moneyblog

Inheritance and Life Insurance

Is inheritance ending? Headlines have announced the end of inheritance in western newspapers for a variety of reasons. The two biggest reasons are supposedly high housing costs, and high aged care costs. Two products, you might argue, of economic success, and at times, poor regulation. For baby boomers that have enjoyed good public services and the support of the state, and for those that bought property, a fabulous contribution to their net worth from a combination of restrictive planning laws, good fortune, and the desirability of living in a successful, liberal, modern economy - things have been pretty good. But some are now worried. Stretched welfare states are struggling to cope with hordes of older folks that may need expensive aged care, and are thinking of ways to charge for it. At the same time, those high property prices have made it difficult for children and grandchildren to buy houses - and the boomers are trying to help. Meeting both costs may use all the capital that they have. Therefore the dream of providing an inheritance to children may be disappearing.

It  was always a lottery, sometimes a cause of great controversy, and in many cases, a bad idea.

The 'ideal' circumstance for an inheritance was that a good life is followed by a good retirement. Healthy to the end, the retiree dies in their sleep, suddenly, after enjoying a slightly longer-than-average lifespan. The balance of a carefully nurtured investment portfolio, plus the full value of the family home, amounted to a useful sum or each of three happy smiling siblings, inheriting in late mid-life. They too invested the money wisely, subsidising the advanced education of their children, or helping them into homes, or donating to charity.

The ideal was rarely such. Families are tricky things. Old-age, longer than it once was, has exhausted smallish pension pots. Hard choices about downsizing were taken. Inequity between siblings emerged as the surviving parent gave much to one in order to help them through a tough patch - maybe a business failure. Another, perhaps the eldest, always went round and mowed the lawns. When Mum was finally too frail to look after herself (for Mum it usually is) then they were moved into a granny flat beneath the house of number one daughter (you decide whether this example is evidence of a sexist society). That move created tensions in her family - and muddied the financial waters further as budgets were pooled, and some capital was spent to make the flat work. Time was taken off to help Mum with her health as it worsened. The middle child who now works in Singapore didn't help at all. When the Last Will and Testament was opened, it was discovered that all remaining money was to be donated to the SPCA. The child with the flailing business record, it turned out, was relying on something to get them out of a hole...

All of this is frankly, silly. In effect, it is to mourn success. Longer lives are a bigger component of the 'end of inheritance' than any other factor. On average, the adult children of people dying these days are in their sixties. While there are many unfortunate exceptions, again, typically, they are wealthier than their parents. There may be any number of market or public policy solutions to the housing crisis, but paying for aged care so that inheritances may be preserved, to be, hopefully, disbursed where needed to buy houses must be the most roundabout approach ever conceived. I would hate to see a cost-benefit of such a policy.

Life insurance has virtually no role to play in inheritance provision for the elderly - it is not usually affordable to maintain cover into your 70's, 80's, or 90's as will typically be required to see a payment made. When you think about the long-run economics of insurers, their role is only efficient in managing unexpected loss much earlier in life. If you want a large sum of money a long-way in the future investment is the right approach.

 

You never had a chance

Here's the brutal truth folks: although it may feel like a loss when your celebrity crush announces that they have a partner, it isn't - you never had a chance. Here in New Zealand, you can't insure that, but in China, you could. Until now. China is trying to stamp out 'love insurance' which its insurance regulator has sensibly labelled 'gambling'.

Although I don't think it should be called insurance, and I'm no big fan of gambling, I still think that if you want to be fool enough to bet on such things, then you should be able to make your way to a betting shop and queue up to throw your money away. It's not good for you,its not good for them, and betting on humans is an invitation to corruption, but it is arguably no worse than any number of other silly things humans do with their time and money.

Reminder: National Advisers Conference 2018

Financial Advice NZ have announced the dates for the National Advisers Conference this year. It is to be held from Wednesday the 26th to Friday the 28th of September at the Rotorua Energy Events Centre. Click here for more details. 

UK: Income Protection Immediate Support Payments

In the UK an income protection insurer (British Friendly) is now offering to make 'immediate' support payments, albeit at the end of the waiting period, even if there is incomplete medical information. The new found flexibility looks a lot like formalising some sensible discretion on the part of claims managers. In truth, claims managers may be subjects to conflicts between a requirement to be thorough, and a requirement to meet the needs of a client that is in trouble - already disabled, and probably in need of funds.

