There is something I have not addressed past few weeks and that is regarding the news that Life Insurance Policies that can be bought directly. You can read Channel News Asia’s coverage over here and from MAS direct media release here.
The initiative is part of an industry evaluation process called the Financial Advisory Industry Review (FAIR) — introduced in 2012 — which sets out recommendations to raise the standards of the insurance sector. Amongst the recommendations is for all insurance companies to offer direct purchase of products, or policies that can be purchased without going through the advisers.
There weren’t much proactive movements on the recommendations of FAIR, and it would seem there isn’t much economic incentive to do so. Thinking about it:
- Having a direct channel would mean cannibalizing or competing with their existing advisors, or advisors carrying their products
- They would have to have additional administrative overheads, whereas previously, the administration is handled by the advisors and cost borne within existing operation structure
It is difficult to structure what constitutes products that requires or doesn’t require advise, and if you ask me, the line is blur. The consequences for underinsured for all products differs from individual to individual. MAS segregates the products in the preliminary stage to these products:
- Term life insurance products with Total Permanent Disability (TPD) cover
- Whole life insurance products with TPD cover
- Optional critical illness (CI) rider attached to term life or whole life insurance products.
- Term products will comprise of 5 year, 20 year or coverage up to 65 years old
- Whole life products will comprise of premiums paid up to 75 or 85 years old
- Maximum sum assured for direct purchase products (Term, whole life and CI rider) is $400k
- A sub limit of $200k is placed for whole life products on top of the 400k limit. For each insured purchase from each insurer (meaning if you buy a whole life directly from AXA you can only purchase up to $200k for yourself). They are afraid that folks spend too much paying for whole life insurance since they cost far more than term. If you cannot serviced the policy, you surrender them early, and if you surrender them early, you tend to lose a substantial part of the value
- This means that if you require a coverage of $1 million and you decide to buy term, the maximum that you can purchase from a single insurer is $400k. In this case you might have to split to $400k from insurer A, $400k from insurer B and $200k from insurer C. Or the alternative is to approach an advisor or third party platform.
I find this comment by the President of LIA in the Today to be rather interesting:
Its president, Dr Khoo Kah Siang, said the move will help bridge the protection gap for life insurance in the Republic, which stands at an average S$242,500 for every adult here who is actively working, a 2012 study commissioned by LIA showed.
“These direct purchase products are designed to meet the primary protection needs of consumers and are particularly suitable for self-directed individuals who do not need advice from financial advisers. We are pleased that this new channel offers another avenue for Singaporeans to obtain affordable protection products,” Dr Khoo said.
Hold on here. So previously, if there are no other means to purchase insurance but to go through an agent representative, then how come there are so much shortfall? The problem perhaps do not lie in whether there is a direct channel but the cost of the products and the representation provided in general.
The impact all round
The first thought is that this will cannibalize the lively hood of the tied agents or the independent advisors. For the same products that they sell to clients, there is one that cost possibly 1 year of commission less (or even more from what I am told)
The problem is that, this channel might not even see the light of day:
- As an insurer you can offer this direct channel but you don’t have to market it or tell people about it. Only the most hard core of savvy people will know that it exists. There is little incentive for them to market it. This can be just for compliance sake
- “Improved” products can be introduced, that blurred the lines between term, whole life or investments. When lines are blurred, they can’t be offered to the direct channel. These improved products can be the foundation basis for an assured, with these traditional ones supplementing it. The advisor value adds greatly
- Financial Planning is about personal touch, having someone explaining things to you, especially on a topic that many deemed too complex. As such, even with such a direct channel, many would felt overwhelmed or anxious that they are making decisions with their money without professional help
- Direct Channel is not something new. The UK, Australia and US already have this. Yet they don’t solve the adequacy or mis-selling problem. This serves more to address a specific groups’ needs not solve an industry wide problem
Doing this would mean that the insurance companies have to set up an administrative infrastructure for that. That would incur greater upfront costs and recurring costs.
In terms of earnings, what I understand is that commissions are not the main revenue basis but to provide the sales incentive to reach more customers. End of the day insurance companies earned by managing their combined ratio well, which is the premiums that they take in versus the claims pay out. Much would depend on their underwriting.
