My relationship with insurance started in 1997 when I first enlisted in the army. I think many of you guys would share the same experience as myself.
The army company I was posted to, let in an adviser to persuade us to buy a personal accident plant.
That was my first policy.
I wouldn’t have to think about insurance again, until in 2005, a year after I graduated from university. That was about 2 years in, where I already discovered the world of unit trusts.
I thought maybe I should start being a responsible adult. After learning about unit trust, I learned that it can be rather suicidal if you put a lot of money into something you do not know much about.
I decide to do what I did when I have no idea how to invest in unit trust. I picked up a relevant book, or a few books on personal finance and read it. I have an idea about different kinds of protection.
However, I was still not very sure. Some experienced advisers and experienced members in the unit trust forum was kind enough to share their knowledge. Those proved to be invaluable in drawing what is in the books to real life scenario.
The Challenge of Well Informed DIY Consumers
However, when I need to purchase the kind of insurance, I think will protect me, it became frustrating. I realize that while my ex-colleague could introduce his independent adviser to me, it was a frustrating process:
- You were recommended policies that the adviser’s team thinks are suitable for you. This does not look like what I want
- When you ask for a particular area of coverage, they don’t let you compare the pros and cons. They just recommend you the policy that their back-end manager thinks are most suitable for your profile
- You have to purchase through one human adviser
- #1 and #3, when combined is pretty tough because there will be a lot of back and forth of up-selling or persuading you the virtues of insurance or wealth building products that is not suitable at this juncture of your life
Somehow, there wasn’t a platform that address the market of consumers who take a more active role in their insurance protection planning.
The Less Well Informed Consumers had it Even Tougher
For those, that are less savvy or do not have an interest in this area, they are much more comfortable, or preferred to have an adviser to help them plan out everything.
They decided to find a trustworthy personal financial adviser.
However, whenever I review most of their plan, what stand out is that:
- large amount of their cash outflow goes to insurance
- their insurance protection coverage is not adequate
Still, most of them do trust their advisers. Your friends don’t want to hear you tell them they made the wrong choice.
The Competency and Economic Incentive of Financial Advisers
The main issue, is that in financial planning, despite whether the agents are tied or independent, it is a sales based role.
The adviser has a strong economic incentive to push the protection, savings or investment plans that yields good enough commission for their own remuneration. There is a conflict of interest there.
And economic incentives were also one reason why follow up with you the client is flawed.
Suppose your adviser have already planned what you need to have a comprehensive protection coverage. Normally, an adviser should consistently revisit your situation to see if you need additional coverage.
That would be an investment on time on your part, but also on his part. Since he or she is commissioned rewarded, he or she would have to go through many of these sessions not remunerated if you do not buy additional policies from him/her.
To justify spending that time, there is an economic incentive to recommend some additional purchase even if at current point, that is not required.
Thus, it is also difficult to justify spending time coaching clients, mentoring clients through their poor financial habits. These creates a lot of financial improvement, but the adviser will not be well remunerated.
Economic incentives aside, some advisers are experience and competent. Some are just starting out, or do not plan well.
When you engage a financial adviser, how guaranteed are you that you get one that is competent, experienced, have integrity?
I would say some of you guys would get the good ones, some would get the poor ones.
The 2011 MAS Mystery Shopping Case Study
How bad was the state of financial planning?
In 2011, MAS decide to go mystery shopping on financial advisers. They wanted to assess the state of financial planning in Singapore.
They were horrified by what they found. There were inadequate disclosure of fees and charges, the frequency of the fees & charges. There were also inadequate warnings. Products recommended bordered unsuitable, based on the mystery shoppers needs. The products recommended do not meet the time horizon or too high risk.
MAS made a set of recommendations but this was strongly pushed back by the Life insurance association, whose heads were from the various insurance companies. The recommendations include pushing for a more fee based structure, lower first year commissions, and more remuneration tied to non-sales key performance indicators.
The end result is that the remuneration structure is still largely sales based. And the economic incentive remains the same. The distribution of financial planning is still very agent based. As each individual adviser’s competency is inconsistent, some get better planning, some get atrocious planning, or no planning at all. The economic incentive and inconsistency increase the odds that likely you will be under-insured in the right areas, have greater cash outflow then you need to.
How much do I think the insurance protection industry has changed?
