Poor outcomes in the direct market could turn a whole generation away from life insurance, Association of Financial Advisers CEO, Brad Fox, has warned.
Speaking to riskinfo about the AFA’s 2014 plans, Mr Fox said direct insurance was firmly in the Association’s spotlight, because of the impact an adverse claims experience could have on the perception of the insurance industry as a whole.
“Our concern is about the medium to long term impact of an adverse claims experience; that is, people who thought they were covered having claims declined,” Mr Fox explained.
“We think it’s important to consider whether any criticism of the direct segment will end up casting a shadow across the entire life insurance market place. That worries us, because we know there’s a vast difference in the policies that are being issued via the direct channel and retail products which come with financial advice.
It’s too late to find out about a pre-existing condition exclusion at claim time
“What we don’t want to see is people who don’t understand what they’ve purchased through a direct channel having their claims denied because of pre-existing conditions that didn’t need to be disclosed at the time of application because there wasn’t any formal underwriting. There is a real risk that those customers may come out and say: ‘Life insurance isn’t worth the money,’ and we end up turning a whole generation of people away from seeking life insurance. That’s a poor outcome for everybody.”
Mr Fox said there was absolutely a role for direct insurance in the Australian market, and that pre-existing condition exclusions assisted consumers by making the application process quick and uncomplicated. “But as time goes by, we’ll see more claims on these types of products come through, and there is a question mark over whether they’ll be paid. This is not about insurance companies failing to honour the contract that was bought – it’s about consumers not understanding the terms and restrictions of that contract.
“It’s too late to find out about a pre-existing condition exclusion at claim time.”
The other area of concern for the AFA is the ease with which customers can surrender existing retail or group insurance policies for what appears to be a cheaper version of the same product, offered by a direct insurer.
“As an example, consider a consumer that has a good quality income protection policy that they’ve had for a number of years. They’ve been on stepped-premiums, and they’ve seen the pricing go up, and they think: ‘I’ll ring this 1800 number to see what else is out there’. They do that, and they get something that appears cheaper, so they switch. But there’s no comparison being done between the product they’re moving from to the product they’re moving to. That’s a real concern. Because in the consumer’s mind they’re simply changing from one income protection policy to another, without understanding the massive differences that could exist within the contract.”
Insurance is a contractual promise, but that only holds water when the consumer understands what it is they have bought
The AFA’s view is that direct channels should be required to ask the following question during the application process: ‘Will the cover you’re asking me to quote you on today replace any existing insurance you have?’ “Then, if that answer is yes, they should be on the product replacement level of advice that advisers have to comply with,” Mr Fox said.
“Some would say this is financial advisers trying to protect their patch. I would say, no, this is much more than that. Insurance is a contractual promise, but that only holds water when the consumer understands what it is they have bought. We’ve got to ensure that consumers have sufficient protections in place so that they know what they’re buying, both the strengths and the weaknesses.”
Mr Fox said it was too early to pinpoint exactly what kind of industry response was required, but that there were “valid issues” surrounding the direct market that needed to be considered. “It’s about exploring the compliance and regulation settings that apply across the market, not just to advisers, and identifying what we need to do to put the country in a better position to solve its underinsurance problem, without creating potential problems down the track because consumers don’t understand what they’re buying.”
The AFA’s comments coincided with a statement from the Australian Securities and Investments Commission (ASIC) which indicated the regulator was still concerned about the advertising of funeral insurance products (see: ASIC Continues to Monitor Funeral Insurance Market).