Strategic insurance advice versus insurance product advice

Sonnie Bailey

15 April 2018

Every so often, you’ll read about Kiwis being “under-insured”.

Of course you’ll read about this, because the only people who care enough about insurance to create and publicise reports of this nature are insurers and insurance advisers who think people need more insurance.

It’s absolutely true that many Kiwis are under-insured. But there are also many Kiwis who are over-insured, and paying more in premiums than they need to be. To a large extent, this is a function of how insurance advice is remunerated, and the fact that two distinct advice services relating to insurance are conflated together. I discuss these issues in this article.

If you’re interested in being appropriately insured – and not being over-insured (and paying too much in premiums) I recommend reading this article. I also introduce my new course, Insurance for Savvy Kiwis. Click here (or on the image below) to check it out.

If you need personal insurance, I recommend engaging a quality insurance product adviser, rather than dealing directly with an insurance company or using a comparator like LifeDirect.

The adviser will help place you with an insurance product that’s suitable for your needs, help you through the underwriting process, and assist you if you need to make a claim.

I say this even though I’m uneasy about how they’re remunerated.

Insurance advisers are generally remunerated in one of two ways. The majority of them receive commission for placing people into insurance products. This usually consists of an up-front commission, plus a trail commission for as long as the policy remains in place.

Some insurance advisers receive a salary. Usually, this is because they’re an employee of an insurance company – which means they’re basically salespeople for that company’s products.

Sometimes, the adviser receives a salary, but they work within an advisory business which receives commission. They might argue that they’re not conflicted. But if they’re not writing new insurance policies, they won’t stay in the job for long.

Commission when it comes to providing a professional service makes feel a bit dirty. But a plumber gets dirty, too. And we still need plumbers.

What makes me feel better about it is that clients who use an adviser don’t usually pay any more in insurance premiums than clients who arrange their insurance directly with the insurance company. These commissions are basically distribution costs that the insurance providers need to incur in one way or another.

All products need to be marketed, sold, and distributed. If I had to choose, I’d prefer to see these costs go to advisers who have freedom to recommend any insurance product, rather than an army of salespeople who are tied to a particular provider.

The conflicts associated with commission

I have agonised for years about whether insurance advice can be provided effectively without involving commission.

I’d like to see commission-free advice because commission creates incentives that put the interests of the adviser in conflict with the interests of the clients.

The most likely result of this conflict is that commission-based advisers will recommend more insurance for clients than is necessary. And they will be reluctant to recommend that clients reduce their cover as their insurance needs reduce over time.

It has taken me years to work out a solution to this issue. And I’ve finally “squared the circle”.

Distinguishing between two very separate, distinct types of insurance service

There are two very separate, distinct types of insurance advice, which are often conflated. They are:

Strategic insurance advice

This is advice relating to the types of cover that a client needs, and the levels of cover that are suitable for the client.

I think this type of insurance is too vulnerable to conflicts of interest associated with commission. The incentive for commission-based advisers to recommend more, rather than less, insurance muddies the water too much.

Insurance product advice (and assistance.)

This is advice relating to the specific insurance products that are suitable for the client, in light of their circumstances, including concerns they have, and pre-existing health issues and potential underwriting issues they may face.

I don’t have much of an issue with commission relating to this advice. If the client has already decided what level of insurance they need (and perhaps received advice to inform them of this), it creates an incentive for the adviser to get cover for them.

My experience

As a financial services lawyer in Australia, I used to review advice provided by insurance advisers.

One of the first questions I’d ask these advisers was: Do you ever recommend that a client reduce or cancel their cover?

Most them would say yes. Without hesitation. Which is great: it’s what I wanted to hear.

I would then follow up by asking: When was the last time you recommended that a client reduce or cancel their cover?

A lot of advisers struggled to give me an example.

I used to ask for evidence of this advice. (But it’s still advice, and should have been documented.) But I gave up, because very few advisers could provide anything of this nature.

Call me cynical. Especially now that I’m an adviser and I tell about half my clients that they’re over-insured and should reduce their cover.

But that was my experience. And I can give a good reason why this was the case. It’s because they don’t stand to make any money from giving this advice.

In fact, if the client in question has insurance that the adviser placed them into, the adviser would end up losing money by giving advice of this nature. They would lose some or all of the trail commission.

Insurance advisers often face a disincentive to recommend that clients reduce cover.

My solutions

Fixed fee, product-agnostic advice

This is one of the reasons I provide product-agnostic advice through Fairhaven Wealth.

I charge clients a fixed fee for my advice, and I provide advice about type of cover and level of cover that is suitable for them.

I couldn’t care less about whether I recommend more or less insurance for a client. I don’t stand to gain or lose anything by recommending either way. My focus is on providing appropriate advice, and educating clients about the basis for this advice.

If a client needs cover, I recommend that they use an adviser to select the right product for them, help with underwriting, and help at time of claim. I’ll refer them to an adviser if suitable.

If a client reduces cover, they can give these instructions to their existing adviser or directly with the insurance provider.

It’s important that people see this distinction between strategic insurance advice and insurance product advice. There’s a difference between the advice relating to whether you need cover, and what level of cover you need, and which insurance product you should use.

An online DIY course: Insurance for Savvy Kiwis

As well as offering my unique service, I’ve created a course titled “Insurance for Savvy Kiwis”. In this course, I discuss the main types of personal insurance, the risks they cover, and factors that should influence what level of cover you might need.

I encourage you to check it out here:

This course is a work in progress. Please sign up, and let me know what you think.

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Other articles you may like:

How I money (2022)

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When Consumer is anti-consumer

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Paid off the mortgage? Don’t cancel your income protection insurance just yet

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Don’t cancel or reduce your insurance in the heat of the moment

Don’t cancel or reduce your insurance in the heat of the moment

Kids and money – building financial literacy and investing on their behalf

Kids and money – building financial literacy and investing on their behalf

DEVIL’S AVOCADO: Reflections on providing advice [this blog in books #6]

DEVIL’S AVOCADO: Reflections on providing advice [this blog in books #6]