You can imagine the situation: say, there's a diagnosis, that kind of diagnosis is rarely wrong, but there is a standard test / procedure to check, and for whatever reason, that is taking time. Discretion to pay may be exercised already, but creating a process makes the rules fair for all. So the company makes the payment, subject to a maximum, and with the requirement that should it turn out the claim isn't valid, then the money advanced can be recovered from a future claim (it is not immediately repayable, remember, this person is off work). Anyone who would like to let me know if they have had cases where such discretion has been exercised, please drop me a line.

Behavioural economics' challenge: would policymakers do any better?

With so many behavioural economics articles advocating government action, one researcher has called for more research...

"This study analyzes leading research in behavioral economics to see whether it contains advocacy of paternalism and whether it addresses the potential cognitive limitations and biases of the policymakers who are going to implement paternalist policies. The findings reveal that 20.7% of the studied articles in behavioral economics propose paternalist policy action and that 95.5% of these do not contain any analysis of the cognitive ability of policymakers. This suggests that behavioral political economy, in which the analytical tools of behavioral economics are applied to political decision-makers as well, would offer a useful extension of the research program"

With thanks to the twitter feed of Jenesa Jeram at The New Zealand Initiative.

Implications of the Transitional Arrangements

Susan Edmunds writes at Goodreturns about the application of transitional arrangements to new advisers entering the industry. They could join a Financial Advice Provider with either a full or transitional licence - and so most of their terms will be dictated by that - but...

“However, the new entrant financial adviser will not be covered by the competency safe-harbour; this means they will need to meet the relevant competence, knowledge, and skill standards as set out in the new Code of Conduct before they can give financial advice.”

While it is entirely to be expected that new entrants must meet the new standards, it does have some practical implications both for the businesses that may hire them and the potential applicants.

At the start of the transitional period virtually all the Financial Advice Providers will be on transitional licences, and their staff will need to be adding required training for additional competencies where necessary. Because of the mismatch between requirements for existing advisers seeking to bridge the gap to new standards and the requirements for new advisers they may choose to focus on meeting one goal before the other, and that means the focus on exiting advisers. Companies that had hired new advisers every quarter, or even monthly for larger businesses, may find that a hiatus in hiring is required for a while during the transition.

Dan Schreiber on Digital Insurance Companies

Daniel Schreiber has a great piece over at LinkedIn on how AI "eats" insurance. You may take only a very little comfort that he's from a general insurer. Life insurance is not immune to the lesson he's preaching. The only comfort New Zealand insurers have is that courtesy of the tiny size of our market, local regulatory variation, and our distance from the centres of innovation (mainly San Fancisco and London) we have more time to react and build proper digital platforms ourselves, before these folks arrive. But maybe you won't, maybe you'll just let them. For digital insurers going direct, like Daniel Schreiber envisages, it is vital that end-to-end you own your platform in order to bring in all the data to the learning environment. As an aside, Schreiber offers the briefest and most cutting take-down of averages: "on average your customers have one testicle". Anyhow, go read the whole article. It isn't all right, it isn't all as simple as that - but there are some strong points, and they should spur action.

Sorted has a great suite of financial tools, but is missing one...

Sorted has this great suite of cool looking new financial tools - the kinds of calculators and planners with nice graphics and good step-by-step instructions that you would like to see from the Commission for financial Capability. Take a moment to check them out. Notice which area is missing? That's right, insurance.

 

Would You Take Money Advice From a Computer?

As robo-advice is set to take off in NZ this year Tamsyn Parker has written this article for NZ Herald outlining potential risks. Robo-advice is believed to give lower-income Kiwis access to financial advice they may not usually have access to through a 'human' financial adviser. Once again the discussion is centered on the investment side of robo-advice. Realistically, they might be right: the demand forging factors are strongest for KiwiSaver. The regulator wants KiwiSaver providers to offer more engagement tools for customers, and to demonstrate that customer have at least considered a more aggressive investment strategy. For providers there are cost pressures caused by serving many members with small balances through current (human-provided service models) Click here to read more. With insurance the pressures are different - while there is no current regulatory pressure, and a wide variety of services models already exist, although cost pressures for using human advisers are, if anything stronger.

