Business Times – 17 Aug 2011

Business Times – 17 Aug 2011
COMMENTARY
Insurance advice: What banks need to do  

At the very least, they should tell customers outright they’re not independent advisers and encourage them to shop around

By GENEVIEVE CUA
PERSONAL FINANCE EDITOR

DO bank advisers give independent advice when it comes to insurance products? The answer is most often no but consumers often do not realise this, as a letter published last month in The Straits Times attests.

In her letter, Jessie Loy sought independent advice from banks on insurance products. She was dismayed to find each pushing a specific insurer – DBS is selling Aviva; OCBC markets Great Eastern Life and so on.

In a recent published reply, Association of Banks in Singapore director Ong-Ang Ai Boon wrote that banks have commercial tie-ups with partners, and they ‘review product offerings of their insurance partners to ensure the products offered are suitable’ for their clients. She also said that a fact-find or needs analysis is ‘diligently conducted’ before any recommendation.

The reply states the reality: Bancassurance is a commercial arrangement between a bank and an insurer. It is a very lucrative one. This year, based on Life Insurance Association data, bancassurance’s share of new premiums rose by 10 percentage points to 34 per cent in the first half.
In the period, the channel’s sales actually doubled to a record $322 million.

With this distribution arrangement, bank staff must be trained to market and explain insurance products which can be much more complicated than a unit trust.

Giving consumers a choice of competing products is in their interest, but it may not make economical or business sense for the bank as it will require greater effort and investment in training, for instance. Banks have also been trying to streamline the products on their menu.

But Ms Ong-Ang’s reply skirts a big question, which is germane to Ms Loy’s predicament. When it comes to insurance products, how important is independent advice?

There is one argument that has been bandied around among bankers – that the offerings of insurers are broadly similar particularly when it comes to the choices deemed appropriate for depositors such as endowment plans. Hence, as this argument goes, unless there is some unique proposition, there is little need to tie up with more than one insurer.

But it is precisely because of the commoditised nature of many insurance products that the need to compare key features becomes even more pertinent. Among endowments, clients will want to know how a plan’s guaranteed rate and total rate of return compare with another plan, for example. What is the insurer’s track record in terms of cutting and restoring bonuses?

Among regular premium investment-linked plans, at least one insurer levies an extra layer of annual charges that others don’t. Among term protection plans, how competitive is the annual premium?
Term plans give pure life protection for specified periods with no bonuses or investment returns.

The rub is that it really isn’t easy for the client to do his or her own research, or even to ask the right questions.

To be sure, there are significant differences, even among products that seem so plain vanilla. Pricing of term protection plans can vary widely, for instance. At certain age bands, the price differential can be well over 10 per cent. This is particularly relevant in the area of mortgage insurance. Home owners or investors who buy property should be encouraged to take up a mortgage protection plan. But they shouldn’t just take the plan that is offered by the bank that is financing their property. When this writer was scouting for a mortgage protection plan some years ago, she compared three offerings and took the one that is not marketed by the mortgage provider, because it was more attractively priced.

Even endowment products will vary. Some insurers will quote projected returns fairly aggressively and their life fund asset allocation may reflect that with a relatively higher allocation to equities. More conservative insurers will quote more modest rates of return. What is the insurer’s track record in meeting projected returns? Ironically, you may well find that a conservative insurer has cut bonuses drastically in the past. And, there is one insurer that still strives to maintain its record of not cutting
bonuses at all. An insurer such as NTUC Income, which is a cooperative, professes to pay out 98 per cent of surpluses, and theoretically should be able to offer relatively more attractive rates of return.

Financial strength, fortunately, is less of an issue. All insurers have capital well in excess of the regulatory solvency ratios. They can in fact afford to pay out more of their surpluses as bonuses and still stay comfortably within the required ratio.

There are of course quite a number of licensed financial advisers who are able to distribute multiple insurers’ products, and are able to do comparisons, even including products that they don’t distribute. Similar to tied insurance agents, such advisers are typically remunerated through product commissions. Or, they may be remunerated through an advisory fee.

Banks should as a matter of course do a client needs analysis as a first step in the advisory products. This helps to ascertain the suitability of products. Then, they could choose to go the extra mile with some competitive product comparisons. That of course risks losing the customer to a competitor.

At the very least, they should tell the customer outright that they are not independent advisers and encourage them to shop around. After all, a long-term commitment such as insurance should be a well-considered decision.

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