Insurance is a lot of fun

Dear Clients and Friends,

There is much more to insurance than meets the eye, as has been exposed recently with the January floods. Many people thought they were adequately insured only to find out that their insurance company would not pay out for one reason or another. Other people have claims and are getting paid.

In this article we talk about some of the behind the scenes manoeuvring that goes on with insurance.

We hope you enjoy reading it and feel free to pass it on to friends, if you feel it might interest them too.

As always you are welcome to contact me if you have any questions.

Best wishes,

Christoph Schnelle
Adv Dip.FS (FP) EPA Acc Level 2

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Insurance is a lot of fun

In this article I am talking about Life, Income Protection and Disability Insurance

Insurance is a lot of fun. There is a huge amount of choice and usually something good for everyone. You just need to find it.

Having said that, 80% of the insurance arrangements I see can be improved upon, often by a lot.

The other 20% either have great insurance policies and shouldn’t change or their health has deteriorated and they are getting a bargain because they pay the same as a healthy person but are much more likely to make a claim.

In practice, insurance in the market place is a struggle between the insurance companies trying to make a profit and the buyers trying to get the best deal. However, buyers know far less about insurance than the insurance companies do and this leads to some curious results.

The apparently most inefficient and expensive way to sell insurance – via agents – actually gives the customer the best chance of a good deal. This is not true with a rogue agent but an average agent will usually give a customer a better deal than they can find themselves. A good agent can be very helpful indeed. Why, you might ask?

The price of direct insurance

Every offer from an insurance company directly to a retail customer I have seen is either very expensive or the insurance itself is of questionable value. Examples:

• A quote from Suncorp online tends to be 40% - 100% higher than a quote from an agent for Suncorp life insurance. There is really no difference except in the price.
• Lawyers, doctors and accountants regularly receive offers in the mail for insurance without a medical approval. The insurance is double the normal price and only a good idea for those who are too sick to be approved for insurance elsewhere.
• Insurance that gets advertised on pay TV and late night TV tends to be even more expensive.
• Insurance through your super fund is very much hit and miss – some funds offer good insurance, others don’t. Straight life insurance is usually ok but the amount insured for is far too small. Disability and Income Protection insurance can have very restrictive definitions, i.e. you think you are insured for certain events but it turns out that event is excluded in the definition.

The price of vested interests

Where it gets to be fun is how insurance companies compete for the attention of agents. Some keep it simple and have their own agents, like AMP and the big banks who all own life insurance companies. These agents are less likely to be rogue but will they be able to offer you a better deal from a rival insurance company?

Other insurance companies work through independent agents and they do their best to get the agent to recommend THEIR product. This is mostly done via carrots, not sticks. For example: Insurance companies give volume bonuses – they take you to junkets, give you movie tickets and all sorts of not-quite-cash incentives if you do a certain amount of business with them. This is not good for the client because insurance companies’ offerings are quite diverse and for client A, insurance company X may have the best deal but for client B, insurance company Y is unbeatable.

The advantage of true independence and more insider information!

Here are more examples of why it pays to have a broker who is truly independent and acting in your interest:

• Two insurance companies in the Australian market are trying to increase their market share, so they charge lower premiums but offer the same coverage as others. In certain circumstances they offer a bargain.
• One insurance company provides great income protection but is not quite so great with other products.
• One company is particularly easy to deal with but until recently was too small to consider – insurance can be a 30 year contract and smaller companies are more likely to fail. A big company just offered to take them over, so now they are very competitive.
• For many clients one company offers a much better deal for disability insurance than other companies but is not so competitive with life insurance.
• Insurance companies differ in their underwriting, i.e. whom they accept or how much extra they charge for marginal cases or what they will exclude. Sometimes this is because of their own preferences, at other times because of their reinsurance arrangements. Yes, insurance companies insure themselves – they take their own medicine.
• Insurance companies also differ in how generous they are at claim time. Some explicitly charge more than others because theirs is a premium offering, i.e. they imply they will be easier to deal with at claim time. Others are just more expensive.
• Definitions are very important.
  I have seen Income Protection policies where you don’t get paid if you are in hospital but are still able to write invoices on a laptop, because you only get paid if you can’t do any important part of your work.
  A very common example is Disability insurance. With one definition the insurance company pays out if the client cannot do that job any more (a surgeon with a tremor, an electrician with a weakened shoulder, an office worker who can’t sit for long periods). With another definition they only pay out if you can’t even earn a quarter of what you have earned before (the surgeon can’t do consultations, the electrician can’t work as a despatch clerk in a wheelchair, the office worker can’t work as a 10-hour a week employee).
  The latter definition is the one used by most super funds. There isn’t even a big difference in price between the two definitions but there can be a huge difference when it comes to claim time.
• For quite a few clients, the agent negotiating with the underwriters can make a big difference. Loadings may be reduced, exclusions can sometimes be removed, even the price can at times be reduced. An example of the latter is that professionals pay considerably less for certain types of insurance but the definition of a “professional” is fluid and partly open to interpretation.
• All insurance companies offer lots of different options – with or without coleslaw, mayo or fries. The coleslaw may be useless but the fries may be a great deal and the mayo may be very useful for some but unnecessary for other clients. Options can make a big difference to the client but also to the agent.
• Some insurance companies offer their agents higher commissions if the agent sells particular options to their clients. Often I feel these options are coleslaw.
• Income protection for example, has a big range of options and you can get cover for next to nothing or pay quite a lot. In both cases you can get value for money – a 25 year old entrepreneur without dependants has very different needs to a 40 year old doctor with three children.

An agent is useful when buying insurance but the biggest value may be at claim time. It is an agent’s job to help with a claim and it is important for an agent that the client gets paid. Insurance companies also seem to be more generous when they know that the client’s agent will relay his/her experience to 30 other agents.

In addition, I have asked quite a few other agents and the uniform experience has been the same as mine: If you have a policy with a reputable insurance company, then almost always the only reason a claim doesn’t get paid is because either the client didn’t disclose something in the application or the claim truly falls outside the definition of the policy.

Some examples of individual claims paid in 2009 by one life insurance company:

Overall I feel that life insurance is reasonably clean and competitive. Insurance companies compete vigorously and there are good deals available for those who have a good agent.

This message was sent by Christoph Schnelle of In Your Interest Financial Planning.
Click here to email me or phone us on 1300 889 657.