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Insurance advice reimagined – What does a post reform business model look like?

Is it time to build a bridge and get over it?Change is never easy. The relationship between advice providers and product manufacturers has always been an interesting one. Both are dependent on each other yet the reforms are causing a divide that seems to me to be resulting in a Mexican standoff. I don’t have all of the answers but I hope this adds something useful to the discussion.

It seems to me that some advice providers feel like they are getting a raw deal in the insurance reforms that are heading their way. They seem to feel they aren’t being provided with the opportunity to maintain sustainable businesses.

It’s important to note that advisers never set the ‘rules of the game’ – the product providers did. Yet the advice providers have been tarnished over their ‘commissions’ – not the product providers who have provided them and made the rules of the game. And somewhere caught in the middle are the industry associations.

Let’s have a quick look at the participants and their motivations to see how far apart the parties really are.

Clients: Want trustworthy and reliable advice that meets their goals over time. Want an adviser who can make appropriate product recommendations and implement the advice. Want the advice provider to be there for them if they ever need to claim.

Advice providers:  Want sustainable and profitable businesses, happy clients, business certainty. They also want reliable products for their clients.

Product providers: Want sustainable and profitable businesses, happy clients, business certainty. They also want advisers who are confident in recommending their products to clients. They also want to be better than their competition for the financial benefit of their shareholders.

Industry associations: Want sustainable and profitable businesses, happy clients, certainty. They also want the opportunity to set and monitor professional standards and provide development.

Regulators and government: Want sustainable and profitable industry, happy clients, and a competitive market place. They are always looking for ways to save money, insurance provides the opportunity to reduce reliance on government safety nets like Centrelink.

When you look at it, I’d argue that at a high level, everyone wants the same thing.

It’s a good principle – Deliver client value, get paid

I think most people would agree that if you deliver value to a client, you have the right to get paid. But never in the history of history has a service delivery process been so confused in the delivery of value and getting paid in advice / insurance businesses. I’m not here to assign blame, I’d simply say that if you deliver client value, you deserve to get paid.

Step in the process Is it valuable to the client? Is it valuable to the adviser? Is it valuable to the product manufacturer?
1. New client acquisition costs No, it’s a competitive market place Yes, new clients grow the business No, that’s the adviser’s business
2. Client fact find or data collection Yes, it provides the basis of getting advice Yes, it provides the ability to understand the client No, that’s the adviser’s business
3. Assessing the client’s situation Yes, it provides the adviser with the ability to provide a recommendation Yes, it is the thinking stage to provide a solution No, it’s up to the adviser to determine the appropriate level of cover
4. Preparing and presenting the advice plan Yes, it provides the solution for the client Yes, it provides the solution for the client Sometimes, it provides the adviser with the opportunity to recommend our product
5. Implementing the plan Yes it provides the client to have the solution implemented Yes, it provides the client to have the solution implemented Sometimes, it provides the client to have the solution implemented if our product is used
6. Reviewing the implemented plan Yes it provides the client with the opportunity to make sure it’s still serving their needs. Yes, it provides an advice opportunity Sometimes, but not always. Only if the adviser still believes the product is still serving the client’s needs.
7. Making a claim Yes it provides the rainy day outcome the adviser and client had planned for Yes, it provides the rainy day outcome the adviser and client had planned for Yes, it costs money to administer and pay the claim and this is why premiums are paid in the eyes of the client

 

So if we accept the principle that if you deliver client value, you deserve to get paid, then let’s assess the above matrix.

In the seven steps in the process identified:

Steps 2-7 provide the adviser with something to deliver that is valuable to the client and therefore the opportunity to earn income.

Steps 4-7 provide the product provider with something to deliver that is valuable to the client and therefore the opportunity to earn income.

Yet we don’t always charge for value at the point where value occurs. Why is that?

It’s been accepted by either design or default, that you can’t charge client fees when they make a make a claim. I don’t see that changing. The advice and product purchase has come together for the rainy day. If the rainy day happens, then the outcomes should occur for fees and premiums already earned.

But what about the other steps in the process where value occurs? Why aren’t advisers paid for the value they deliver?

Well, it appears to me to come down to the ‘rules of the game’ set by the product providers who pay commissions.

There are some questions that need to be resolved

  • Who invoices the client
  • When the amounts are invoiced
  • How much is invoiced
  • The form of those invoices take – fees, commissions, premiums or perhaps a mix of all three?

Advisers have a choice to make

How will you answer the above questions?

If all advisers were to turn off all commissions and become 100% fee based, then product providers lose their market influence in an instant. It’s going to take change and effort on your part to reimagine your life insurance business. You though, like your advice peers, get to charge for the value you deliver. Making this decision though will require effort and planning and I’m not suggesting for a moment it’s easy or the right decision for your business. That’s up to you to determine.

And as an adviser, what will your expectations from product providers be in a post reform environment?

Product providers also have a choice to make

If you’ve asked for reform against commissions, then you too better be prepared to change the rules of the game. Your products need to be more competitive in terms of service, features and ease of implementation from the adviser and client perspectives. You also probably need to have a serious think about pricing – you are probably going to have to start offering advisers sharper pricing for their clients.

At the start of this post I said I don’t presume to have the answers, but hope this adds to your own business thinking. The one thing I know for sure though is that if you provide value to your clients, they will be willing to pay for it.

If we don’t consider something like the above client value matrix in the decision making, the advice – insurance industry might end up in a worse place than what it is right now, which I don’t think is anyone’s best interest.

photo credit: Sydney Harbour Bridge via photopin (license)

2 Comments

  1. David J Earley

    Peter, some good points here. However, one issue which I feel has not been addressed is when you are taking nil commissions & charging a fee, you are reducing the level of the client’s tax deductibility status pertaining to IP & BEX. If our fees were also allowed to be made tax deductible in these areas, this would help bridge some of the concerns. A lot of the effort must also come from the Life Offices, which is lacking to date.

  2. Peter Bowman

    Yes a fair point about that tax deduction. I agree it would make sense for the legislators to ensure that clients are looked after in this regard. I think it would not only good for the client, but also good for the government, encouraging take up rates has to reduce reliance on Centrelink and other safety nets. It would also do something good for advisers – support the idea that advice is valuable – clients are better with it, than without it!

    In regard to Life Offices, I think they have the bulk of the work to do especially if they are to retain adviser support. My understanding of the evolution of the industry is that Life Offices loved the idea of advisers being non-aligned at a point in history, it saved them lots of time and money and business risk by having advisers take all of that on. Since that point in time advice offerings, like their product offerings have evolved, and advisers have become the champions of looking after client needs. I have heard some are thinking about it and don’t know why they wouldn’t be using it as an opportunity to strengthen their adviser relationships by talking about how they are going to reimagine their own offerings. Perhaps they’re waiting to see what gets passed and what doesn’t.

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