IFA RISK MASTERCLASS

Researching Products

Russell Hutchinson, Quality Product Research Limited

May 2013

What we will cover:

1. How Selecting Providers Connects to Product Selection

2. Basis for Factors in Researching and Comparing Insurance Policies

3. How You Use Research in Your Advice Process

This presentation is not financial advice – if that is what you are looking for, then go and see a financial adviser!

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The Most Important Issues in Research

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Capital Employed By Selected Insurers

Company Capital

Sovereign $670m

Asteron $396m

Onepath $530m

Fidelity $141m

AIA $87m

Partners $20m

Source: Milton Jennings, FINSIA presentation.

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The Approved Provider List Analysis Tool

- A tool for advisers to help draft their approved provider list - A challenge to act consistently and to justify who you include or exclude on an exceptional basis - A challenge to think about how you handle special situations - Download at http://www.chatswood.co.nz/moneyblog/2013/05/ifa-conference-researching-product-providers.html

The business requirement: A person with a role is unable to perform: - A couple of weeks and is likely to return- A month and is likely to return- Three months and is likely to return- Longer and is unlikely to return

The insurer: must have an insurable event with features that it is: - unlikely- the insured wishes to avoid it- entails a loss

• Hence: insurance is often ‘event’ based rather than outcome based• That’s not ideal, and it doesn’t have to be that way• The mismatch must be managed by innovation in your advice and supporting

arrangements – usually legal commitments.

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The Disconnect Business vs. Insurer

Quick Quiz

• Should your advice process be research-led or research informed?

• Should you use your own research or third party research?

• What issues do you think should we consider?

• Should the probability of an event be taken into account?

• If you use research are you required to sell the ‘best’ product?

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Researching Products – Quick Quiz

• Should your advice process be research-led or research informed?Informed – not led. You are still the adviser

• Should you use your own research or third party research?Recent cases suggest that you must use multiple sources

– from the product provider, your own investigations, and third party materials

• What issues do you think should research should consider?From discussion

• Should the probability of an event be taken into account?Absolutely YES

• If you use research are you required to sell the ‘best’ product?NO, it’s about personalised advice and suitability, you

lead the advice process

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Researching Products – Quick Quiz

• Financial Advisers Act FMA’s examples of Care, Diligence and Skill

• AFA Code of Conduct

• NZQA’s unit standards on insurance sales

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Guidance from Law and Regulation

Financial Advisers Act says: reasonable care, diligence and skill

FMA published examples on its website last year focusing on:

• Insurance• personalised advice and • applicable features• Warnings against generalisations• Replacements• Need for comparisons or a warning

You can look them up at www.fma.govt.nz search on the terms “care diligence and skill”

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FMA’s examples of Care Diligence and Skill

Unit Standards for qualification at NZQA level five.

25644 - states:

“Exposures to risk and the methods for handling risk are evaluated in terms of probability of risk, potential severity and/or impact of risk consequences”  This estimates that illustrate actual probability, not merely numbers of claims, or illustrative scenarios are important. And also the range of “risk consequences” such as “costs, financial benefits, non-financial benefits, direct losses, consequential losses, hidden losses.” That’s why amounts are important.

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Insurance Unit Standard example - NZQA

• Level 1 – the incidence of different items within the product: • Heart attack versus CJD - benefit: not getting caught up in “micro” benefits that

add little to the total value of a product• Very little data• But price is a good cue / clue

• Level 2 – understanding the likelihood of a person suffering the insured contingency during the expected cover period:

• Little data and needlessly so – every insurer has this information • We expect to offer this information personalised to every research report

in Quality Product Research from July.

• Level 3 – understanding risks in aggregate for groups of people • Little data, and again needlessly so, • But we have a good example for you on the next page

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Layers of Probability to Address

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What Is The Probability?

