moneyblog

Capital and Income Needs Analysis

Having just re-read Dr Michael Naylor's book, Insurance and Risk Management in New Zealand, I wondered whether any advisers would like to email me and tell me if they use his detailed approach to income and capital needs analysis (either in part or in full) with clients? What about his suggested approach for assessing the marginal value of adding more of one cover compared to another? Again - just drop me an email and let me know if you take this approach and when you do, how much explanation you give to clients. 

Jake Bailey on Euthanasia

A good article by Jake Bailey on Euthanasia. Well worth the read, if nothing else because Bailey does not fall for the idea that it is somehow a binary choice between palliative care and a choice to die. Bailey points out the value of the choice to die at some point as an option that in itself (even unused) can help ease the worry about what happens should a person find life unbearable. Link. 

Not all deaths are equal: how many deaths does it take to make a disaster newsworthy?

Take a look at these great data visualisations of how many deaths it takes to make natural disaster newsworthy in the United States. Some parts of this are predictable: their news tends to focus more on Southern and Central America than, say, the Pacific Islands - that's probably because there are many more personal relationships and family connections, and a common language with many of the countries.  Other items make sense when you  think a little more - food shortages emerge slowly, whereas, a Tornado creates sudden havoc, with good pictures, making it apparently more newsworthy. Other charts remain shocking: only one European death will result in coverage, but to get in the US news, 45 African deaths is the average. It's outrageous all round - not just in deciding what to cover, but also because death is so much more common in African countries due to all sorts of factors: development level, and often, nasty governments. 

A Sad Case of A Lapsed Policy and Claim Decline

The insurer in this case is being asked to make a special case for payment (in this case, details) where a policy was lapsed due to four unpaid premiums. The case is heartbreaking - and many emotions come up - but I am not sure (based on just the article) that it can reasonably be said that the insurer should pay out, on the contrary, in fairness to their other policy holders, they probably cannot. Several thoughts occur, firstly, of course, sorrow for the family. But also a reflection that policy design these days - with pure risk insurance - leaves no room for a cash value to ensure that a policy cannot lapse during a period of problems caused by illness. 

PAA Special General Meeting

In case you overlooked this in your email, this notice from the PAA to members of the special general meeting:

This is important. This is your opportunity to attend and vote on the establishment of Financial Advice New Zealand. If you haven't yet registered to attend the meeting, register now and make your vote count.

When: Thursday 27th July, 9.30am registration, 10.00am kick-off and finish by midday
Where: Sorrento on the Park, 670 Manukau Road Royal Oak, Auckland.

Purpose:
Member vote to proceed with the ongoing establishment of Financial Advice New Zealand

What If Everyone Lived to 100?

RBNZ: Videos of Bank Notes Security Features

The RBNZ of have released videos in English and Te Reo Māori to help the public identify the ‘real deal’ Brighter Money banknote. The videos can he found at this link.

What to Call the Time of Life Between Work and Old Age?

'WHAT do you call someone who is over 65 but not yet elderly? This stage of life, between work and decrepitude, lacks a name. “Geriactives” errs too much on the side of senescence. “Sunsetters” and “nightcappers” risk being patronising. Perhaps “Nyppies” (Not Yet Past It) or “Owls” (Older, Working Less, Still earning) ring truer.' Click here to read more.

Why is it important? Well, you don't want to keep referring to people who are merely 68 years old as 'elderly' or 'retired' when these days most of them are neither - in the literal sense of those words. 

Partners Life Launches a Further Shadow Share Scheme to Reward Advisers

Partners Life have launched an enhanced, new version of the "Shadow Share" scheme. Click here to read more details.

Diana Clement: Honesty is the Best Policy, Insurance Fraud Found

Diana Clement has written this article in NZ Herald discussing many of the ways people try to make fraudulent claims and the ways in which technology are helping them get caught. 

'Technology streamlines how easily these cases are identified and reduces the legwork needed. For example, predictive modelling systems are now used to compare claims against known fraud indicators. The system spits out numerical rankings according to how likely a claim is to be dodgy.'

Click here to read more.

Fidelity Life e-App

Fidelity Life have an easier, faster and smarter way to complete application. Click here to read more about their e-App

What's a meaningful difference?

If I was out buying a car, and my partner wanted to buy a demonstrably worse car, for a reason I didn't like much, we would have a discussion about meaningful difference. The last two cars I have bought have not had a rear windscreen wiper. My view: the rear windscreen wiper doesn't matter a damn. Her view: it is essential for backing in the rain. What other features of the vehicle would I be happy to compromise on in order to get this feature next time? 

It depends. It's about the customer. 

