cold-face and instrumental in the development of the industry. Seriously?
Too many preachers, providing ridiculous commentary. The risk industry reported a 30% increase yesterday, advisers are on a continuing professional program and documentation is abundant (including full commission disclosures). Focus should be on:
Insurance companies providing adequate systems to deliver easy updating/amending of existing policies.
Licensees continue to educate and improve professionalism.
ASIC and other industry bodies to work on providing simplified, quality advice documentation.
Remove all other incentives so that only remuneration is “disclosed commissions and/or fees”.
Well said Spiro I stopped taking commissions more than 10 years ago and now only have clients that want to pay me a fee. Those high performing advisers that you hear about are usually those that do the most churns not for the client but for their own income. It is not our job to fix Australia’s under insurance after all it is our job to provide good advice to those clients that want our advice. Keep working for your clients Spiro. MK
Thanks for the history lesson Spiro but I understand you have lost the larger part of your risk sales force (at least those that write anything of value) so naturally you preach from a position of security.
No mention here regarding how this will actually increase the insurance take up rate – because it wont.
Great advice here to be ‘open and honest’ with the consumer. Perhaps you can be the new ‘Ethics’ coach that the FSC is pushing for – it would appear you have a few mates on the council.
Must be a sobering feeling being the last man of integrity standing.