Number of partners

Chance of 1 partner dying before aged 651

Chance of 1 partner dying or becoming totally disabled before age 651

2 35 in 100 52 in 100

3 47 in 100 67 in 100

4 57 in 100 77 in 100

5 66 in 100 84 in 100

6 77 in 100 89 in 100

• Source: Zurich Life Australia, AIA (in NZ) has similar data split by age• Underlines the importance of documenting what will happen in the event of a

claim properly – because the claim likely

• Client tolerance for risk – link to probability

• Use of client information – affects client perception of scope - if you collect it, they expect you to use it in your advice process

• Personalised advice – taking into account the client’s situation

• Basis of advice – often in writing, and availability to the client

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AFA Code of Professional Conduct

If you’re going to do research or use research you therefore need to take into account the following:

• Client information - Your research screen must do the basics taking into account gender, occupation, age, and so on

• Risk / incidence - probability which varies depending on gender, occupation, age- you can you tell, because insurers change the price

• Definition – now we can look at policy documents – wording – fundamentally we’re looking at whether this wording or that is more likely to pay – or for absent features

• Amount paid• Frequency

That’s our foundation for research. But … we’re only half way there.

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Combining These Requirements We Find:

Your Competence - Your familiarity with the product – relates to competence, and this therefore central to compliance with the Financial Advisers Act

Underwriting Definitions – Not always identical to personal product definitions and not always as good. Often slower to be updated. A fault in product design.

Product Features – Expiry dates often not quite as generous as they should be. Particularly affects future insurability options.

Non-medical claims requirements vary compared with personal– for example: 1. Timing of claim payment as in OnePath’s Business Extra2. Links to employment contract as with Partners Life Key Person cover3. Financial information requirements – applies to most business-specific policies

Boundary Issues - Especially the in the case of financial information it would be easy to move into areas where additional professional advice is required.

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Issues Specific to Business Insurance

1. Your Context

2. Personalisation

3. Currency

4. Availability of the research to the Client

5. Input into advice process – not a determinant

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Issues in How YOU Use Research

1. Validity will depend on your scope of service

What are you telling the client you will do for them?What might they reasonably expect is included?

2. You may choose not to offer personalised advice

…but not to do so may cause problems, especially if you are moving from a context of offering personalised advice on other products

3. You may choose not to offer comparison, but

…remember the FMA’s examples and recommendation that you should warn of the risks of no comparison

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Your Context

Since January, in our research product, we have updated:

• One provider - Five products• Another provider – three products• Two other providers – one product• An item weighting – for every provider we research in one product• Other minor changes

Yet I still visit advisers that have printed copies of research from last year and even the year before on their desks for discussion with clients

Don’t use: • Out of date research• Non-personalised• Pre-printed – because it isn’t personalised

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Currency

• You can cheerfully disagree, provided your view is well founded

• You should ‘look through’ the research: does this feature count?

• You should take into account non-insurance factors – such as a decent emergency fund

• You can also take into account non-research factors – such as FSR, claims, an so on

• I will make only one sales pitch – whoever you choose – you should use research,

I’d rather it was mine, but please, use research.

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Integration With Your Advice Process

Increased Risk with ComplexityDisputes body claims example showed that a business could not reasonably be expected to understand what was meant by different product names

• Therefore an increased duty to explain to clients• This was an example where compensation was ordered where cover was not

purchased.

Liability Issues: Based on Disputes scheme reports we know that:

• Where you fail to provide advice - moderate• Where you recommend a sub-optimal product - moderate• Where you fail to recommend a product - high• Where you are involved in non-disclosure - high

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Compliance and Liability Issues

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We Would like Your Input Please:We are researching business product right now

We supplied participating advisers with an interim report on our rating issues and basis proposed a couple of weeks ago

Right now we have a researcher working up the initial draft comparisons for consultation

We would like your help – if you are a subscriber and would like to contribute to the project we would be delighted to provide you with drafts and seek your input.

Please contact Kelly@qpresearch.co.nz

www.chatswood.co.nz and www.qpresearch.co.nz about Russell HutchinsonIf you would like to download the insurance company criteria / selection tool you will find the link on both of the above websites.

NZQA Unit standard 25644: http://afacompetence.org.nz/userfiles/file/Standard%20Set%20E%20-%20Insurance.pdf

FMA Care Diligence and Skill Examples: http://www.fma.govt.nz/help-me-comply/financial-advisers/your-obligations/care,-diligence-and-skill-examples/

AFA Code of Professional Conduct: http://www.fma.govt.nz/media/283463/afa-code-of-conduct.pdf

RESEARCHING PROVIDERS

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