How insurers might tackle the trust gap

Trust in financial institutions is at an all-time low in New Zealand and this “deep mistrust” is a major reason why Kiwis are massively underinsured, says PwC partner Ben Coulter.

Wednesday, October 12th 2022, 9:11AM

Coulter was among four panelists at the recent FSC conference who led a discussion on the future of life insurance in this country. “There is a massive gap in life insurance but it’s an ocean when it comes to income protection,” he said. “This is highly interconnected with the trust gap….but there’s an education gap as well.”

The size of the underinsurance gap became clear in a piece of research released last September by Swiss Re which measured for the first time New Zealand’s mortality protection gap - the shortfall in financial resources that households need if they’re to maintain their standard of living if the primary income earner dies.

This mortality gap is a “staggering” $670 billion ($830,000 per household), according to George Stavliotis, a Sydney-based vice president of Swiss Re and one of the four conference panelists. It means nearly 65% of New Zealand households are under-protected with the biggest gaps being among low-income earners and middle-aged high-income earners.

“There is a big opportunity here and a very big need,” Stavliotis said. The Swiss Re research indicates that closing the gap in New Zealand would reap an extra US$1.5 billion in annual life insurance premiums.

Stavliotis acknowledged the trust gap in New Zealand but said it was far more serious across the ditch. The fallout from the royal commission into financial institutions has created a massive trust issue in Australia and the financial services industry is still recovering, he said.

Another panelist, insurance and financial services ombudsman Karen Stevens, said part of the reason for the trust gap is that many customers don’t understand the insurance products they have bought. The data her organisations gleans from complaints shows the first and second most common complaint inquiries are about the scope of cover.

“We’re trying to encourage everybody to educate their customers more,” she said. “This is the thing people are most upset about. They have expectations and make assumptions that they’ll be covered for certain things and they’re not.”

As an example, Stevens cited trauma cover. Complainants have explained to her how traumatised they’ve felt without realising that critical illness insurance will cover only specified illnesses.

“So yes, there is a trust gap but it [stems] from the fact that people simply don’t have sufficient financial knowledge and literacy to properly evaluate what they’re buying.”

Stevens believes the embedding of COFI principles and fair conduct programs in financial institutions might help resolve the trust problem as a customer-centric environment means institutions will need to show how they’re properly informing customers about the products they’re buying. But this will be a challenge, she says. “Because of their expectations and lack of understanding, it is quite difficult to know if they’ve got it.”

On a more positive note, Stevens says complaints to her organisation have been dropping over the past four years and the 2022 numbers, expected to be released shortly, will likely be the lowest for that period.

Partners Life managing director Naomi Ballantye, who was also on the panel, said the lack of financial literacy and understanding about the scope of insurance became clear in a survey her firm did earlier this year. This revealed that 34% of respondents thought ACC would cover them for time off work for an unexplained illness, 25% thought they’d be covered for chronic back pain and 18% thought they’d get cover for cancer.

Cost was cited as the major barrier to buying insurance, with 58% of respondents saying they weren’t planning on buying cover anytime soon.

But Ballantyne said she thought the future of life insurance looked “fantastically positive”. In the wake of the pandemic, people have become aware that life can end in a heartbeat, that the public health system can’t cope and that money, jobs and having an income all matter.

“So, if you ever needed an opportunity to introduce risk and look after yourself, now’s the best time to be able to do that,” she said. “The opportunity in this industry is the best that it’s ever been, at least in my lifetime.”

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