How junk is junk insurance and why should you care?
Recent articles headed “junk insurance” could be seen as the broad brush of journalism splattering tar on all insurance. Could we instead treat it as an opportunity to talk about quality?
Thursday, August 1st 2019, 1:14PM 
1 Comment
by Russell Hutchinson
What do people mean by junk insurance? Several types of insurance cover were referred to as "junk insurance" during the proceedings of the recent Australian Royal Commission. The hallmark of junk insurance is usually two things:
- A very low ratio of claims to premium
- A high ratio of declined to accepted claims
What is a low claims ratio? The average for life insurance in New Zealand is about 60%, for trauma and income protection it is much higher. For health insurance, likewise. While regulators aren’t talking about a specific number, claims ratios that are only 30%, or lower, look suspiciously poor value for customers. Added to that, they tend to be sold with no advice, often is situations that are not supportive of the client making a good decision.
Gap insurance, for example, is meant to cover the difference between the value of a car and any finance remaining outstanding, in the event the car is written off during the period of the loan. It is hard for the consumer to assess the value of the contract, and they are perhaps more focused on getting the car and the loan needed to acquire it.
Redundancy insurance has also been criticised for being sold to people who could never qualify for a claim payment under the terms of the contract.
What is a high ratio of declined claims? In the absence of good industry data it is hard to say. Once again, no one wants to force a hard rule that might ban important categories of cover. Especially while work has to be done to agree common standards for reporting. However, if more than half of all claims are declined that could be a sign that a majority of holders of the policy are not clear on what it is meant to cover them for, or that the terms were difficult to understand, or too narrow.
A recent consultation on the conduct of financial institutions includes options to prevent products and sales situations like these. Although for insurers this may be a headache, advisers should view it as an opportunity. Advisers tend to sell the best contracts and offer advice extensively on living benefits: income protection, health insurance, trauma, and so on. These are all the products with the highest claims payment rates. Advisers tend to focus on the products with the best features and options for clients. Stories about junk insurance are an opportunity to highlight quality and the value of what you offer.
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There are plenty of products that have questionable value, while at the same time those same products in a different and quite specific situation are the best thing in the world.
Accident cover for activities that are uninsurable otherwise, or limited cover that enables placement while stepping around acceptable exclusions that would trigger declines.
Clearly an exclusion of skin and all it's contents is difficult to manage, at the same time placing risk that avoids exclusions with limited wordings have a place too.
Without specialist advice these products will look like junk and they will have lower perception of value because they need that advice around relevance.
Another example is Partners Specific Condition Cover, in many ways it's inferior to a more traditional disability cover, however, in several situations where disability cover couldn't be placed or wouldn't work (no income or occupation) it has proven to be the only cover that would have responded in those clients resulting claim situations.
Not that a disability cover wouldn't work, but more the pressure on wait periods, cover terms and affordability would have resulted in missing a claim with the resulting affordable structure on disability or they would not have had any coverage. On the spec condition cover, easy claim and happy client's as a result.
The flip side, an IP claim accepted this week that has had no pushback from insurer or reinsurer, and we’re talking potential $1.5mil of claim, approved and paying.
The quality of the advice and execution of the client decisions is where we show demonstrable value.
In all of these examples the prior cover approach would not have had the result we have at claim.
They would have had nothing or little in the way of long term security and that is why we advisers have a significant responsibility to our clients and why we have significant value to add to people's lives