PWC are about to announce their fifth finance company to go into liquidation over the past 15 months. Politicians are scrambling to “find solutions” to this “investor crises”. It has been suggested that the new Financial Products and Providers bill be brought forward from its scheduled parliamentary hearing date in December, so that the new conditions and regulation for financial products and their providers comes into effect sooner rather than later. [Ref: Dalziel considers advancing new disclosure rules - NBR]
Unfortunately the proposed bill tangles up Insurance companies with Finance Companies under a broad category of “Financial Services”. This leaves life insurers potentially attracting some of the adverse publicity currently surrounding investment companies.

A life insurer collects a monthly premium to cover an insured event – its financial security relates to its claims-paying capability which is a far cry from the risks associated with investing in a Finance Company that borrows money from the public and other institutions to finance property development and the like. Such finance companies are strongly subject to the vagrancies of interest rate hikes and fluctuations in the world financial markets. Life insurers are not nearly as exposed to these risks.

The question is “will the proposed regulation neutralize the effects of such financial vagrancies or will it simply add huge compliance costs for the industry and increase the barrier to entry into the NZ market by innovative new players – ultimately resulting in a less competitive environment for the consumer?”. I think the latter. Interested in your thoughts

Receiverships: Five Star Consumer Finance, Nathans Finance, Bridgecorp Finance , Provincial Finance, National Finance 2000

Ok, we know that life insurance is simple - it’s a product that provides a cash lump sum for your family (or financial dependants) in the event of your untimely death. 

And whilst bullet-proof younger people seldom if ever think about dying, as you get older it starts to play on your mind. (So I’m told…)

But how many people actually know what they’re most likely to die of? 

Here’s the answer… if you live in NZ there are three killer diseases that account for around 60% of all deaths:

                                          Males   Females

• Cancer                    30%       26%
• Coronary                23%       21%
• Stroke                       7%       12%   
• Other                      40%       41%

         Total                      100%    100%    

Obviously there are significant differences in mortality statistics across age, race and gender populations.  And there are many forms of cancers that make up the total for cancer. 

Over the next few months I’ll break down some of these stats for readers of this blog.

Source – NZ Ministry of Health

The Sunday Star Times special report last week entitled “The hidden sales scandal” is getting a mixed response in the insurance industry – see Phil’s Blog.
In my view, people are missing the point.
Whilst the special report did highlight that commissions in NZ have reached unprecedented new heights, it didn’t conclude that consumers don’t value the advice they get. They do. It also didn’t conclude that advisers don’t add value. They do.
As I read it, the report concluded that the large disparity in commissions between insurance companies means that some insurer’s products get ‘pushed’ a lot harder than others – in other words, consumers may not be getting unbiased advice… advice that’s in the consumer’s best interests. Instead, many are getting advice that’s in the insurer’s best interests…. not exactly what consumer’s think they’re paying for.
Putting a mechanism in place, such as commission disclosure, will make the continuance of this practice extremely difficult – because consumers will soon figure it out. If a consumer is offered an expensive product that carries a higher commission, it will give them the opportunity to ask… “why?” Let the consumer rule.

From YouTube…

A funny Swedish advert for life insurance

Last week’s Sunday Star Times article by Rob Stock “The high cost of bad advice” was followed up today with a second episode entitled “The hidden sales scandal”.

In this second article Rob argues that “Customers of insurance and investment advisers are being sold expensive products not knowing that hidden incentives have distorted the advice they receive”.

What caught my eye was this quote by a Wellington-based financial planner…

“The client needs to know why products have been recommended based on research and needs to be given choices which are then discussed.”

I agree.

But the problem is that consumers are not usually offered ‘ALL’ the choices… are they? The article suggests that low cost products carrying lower commissions won’t be put on the table. This leaves the consumer in the position of having to make an informed choice based on only SOME of the options available.

What about the idea of insurance advisers disclosing which insurers they represent and which ones they DON’T?

This would equip consumers with better info with which to make an informed choice.

And consumers making an informed choice is what it’s all about… isn’t it?

Pinnacle Life was profiled on Kea NZ’s website recently.   Here are excerpts from the story… 

Kea, 6 August 2007 

“Kea corporate member, Pinnacle Life based in Auckland, achieved a world first in May when it launched its online life insurance product.” 

”New Zealanders based in a number of countries around the world can buy their life insurance within minutes, just by completing a simple-to-follow online application process.” 

“A major advantage for Kiwi expatriates is the portability of Pinnacle Life’s policy which can be applied for whilst resident in a number of countries including: Australia, US, Canada, UK, Singapore and Hong Kong.” 

“Pinnacle Life policy fees are paid in New Zealand dollars from wherever the policy holder is resident. Current fees are 10-15% lower than other similar life insurance policies on offer in

“Given the large numbers of Kiwis residing overseas who plan to return to New Zealand in the future, having a life insurance policy which you pay for in NZ dollars is preferable to maintaining a policy which needs to be paid in US dollars or British Pounds, particularly when you’re earning NZ dollars,”  

”Pinnacle Life reports excellent pick-up of their online life insurance from Kiwis both locally and internationally, with results surpassing initial targets. The company has plans to introduce new products over the next few months.” 

Read the full story on the Kea website…

Yesterday we ran a story about vegitarians and life insurance. This is the eMail response we got from a leading reinsurer…

“We are not aware that there is any solid evidence that Vegetarians actually live longer. As we know there is evidence to suggest that nutrients found in fresh fruit and vegetables play a major role in reducing the risk of chronic diseases such as heart & cancer. Obviously, a high consumption of fresh fruit & vege means more protection. However, being a vegetarian also brings with it certain health issues –for example: Anaemia, Vitamin B12 deficiencies.”

“I don’t believe any serious life insurer would go down the path of offering a discount to someone just because they are a vegetarian. It’s the same argument as the “I go to the gym so I should get a discount” or “I don’t drink so I should get a discount” – yes, in all instances you are proactively doing something that offers a health benefit, however what about your other habits, genes etc. A vegetarian that drinks 5 schooners a day, or eats a kilo of chocolate a day obviously isn’t any better a risk than a tee totaling meat eater!.”

Fair point! Any other views??

UK-based Animal Friends Insurance announced last week they’ll offer a 6% discount on life insurance premiums for vegetarians and fish-eaters.  

They’ve also called on other insurers to follow their lead, given medical evidence suggests that vegetarians as a group are less likely to suffer from major illnesses, including some cancers.  They claim that whilst the life insurance industry has significantly developed its understanding of risk over recent years, it hasn’t given adequate weighting to the benefits of vegetarianism and therefore vegetarians are “subsidising” meat eaters.

Hmmm.

Source: moneymarketing.co.uk

Hat tip to Rob Stock for this article in the Sunday Star Times today.

Amongst a raft of other things, Rob says “So bad have things got that the bosses of some of the largest [life insurance] firms now openly claim commissions are distorting advice, stunting product development, and misleading the public.”

The article offers these examples – Asteron 160%, AXA 163%, Tower 170%, Sovereign 192% and ING with a whopping 220%!  That’s a lot of motivation to sell you an ING policy.

One idea floated in the article was that all life insurers should offer the same level of commission - not too high of course.  With commission levels no longer a factor, all insurers would be forced to compete on product, service and price.  

What an idea!  And wouldn’t that be great for consumers!!   

He says there’ll be a followup next week covering “What advisers say about commissions, and a survey of exactly what commission all the big insurers and fund managers are paying”

Have to admit I’m looking forward to that.