Why Insurers Leave You Underinsured

February 20, 2013

in Insurance

By Seth Wee (guest contributor)

Imagine having a doctor who purposefully does not treat you completely such that you would constantly remain sick, thus having to visit the doctor repeatedly, each time paying for his services and medication. I am not familiar with the medical fraternity in Singapore and I trust that most doctors do their jobs ethically, but I know that the local financial industry thrives on this unethical practice.

A sad story of an underinsured client

I recently met a client who bought an investment-linked policy recommended to her by her friend. It provided poor coverage and was also taxing on her monthly budget. What is sad was what the agent wrote in the point-of-sale documents to justify the sale of the policy – an ostensibly apologetic “client to increase coverage when financially better”. It shows that the agent was fully aware that such a policy underinsures her client and yet deemed it fit to recommend her friend the policy. It is particularly upsetting since the client had specifically indicated her concern was insurance coverage with her limited budget.

Selling costly and unsuitable products is very lucrative. The commission, bonuses, and incentive trips are attractive. But the side effect of their clients being underinsured and having to purchase insurance again makes it even sweeter for sales – it creates opportunities for repeat business. Herein lies the incentive for agents to continue giving bad advice.

The agents are not concerned if something happens to you while being underinsured, nor the fact that your insurability likely decreases with age. They do not care that your financial obligations will increase in the near future when you buy a home or start a family, which leaves you with little budget to afford their expensive policies. They do not bother with that fact that selling you that policy takes up your excess budget, while preventing you from being adequately insured with better solutions like the client I have just mentioned.

All they have to do is to write a few lines of justifications in the point-of-sale document as if it is perfectly reasonable to leave you underinsured. Each year, they will have yet another excuse to get you to “top-up” on your perpetually inadequate insurance coverage.

There are solutions

The truth is that there is an appropriate insurance strategy that can address each person’s insurance needs properly. I have a client with a special needs sibling who is dependent on him. I calculated a need for $600,000 in death coverage for him and solved it within his budget.

Another client had a newborn and he thought that he should get a small amount of life coverage because he thought it was “expensive”. I calculated the shortfall he required and got him decreasing coverage of $500,000 at a premium rate, which I think is cheaper than what most people pay for phone bills nowadays.

Many tied agents cannot even access most of the better solutions. But that is no excuse, as they can always do what I did, and leave their agencies. However, who would want to give up thousands of dollars in recurring income to earn a pittance selling ethical solutions? