David Bourke in Australia has been a long time and generous follower. He operates an insurance agency there that follows very high standards and he has shared many useful ideas with me.
He commented on a post this past Saturday. It was in response to an earlier article about direct sell life insurance. Depressing would be understated. For a real professional like David, the situation must be beyond frustrating. Regulators should ask, “What value do we add?”
The gist of his comments:
- Direct market insurance has been operating in Australia for several years.
- The products offered have deteriorated to the situation where underwriting is done at claim time.
- The lapse rate is around 45%
- Professionals who sell insurance must give the client a 30 to 40 page “Statement of Advice” that explains the methods to be used and why, before the client can proceed.
- The regulators are doing nothing about inadequate product and high lapse.
- “There are other issues but I thought I would give you a brief insight.”
I doubt others with the same business environment, (I have had in past several comments from the UK and South Africa) will find that the outcomes are dissimilar.
What does that tell us? Several things come to mind.
Regulators want to regulate. They do not have the public’s best interest as their first priority although they will use that reason to justify their existence. As we see in Australia the outcome is vastly inferior.
Regulators can only regulate the advisors who do not need to be regulated. They make no difference to the others. The SEC knew about Bernie Madoff for years and did nothing.
Neither regulators nor customers get the idea that just because the jacket says it is insurance does not make it so. If there is a pre-existing condition clause it means it is not insurance. I do not know exactly what the contract is. Insurance must be more certain than that. You buy it because you need it.
Maybe there could be insurance that covered against the risk that the first would not pay. I expect that the combined premium would likely be similar to a “real” insurance policy.
In Canada the CBC did a report a few years ago about bank issued life insurance that contained pre-ex clauses and other defects. You would think that customers might learn that no one can get more than they pay for.
A lapse rate of 45% is ridiculous. It would be interesting to know how many lapsed because the customer bought another policy, probably more cheaply, and probably with even more odious conditions contained within. I suppose many others will just stop and no coverage of any kind will exist thereafter.
Everyone loses in this sort of market. Insurers that participate in the travesty should know better. Their reputation will be sullied forever. Any that take the high ground and refuse to compete for the lowest possible denominator, should be praised.
The “Statement of Advice” is interesting and I am not so sure I find it offensive. Years ago, I thought about doing such a thing in a form similar to a prospectus. There are advantages both to the client and to the advisor. The client knows generally what they are getting and why, and the advisor restricts the areas within which the client has a valid complaint.
Here, we are required to supply clients with a list of companies we are contracted with, privacy disclosures and a statement that we are paid commissions. Not too onerous once you get the material programmed. Files must contain a description of the need and the reason the recommended product satisfies that need. Again not especially difficult.
I expect that as time passes we will develop a prospectus of sorts with an insert for the particulars of the case at hand.
In the long run, the defence that works is to deal with clients who value both you and your advice. It is perfectly acceptable to say “Goodbye!” to those who do not.
As the first article said. Be valuable and remind the customers how you do that. A well-served customer is a not a regulatory concern.
Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.