Classification Model Performance

This article by Louis Rossouw, Life/Health Head of Research & Analytics at Gen Re discusses the different types of prediction models that insurers are using and developing. The techniques are generally used in underwriting cases, policy applications and claims. 

Click here to read more about the approaches used and the performance of these models.

Battle with AMP who Refuse to Pay Life Insurance

Andrew Porteous was made redundant shortly before being diagnosed with a rare form of terminal oesophageal cancer. Porteous had life insurance through his job and was not aware that the insurance would lapse once he was made redundant. Porteous is now in a legal battle with AMP who are refusing to pay out the $450,000 policy. Andrew's lawyer Barrister Sandra Grant says:

"I think that the contract - the way it's drafted - does cover Andrew's situation, which is that he has a terminal illness, while he was employed for the purposes of the policy,...he just didn't know that he had a terminal illness, he didn't find that out until afterwards."

I do not have a copy of the policy wording on which to make any sort of judgment about the merits of the arguments advanced by Mr Porteous' Barrister. It strikes me that this situation underlines the value of advice. The client had cover, but perhaps lacked good advice on how to use that cover. A good adviser may have been able to spot the potential claim and lodge it while the cover was in force. This is why advice, as distinct from product, is one of my key themes for 2018.

Whatever the outcome, however, my thoughts are with the family of Mr Porteous.

Click here to read more.

Robo-advice vision: overlooking the insurance dimension

An article from NZ Herald explains that the concept of robo-advice is on the books for 2018. The FMA made an announcement after receiving 49 submissions with the majority of these in favour of robo-advice. Interesting to read the list of companies that the NZHerald note submitted on the law. This isn't the full list, just the ones the Herald picks out to mention, probably based on their familiarity with the brand names:

'The consultation period, which ran from June 21 to July 19, included submissions from: Cigna Life Insurance, Delta Insurance NZ, Fidelity Life Assurance, the Institute of Financial Advisers, the Insurance Council of NZ (ICNZ), Medical Assurance Society of NZ, Partners Life, Southern Cross Medical Society, as well as major retail banks ANZ, ASB, Westpac NZ, fintech start-ups and law firms.'

Look at that list again - seven of the organisations mentioned are insurers or insurance-focused. Yet this article exclusively covers the funds management sector, excluding insurance, probably because it is written by an investment-focused adviser. Readers should not make the same mistake - insurers in New Zealand are very interested in robo-advice. But moving past that, a number of useful points are made. One is about fee transparency - and the connection to improved requirements for the advice process under the draft new Financial Services Legislation Amendment Bill are important. Robo advice services should be subject to the same rules as human advice services, although specific regulatory requirements will differ, because the nature of engagement with the services, and how they are run differs.

Click here to read more.

Boilerplate Unique

I was recently sent an article on the language used by some investment planners, and why its a bad idea to use it. Let's not worry about what investment advisers say, we have plenty of awful jargon in the insurance industry to be ashamed of. 

As you might have guessed from the title of this blog post 'unique' is one to be wary of. Promising to help a client with a 'unique plan tailored to meet your goals and requirements' might sound good to you. But it's kind of "boilerplate" unique. This kind of 'difference' is so standard, its no longer a difference. Do you really do that? How different are each of your insurance plans? How much do your recommendations really vary? Does your process really enable you to make that claim? If you are largely selling insurance for one company, and the plans look pretty similar... then, don't claim this. You may still be performing a very valuable service, but unique, it isn't. Having said that - do your clients even want unique? I get great comfort from buying a mass produced car, unique might be nice, but is it reliable? After all, insurance is about reliability, predictability, and certainty. Maybe those are the kind of words that you should focus on. If you are trying to point out that you are more flexible than, say, the bank, or life direct, or buying your cover from the back pages of the motoring supplement, then you should explain how what you do is better. If its difficult, then it might be a good opportunity to think about how to make it better. 