If you ask me, what has changed in the realm of insurance since I wrote my first article on insurance in 2005, I would say… not much.
I think insurance cost have gone up, together with healthcare cost.
We live a life that has smaller room for errors. And thus more things are at stake. Thus, the use case for assuring against high impact health costs adequately for you, is getting more relevant.
So too is your wealth accumulation. The narrative provided by the government towards wealth accumulation seems to suggest: Seek out other forms of financial assets other than your HDB flat to accumulate your wealth for retirement.
Today, we have some type of protection plans that didn’t exist back then. You do not have hybrid life insurance, universal life insurance wasn’t actively talked about and we have term insurance coverage that covers different stages of critical illness.
Insurance is still largely sold through commission driven advisory. There are alternatives to this, which I will explain later. Insurance is also a product whose virtues and utility have to be explained and sold. Otherwise, we do not wake up one day wondering whether our coverage is adequate. Those that are not well informed gets recommended and sold the products that they think are suitable, cost effective from advisers who have high integrity. This is often not true.
Web 2.0 and Social Media have made Consumers Better Informed about Insurance Protection and Wealth Management
There seem to be more consumers that are better informed about insurance protection and wealth accumulation.
With Web 2.0, smartphones, social media & online media, the consumers have more information to make informed decisions. For those who wishes to be more informed. I would like to think Investment Moats, and our friends is part of the reason for this.
For the folks who are motivated to be well informed, do they have platforms that allow them to purchase the insurance protection products and financial assets for wealth accumulation?
We do have various new platforms that allow us to purchase new high risk, high return debts, invoice financing. We have platforms that offers Singaporeans to purchase managed portfolio of overseas exchange traded funds. We still have existing platforms that allow us to purchase unit trusts, retail bonds, managed portfolios. Our brokerage platforms have not evolved much (except for lower commissions via cash upfront accounts).
Do we have platforms that acts as a marketplace to purchase our insurance protection? We have new insurers in the form of FWD and Singapore Life which are online first in their customer engagement.
However, the closest to being a marketplace for insurance protection is actually DIY Insurance.
The Success and Challenges for DIY Insurance
4 years ago, I got to know Christopher Tan from Providend. They just set up DIY Insurance to fill a certain gap that was not fulfilled in the MAS 2012 financial planning recommendations.
They offer certain advantages. Let me list them out.
They allow you to compare between insurance protection plans in the same category. Prior to this, you won’t know the rough cost of protecting yourself against death, critical illness, disability income.
With DIY Insurance, except for disability income, you can compare the quote for your age, gender across a set of available insurers.
Overtime, they build upon this comparison to compare those insurers that is not available for purchase from the platform directly. So you can have a sensing if you were to cover for $500,000 late stage critical illness, how much it will set you back annually.
Consumers can purchase the insurance protection plans directly with no strings attached. Prior to this, if you wish to purchase death, TPD, critical illness protection, disability income protection, you have to go through an adviser. Then you have to go through the process where your adviser tries to up-sell you, or dissuade you from buying cheap term insurance. With DIY Insurance, you are able to purchase insurance protection, savings, retirement plans from them direct. Providend, which owns DIY Insurance, became your adviser, but they just let you decide without up-selling. It should be noted that if your insurance protection needs are lower than a certain assured amount ($400,000 for term and $200,000 for whole life insurance), you can purchase them direct from the insurance companies through the Direct Purchase Insurance (DPI) scheme. For those amount, the cost is likely lower than DIY Insurance.
Provide you with specific advice on the insurance products you are interested to purchase. If you are not clear about certain aspect of the type of insurance protection, after getting the quote and linking up with the customer representative, you can clarify with them. Thus, although you are without an adviser per say, it doesn’t mean you are on your own to figure this out. You still get independent advice on the specific product you are targeting.
Provide Rules-based Robo Advise if You are Not Sure How Much Coverage you Need. Through their rules based system consultation, you will be able to figure out whether you are adequately covered and for your shortfall, what are some of the recommended plans, and your overall monthly and annual incremental insurance cost.
They Rebate You Part of the Commission typically earn by Advisers and Organization that is Lost to You. Initially, they rebate you 30% of the commission typically earned by advisers after cost. This means that you get a much more competitive rate. Then they up this to 50% rebate.