For the consumers that will depend a lot. It would depend on what kind of customer you are. Martin Lee, a financial planner, shrewdly segregates them into four groups:
- Those who have no awareness of insurance but end up buying due to the sales and marketing efforts of agents. This might be through road shows or cold calling. For people in this group, both the insurance product and its concept has to be sold
- Those who understand that insurance is important, have lack of knowledge about what they need and are not comfortable doing their own research. For people in this group, the specific type of insurance and the accompanying product has to be sold
- Those who understand that insurance is important and know exactly what they need based on their own research (whether correct or not). For this group of DIY people, hardly any selling is required. In most cases, they tell you what they want and you provide additional inputs to their requirement.
- The emerging cheapo who knows insurance is important, pesters the agent to value add and compare the products, and the goes directly to purchase these products.
If you belong to the third group then this is good for you. For those that are in 1 and 2, this move shouldn’t matter much. Martin is right. The 4th group is very Singaporean.
A shift to Value Adding
In the long run, many would think the role of advisors would become that of a remisier, where they once made a lot because they were the only channel, only for technology disruption to erode the margins, and commoditize them.
To prevent that from happening advisors would have to show that they offer more than the products they sell. And that is placing greater emphasis on advice. In this case perhaps we see again why it makes more sense to tie compensation to the real value. In this case professional advice, instead of by products.
The advisors that consistently add value should have nothing to fear. There are much red tapes that make it seem to the uneducated, professional advisors are still worth it. To those that really adds value, its even better because the proposition have shifted far from cost, where they are trusted because of them listening well to their clients needs and addressing them to a good level.
The problem for DIYInsurance, a portal that started not long ago as a marketplace to compare and sell various insurance company’s products is that on the surface, they look to become redundant due to this. (I talked about how DIYInsurance works in a previous material here)
One of the good benefits of DIYInsurance is that, prior to their set up, there are not many ways to compare products that are largely similar and then purchase them without going through agents.
In a certain sense, the fourth group which Martin cite will have a field day using such a portal and buying direct. Although I am paid as an introducer, for the benefit of readers, I will ALSO tell savvy folks to go direct if its really commission free (DIYInsurance currently rebates
30% 50% of the commissions earned)
Why pay more for the same products if you know what you are doing is fundamentally sound.
End of the day, portals that wants to thrive will have to find ways to add value. Like what Martin says, the unit trust portals such as Fundsupermart and Dollardex serves to disrupt, and they brought down the sales charges dramatically. If you look today, the banks are still selling unit trusts and so are the IFAs. Exchange Traded Funds listed on the SGX are supposed to be better, but even with that, costly unit trusts still sells well.
There are much value add for DIYInsurance.
They are not limited to the 3 categorization of products. Although they do not have much comparison options, they do make the information available for the following and enables you to purchase directly from them:
- Disability Income
- Long Term Care
- Decreasing Term insurance
- Savings Plans (Endowment) (at time of writing coming soon)
As this is not a direct channel this would mean that, the $400k and $200k sub limit is not applied to them. If you require a coverage of $1 mil from a single insurer, this is possible.
As a niche player for those under category three, they probably are not afraid of people being category four, which is why they provide enough education materials and calculators to help them make better plans on their own.
The problem with direct channel is that the process is not that straight forward, and likely there are much queries on the minds of potential customers. It will be very difficult for the process to be “passive”. There will be much differentiation in the quality of service on this front as well:
Just like good advisors, you can’t survive if you develop a reputation for showing a detachment from engagement and professionalism. The playing field is competitive, for the advisors but also such portals and only the strong ones will surive.
A note to all is that I do earn a fee from Providend Ltd for introducing a prospective client to Providend’s DIYInsurance portal and their related financial advisory services. Providend Ltd is a licensed financial adviser under the Financial Advisers Act and a Registered Fund Management Company under the Securities and Futures Act of Singapore.
I prefer to work with businesses that I know will take a holistic view of the clients’ unique situation and planning processes that I have reviewed and trusted.
As an introducer, I am not permitted to give advice or provide recommendations on any investment product, market any collective investment scheme or arrange any life insurance contract, to or for any particular client, except to the extent of carrying out introducing activities. Thus, for your specific financial needs, I strongly recommend that you speak to a licensed representative from Providend as they will be able to help you.
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