Advisers key to closing the protection gap
The protection gap is the preferred name for the difference between what a client should have and what they actually own.
Thursday, November 11th 2021, 10:47AM 
1 Comment
by Russell Hutchinson
Last week, it was my privilege to join Kresh Wright, who is Head of Life & Health New Zealand for Swiss Re, Tony Arthur, Chief Commercial Officer at Partners Life and Doctor Claire Matthews, Associate Professor and Director of Academic Quality at Massey University, to talk about the protection gap.
The term is preferred over "underinsurance" as it is more descriptive of the real problem – not having enough cover.
The protection gap comes in two types - having absolutely no cover or having some but not enough.
The latter group can be further subdivided into those that have a little of everything, and those that have some gaps in their programme – such as no income cover. The gap is large.
Swiss Re estimates that in New Zealand the life protection gap is about $670 billion in sum insured. That’s a little under $200,000 for every working-age New Zealander.
Sometimes I get asked why we don’t talk about having too much cover very often. As you will probably know, too much cover is a rare state of affairs.
It doesn’t happen that often, but when it does, it’s usually because some cover was bought for one purpose (say to cover a large loan) and then retained when it ended.
But protection gap people would probably outnumber protection excess nine to one. In terms of the actual cover, if we switched to sum insured, the balance is probably higher in favour of the gap.
These aren’t guesses, we have checked protection levels in some adviser businesses against modelled cover levels and found these gaps, but do not let that last statement give you the impression that you are to blame.
While protection gaps are common, most advisers try hard to close them and are much better at closing the gap than other channels – we see narrower ranges of product sold, lower sums insured, and much smaller premiums in bank and direct insurance sales channels.
Disability insurance needs are much more complex than straight life cover requirements to calculate and provide advice on.
Advisers routinely offer a better range of cover, better quality, and get clients to commit to a higher total premium spend – and that is still often not enough.
Sure, some of this may be self-selecting – advisers tend to focus on clients with more complex needs and higher incomes, but it is pretty uniform across the channel.
Ideas for solutions abound – but evidence for the most effective solutions is slim. Waiting for others to fix the problem is probably a poor strategy – simply expecting that the Government will suddenly – in late 2021 decide that the problem is pressing is also unlikely.
The most useful thing we can do is educate - talking about the gap in terms of consequences can help a lot.
In the UK some education campaigns around specific types of cover lifted usage considerably – so education, trust, and therefore confidence must be significant factors.
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My nearly, but not quite, 10 years as an adviser has shown that when you slow the client down and take an education approach the clients typically engage and take a better range of coverage.
They are also more sticky and they look for ways to hold onto cover when they are faced with adversity. They brought the cover you didn't sell the cover, a massive change to the typical approach.
Are they still underinsured? yup. But their budget or willingness to spend the required premium to cover the gap is the problem, and often this is a hard barrier.
Remembering when it comes to insurance, the need for insurance is driven by the lack of resources to cover the risk, which translates to the client not having the budget to cover all of the risks they have either.
There is always a compromise and it is up to us as advisers to educate clients that the catastrophic risks are not the only risks and the more likely risks also need equal if not more attention from them.