This is very good if you are proactive in building up your wealth management knowledge, and manage your own protection needs. You have a platform that you can compare the premium rates versus the coverage, purchase without fear of being hounded to buy other products you were not looking for originally and get a good discount.
Since 4 years ago, if some friends require insurance coverage, and they are conscientious enough to do some work to DIY their own insurance, I will recommend DIY Insurance to them. I also have acquaintances who discovered them through other means.
Some thought that they are just buying from a supermarket and expected nothing else. However, they realize they were able to provide some detail information specific to the products and how it affects their situation (if you wish to reveal). Then there were the friends who tried to approach DIY Insurance to inquire about the coverage for their cases where they have pre-existing conditions, or health aliments that they might not be able to cover for. The staff at DIY was able to advise and help them with the purchase. Some worked out, some didn’t, but it does debunk a common misconception that if you purchase it through an online platform you are on your own.
DIY Insurance isn’t without weaknesses.
Rather than weakness, I term it as missed opportunities where they can offer more to the retail consumers. Here are some of the few.
Their Quotes are not Granular. The quotes provided by DIY Insurance are based on recent quotes from various insurance companies. They cannot provide you with quotation for every insured sum for each different age (for example you need only $800,000 coverage for a 23-year-old instead of $1,000,000).
In the most ideal scenario, the potential customer says he needs $800,000 death coverage for himself, from 35 years old to 65 years old, and the quotes provided are specific to this kind of filter. What DIY Insurance can provide is a yardstick of the premium cost for $1,000,000 coverage. You have to do your own conversion as to how much premium it will cost you (Annual Premium/10 x 8)
They only offered Insurance-based Financial Instruments. Currently you can purchase whole life insurance, term life insurance, critical illness plans, insurance endowment plans, disability income insurance from DIY Insurance.
I think the idea is to provide what they think Singaporeans will need, through their platform. For example, they think that they need protection against certain risks. And they are able to provide that for death, TPD, CI and Disability Income protection (although I do contend if they have the best disability income solution out there).
They think that Singaporeans should build wealth early and consistently over their working life. Do they have the solution? They do have insurance savings, retirement plans. How much do they believe that those are the instruments that should be core to us building our wealth? I think it’s not very strong. So why can’t they offer what they are offering their accredited investors under Providend?
However, the lost opportunity are tools to somewhat aggregate our financial information to create a holistic view. I think this is because insurance is not some products that we frequently shop for, so as customers we do not find a need to go back to it. Thus DIY Insurance loses the mind-share of their customers over time. However, if you bundle it with some applications that people come back to frequently, you build yourself as a platform.
Limited Success in changing Users Acquisition. Going back to what my co-worker faced, you would realize the issue is not so different if we go back in time to 2003. Given the proliferation of social media, web 2.0, and that they carry a set of fundamentally sound products, our thoughts are that DIY Insurance should thrive. Yet the majority of insurance protection and wealth accumulation assets are still done through advisers.
Insurance protection and wealth management, at the end of the day, is still something that requires someone to sell to someone, through education, product introduction, so that people will take action. If an adviser does not illustrate a need and your shortfall, you seldom wake up one day and tell yourself you need to re look your insurance strategy, research on how to evaluate whether you have a shortfall, and what are the products that is suitable, and how much it costs.
The majority of the people are interested in money, but does not do enough of the work to equip themselves to DIY their insurance protection and wealth accumulation.
Like my friend Alvin from Dr Wealth said, the distribution channel is the king, and the current king is still an advisor based distribution channel.
Re-Branding, Re-Imagining Financial Planning with Technology
Few weeks ago, I manage to meet up with Chris for dinner. He updated me on some of the developments with Providend, and DIY Insurance. They will go through some changes.
Specifically, DIY Insurance will go through some re-branding of their platform.
Not just re-branding but I do detect they have the potential to do more:
- Product wise, they can be more comprehensive in what they can offer to the Singapore consumers to address their wealth accumulation and protection needs
- And my sensing is that, they have upped their technology game by investing in this area.
This would mean that they could possibly address some of the untapped potential I talked about, by leveraging on technology to provide a better financial planning model.
I haven’t seen it myself yet, but do stay tuned as the re-branded platform would likely be out sometime in October.
Will keep everyone updated.