Say you're our car adviser. You might be passionate about, say, carbon emissions - and try to overcome either one of these objections on that score. Or it might be acceleration, and you can argue on that basis. But sooner or later a choice will be made, and all you could do as our 'car adviser' is provide information, maybe some research, then an opinion or recommendation, and try to help us nicely as we go through the debate. Oh, and whatever choice based on our argument about an irrelevant feature we decide to make, you should make sure you documented it all. 

Research Shows Insurers Reluctant to Cover Mental Illness

Research shows that NZ health insurance policies offer minimal cover for mental illness. Susan Edmunds has written this article about a study conducted on 36 different policies from five different insurers in NZ and the findings.

Nib falls into line with cost control

Nib has launched a change to tackle the top-end of medical costs with the addition of the 'First Choice' policy. You can read the details of how that works at this link, and here is Rob Stock's take on the upcoming changes. The changes are not effective until 30 September, and so have not been rated on Quotemonster. 

Study Says Chocolate Improves Brain Function

A study conducted in New York found chocolate consumption to be associated with cognitive performance "irrespective of other dietary habits." Well, that's good! Click here to read more.

How do consumers feel about having blood taken?

This is how consumers feel, really: 

If you wanted a quantification of that then you might like to check out this link which has a lot more detail, but the key number is that around 20% of the population has a fear of needles, as many as a fifth avoid medical procedures in order to avoid needles. That might make a dent in your sales, unless you can get the monster to work out who will send your client for blood tests -- and who won't. It's part of the underwriting requirements database, and if you are a research user you can add that to your client reports at the click of a button, or two. 

United Kingdom: Fraudulent Claims Statistics

In the United Kingdom the Association of British Insurers regularly publishes claims statistics and details of fraudulent claims. The objective is two-fold: show that real claims are paid, to increase confidence; and, show that fraudulent claims are not paid, to deter them, and reassure the overwhelming majority of honest policyholders. This article has details of fraudulent claims including: elaborate scams involving funeral cover, medical professionals claiming for treatment that was never provided, and dodgy claims for income protection. 

 

Proposed Exemption to Facilitate Personalised Robo-advice - Code Committee Submission

The Code Committee Submission on the proposed exemption to facilitate personalised robo-advice is a very good document, well worth reading in full, with a highlighter in hand. Nevertheless, I shall quote some significant sections and add comments here, because the many good points deserve to be publicised and discussed. The Code Committee wisely avoids discussion of the merits of the FMA's proposed exemption, or power to grant an exemption, instead they stick to their role, which is to promote standards: 

"... the Code Committee’s position is that if an exemption is to be granted to facilitate personalised robo-advice then the terms on which any such exemption is granted must be consistent with the terms on which AFAs must operate and the purposes of the FAA consistent with the objectives of the exemption stated at page 13 of the Consultation Paper. This means exemption conditions must ensure that:

• any personalised service provided through a robo-advice platform is subject to no less a set of minimum standards than would apply to an AFA providing a similar service;
• permitting robo-advice is consistent with promoting the sound and efficient delivery of financial adviser services; and
• public confidence in the professionalism and integrity of personalised robo-advice services and their providers is encouraged.

In our view, the above requirements are an absolute minimum. In granting an exemption to facilitate personalised robo-advice, the FMA must be confident that the level of consumer protection involved is no less than that which would be involved had the personalised service been provided by AFA"

You could argue one small piece of this, as a specialist in the field of insurance, for example, I have to speak up for the oft-neglected insurance sector. The current legislated standard for insurance is only that applicable to the Registered (but not Authorised) Financial Adviser, who is not actually required to meet Code standards - but rather the less well-defined section 33 of the FAA (and other law too, of course). But this would be a silly argument, we have a draft Bill which will bring insurance under a common set of Code standards shared by all financial advisers, so in practice I agree with the Code Committee on all the points above. In any case, the exemption draft is plainly aimed at investment business, and in such cases no quibbles should be possible. Robo-advice should meet current Code standards. If not, why not? The Code Committee proceeds to offer suggestions of the draft exemption paper: 

"The Consultation Paper does not provide any evidence that the FMA has taken any learnings from the experiences of those overseas jurisdictions into account in formulating its thinking. Given the likelihood that many of the personalised robo-advice platforms that will be made available to the New Zealand public are likely to comprise New Zealand applications of overseas platforms, we believe it would be helpful for the FMA to document its observations of those overseas experiences."

I expect that the FMA has considered other jurisdictions. I share the Code Committee's view that sharing what they have learned would be helpful. Perhaps we shall see that in some expanded commentary on the next version of the paper, or it could be released between now and then as a separate document to give context. The central part of the Code Committee's argument, however, is this:

The consultation discusses possible limits that might be imposed on the provision of personalised robo-advice if an exemption is to be granted. The limits discussed include limits
on the possible scope of any personalised robo-advice service that might be permitted, and financial limits. The Code Committee believes this is an inappropriate approach to take in the granting of any exemption. Either the provision of personalised robo-advice is consistent with the purposes of the FAA and is able to be delivered subject to the same minimum standards as apply under the Code, or it is not.

