Any broker knows the frustrations of underinsurance.
The gap, however, is particularly stark when it comes to death and disability products.
A new report from the Financial Services Council and MetLife estimates the underinsurance gap in the industry to be $1.1 trillion and posits that will change little unless the entire industry joins to alter general attitudes towards life insurance.
FSC CEO John Brogden says the research commissioned for the Apathy to Action report paints a stark picture.
“Despite 19 in 20 working- age Australians seeing protecting their financial future as a priority, less than half have tried to plan for events that require life insurance,” he says.
“The life insurance industry needs to change the way we talk to Australians about life insurance if we are to close the underinsurance gap. We need to convince Australians of the tangible value of life and income protection insurance.
“This report, by providing some understanding of what motivates consumers and barriers to action, is a call to action for the industry to work together to ensure all Australians are adequately protected against life’s risks.”
MetLife CEO Damien Green says although Australia is one of the most developed countries in the world, it is also one of the most underinsured and it’s a disparity that is hard to reconcile.
“We would like to see working Australians become more actively engaged with the concept of life insurance so that they are equipped to make an informed decision about the product that suits their needs – not just presently, but into the future too,” he says.
This will likely undo the old adage that insurance is sold not bought.
“For this to happen we have to change the way we interact with the consumer. We need to reverse the perception that life insurance is not bought but sold and start designing life solutions customised to individual needs and life stages.
“There is a need to identify methods of engaging with consumers in a meaningful way and, most importantly, we have to deliver on our promise to provide financial protection for Australians.
“This is particularly important in light of recent social and political developments, where emphasis is being placed on actively encouraging individuals to take greater personal responsibility for their financial future.”
Know your product
The report’s key finding is that underinsurance is not caused by a belief life insurance offers them or their families little benefit; it is simply that they apparently lack the motivation to act on that belief.
Life insurance offers them or their families little benefit; it is simply that they apparently lack the motivation to act on that belief.
“There is a clear disconnect between recognising potential income loss as a financial concern and acting to protect against such income loss,” the report states, with almost two-thirds of respondents confident the government will look after them if they cannot work.
The report also found three quarters of people do not equate income protection with life insurance and that people tend to vastly overestimate how much life insurance policies cost.
The report also predicts that if the industry simply continues pushing messages of offering peace of mind and security, the underinsurance status quo will remain.
Instead, it outlines two key strategies for prompting people to take charge of the life insurance needs: generating motivation to act now, and repositioning the category to better meet consumer needs.
Structural change needed
The industry’s best chance of encouraging consumers to act now is to convince the government to step in and provide tangible benefits for taking up insurance.
“Carrot and stick tax incentives, just as we’ve seen being effective in the private health insurance category, were chosen by consumers as the most motivating messages for life insurance,” the report states.
“This is likely because this creates an alternative loss aversion bias, making it costly not to have insurance rather than perceiving it to be costly to have it.”
However, it is up to the industry as a whole to reposition itself. That includes providing death and disability products with a new label that better illustrates what they provide; ‘lifestyle insurance’ is one example the report gives.
It also recommends insurers develop packages incorporating both lump sum disability cover and income protection, and allowing policy modifications to be made easily as the needs of individual consumers change.
“Digital consumers have high expectations of service: fast, easy, tailored to me, and easily comparable to other offers online (thanks to the rise of comparison websites),” the report states.
“Learning from the way banking and health insurance industries have progressed digitally would be a useful starting point.”
A broker’s role
The report also found that having an insurance broker or financial adviser increased the likelihood of having adequate cover but did not leave consumers with a better understanding of the products themselves.
NIBA CEO Dallas Booth says this is no surprise.
“Insurance is a complicated product. We know that previous attempts to educate the general public about it and increase overall financial literacy have not produced fully informed consumers,” he says.
“Relying upon consumers to properly understand their risks and to then take appropriate safeguards against those risks is not a realistic option. It hasn’t worked in the past and won’t work in the future.
“If we are serious about ensuring people know what their risks are and are properly protected from those risks, we must encourage them to seek qualified, professional advice from those who fully understand the products and are licensed to advise people. This is where insurance brokers can help.”
Meanwhile, a spokesman for ANZIIF’s know risk service, Thomas wills, says broader Australian attitudes are likely contributing to underinsurance.
“Apathy is certainly partly to blame for the enormous problem of underinsurance in Australia, but there’s also the view that getting insurance is boring and confusing. Add that to the ‘she’ll be right’ mentality and we can see why people are underinsured,” he says.
“The reality is that there are so many kinds of insurance and so many risks that people feel overwhelmed to the point of inaction.
There is also the misconception that because we live in a country with a social welfare network, you’ll always be covered by someone and this is just not the case.”