"Financial planning" If you know what it is, then great. If most consumers know what it is, I would be amazed. A close and similarly baffling cousin is "Insurance planning" that may very well be what you do, and vital work it is too, but most consumers don't think insurance is something that needs planning. It sounds dangerously complicated. If you want to explain to consumers that there are pitfalls for the unwary, and you can help avoid them: say that. "Insurance planning" is an 'insider' term, the words on your website should be for people that generally know little about insurance.

"Finding you the best insurance in the market" is another one. Obviously, I am interested in the business of comparison. Five people (not counting me) work for Quality Product Research to try and keep research on nearly every on-sale life and health insurance product up to date. If you use it, thank you, then you may be able to claim that you consider the whole market. But I have come across advisers that use no research at all - not ours, not a competitor's, nothing... and they still claim to provide the best cover. Unless they have a very large, hidden, research operation, I doubt it. They may be breaking the law against unsubstantiated claims. Besides, it's not just access to the data - you need to demonstrate that you are actually using it. If you want to tell consumers how many different insurers there are, and how hard it is to choose between them, and how you do it to make life easy for them - then say that. 

Sara Grillo's article at Adviser Perspectives on investment adviser word-crimes is well worth a look. She deserves the last word: 

"If you doubt anything that I’ve said, try this. Google “financial advisor [your local area].” Click on the first five websites that come up and you’ll see that they all say some combination of the same six things. If you find your voice drowned out in all the noise, ask yourself what you have done to set yourself apart."

 

 

 

Tackle the risk

AIG's All Blacks feature advert set in Japan called 'tackle the risk'.

 

Financial Advice New Zealand: new member advisory committees

Financial Planning
David Mason
Charlene Overell
Paul Sewell
Nigel Tate

Investments
Joe Byrne
Michael Courtney
Tim Fairbrother
Liz Koh

Lending
Suzanne Isherwood
Joel Oliver
Hamish Patel
Sandra Spence

Risk Insurance
Bree Catterall
Cecilia Farrow
Peter Rickards
Regan Thomas

nib Check-up Truck

Throughout January nib are travelling around Auckland in the 'nib check-up truck" offering everyone (not just nib customers) free medical and dental check-ups. 

“We’re committed to ensuring families around New Zealand can access the healthcare they need, when and where they need it most. By taking the nib check-up truck service direct to them at their favourite beaches and parks, our aim is to make access to basic health checks more convenient than ever,” Rob Hennin, nib CEO said.

Click here to read more.The first stop is today at Auckland's Viaduct Harbour.

Statistics for planning

We do a lot of work on the scale of the life insurance sector: size, composition, channels, growth rates, persistency, and explore each of the companies and channels that form part of the sector in some detail as well. We also periodically work on models such as how many advisers are present in the market, the size and growth rate of groups, and the flow through the market of people most-likely to buy insurance. 

From time to time it is essential to put those sector and market statistics into a wider context. That context for the market includes population, migration, workforce, employment, home ownership, and incomes and expenditure data. The sector exists in an economic context too: the size of the economy, its growth rate, growth rate per capita, and so on. I often start workshops by asking people how big the economy is, and how fast it is growing (and some other more specific industry stats too) - there are always a good number of people who have no idea. That tells me that when working on a plan for a new project, proposal, or opportunity, don't assume that the reader has all the context that you do. Make life easy for them and give them the context. Here, for example, is the Statistics NZ update on the economy to the end of September last year. 

Financial planning and insurance advice

My latest piece over at goodreturns is about financial planning and insurance advice. Do take a moment to check it out. Link.

Summer - be sun-safe

As I get older I pay more attention to my health. I probably should have done so sooner, but hey, better late than never. Being interested in insurance, I follow all sorts of - literally - morbid blogs. So I know that skin cancer prevalence is on the rise. I have three children and two of them take after their mother with very pale skin and red hair, so we are pretty strong on the sunscreen message. They are always sunscreened in the morning and take sun-block to school. When schools leave our kids to toast in the sun all day at sports events without access to adequate cover, we're the parents that send a sharp message to the school. This video has a particularly convincing approach to educating about the dangers: 

 

Jared McGrath to Head New A&H Product Line in New Zealand

Berkshire Hathaway Specialty Insurance has appointed Jared McGrath to head its new line of Accident & Health products in New Zealand. 

Click here to read more.