The emphasis is added by me. For the Code Committee, you should meet AFA standards, and if you do, there is no need for limits. This is the reverse of the FMA's apparent position, which we might infer as something like 'you cannot meet all the standards, so we will limit the risk'. But the Code Committee has firm feedback on the proposed limits on robo-advice on page 7 and 8 of the document: 

a) Limiting the scope of a robo-advice service in the manner proposed at pages 7 and 8 of the Consultation Paper is an approach we have not observed in any overseas jurisdiction
that currently provides for the regulation of robo-advice.

So it seems that the Code Committee has done some research of its own and finds no international validation of limits

b) The only limits placed on AFAs in providing personalised services are those driven by the AFA’s competency and abilities, as provided by the Code. A similar approach should apply to personalised robo-advice. 

There is a strong consumer protection argument here. Also, consistency with the law : competency is the standard used now, why not keep using it? Indeed, it isn't very confidence building for consumers to see a regime which could be interpreted as saying in effect, that small financial services contracts should not be subject to as high standards as large ones. Consumers with smaller investment funds, or smaller insurance needs, often depend on them far more than consumers with greater resources. 

c) The proposal that the exemption ‘would be limited to personalised robo-advice on products which are easy to exit’ is hard to reconcile with a product list that includes KiwiSaver and credit contracts. Even if limits on the possible scope of a robo-advice service were to be imposed, we believe that basing the filter mechanism on such a concept is ill-conceived.

Indeed, many of us in the insurance industry think we know what the writer of the report means when they put this awkward description of 'easy to exit' into the document. We suspect that what is intended is more like 'has less risks on exit', for example: I have asthma and dodgy knees. It is very easy for me to cancel my insurance, and very hard to get those conditions covered on the same terms. That, we think, is a problem the writer of the draft is not yet confident a robo-advice service could tackle. When we make our submission on the draft we will ask for clarification. 

d) Imposing limits on the scope of permitted robo-advice services is likely to undermine the efficacy of those services. In particular, by limiting the products on which personalised robo-advice services might be provided, it seems unlikely that robo-advice could ever be seen as a suitable option for the provision of investment planning services. Imposing any of the limits discussed would result in consumers accessing a more limited range of outcomes through robo-advice than would be the access if receiving services from an AFA, which would be a negative regulatory outcome.

Indeed, again. 

e) Placing any financial limit on either the value of a product or on the aggregate investments that might be advised on through a robo-advice service, would discourage investment in
the system necessary to deliver robo-advice services. Imposing such limits is likely to compromise the ability of a robo-advice service to reliably deliver suitable outcomes on a standalone basis, requiring human advisers (or self-help solutions) to plug the gaps, undermining the objectives of the exemption.

Although investments is not my main focus, I suspect that no robo-advice provider will be excited about the idea of their service being limited to just $5 million per year. That tiny limit provides almost no incentive for innovation outside the existing providers of funds. The only service that can be encourage is one offered by an incumbent fund manager. I am glad they will be able to do so, but I should like others to be able to do so as well. 

Separately I shall write on the issue of the proposed limits as they apply to life insurance, leaving them out of this post because the focus here should be on the Code Committee's work. Also, it is worth continuing to emphasise - creation is hard, criticism is easier. I am grateful for the work of the people that wrote this paper and recognise that the debate could not get to this point without it.

Latest Goodreturns Piece on Needs Analysis

My latest goodreturns piece on needs analysis, it is meant to be a little bit thought provoking, and at just 400 words, is also not the last word on this complicated subject. Although the title is a little unkind on the idea of doing maths, I am actually a big fan of doing the numbers. Link. 

Risk is rarely zero...

Ignoring risk happens a lot, as part of a kind of binary thinking. Consumers often think risks are 'normal' or 'high' and rarely acknowledge much in between. That's one of the ways you get people stepping out into traffic from out of sight between two parked cars, when only twenty metres away there is a pedestrian crossing. We probably all know people who eat only organic vegetables, and yet love bacon, crispy bits and all.

Small risks taken many, many, times over are especially tricky. Some people appear to be operating on the basis that they will quit smoking just before they expect to get lung cancer.

Talking about risks should be a part of life: which we take, which we avoid, and which we need to manage in other ways.

Financial advisers can help people have more sophisticated discussions about risk. That skill, learned by talking about income protection, perhaps, can be useful when talking to your kids about when they should be home, too. The risk management lessons which can stretch are something like: 

• Risk is real, and variable - what is the risk
• Small risks should not stand in the way of a good decision - otherwise you might stay in bed
• Risks can be managed - let's look at how we could in this case
• Financial risk transfer can make small risks easier to take - opening up a bigger life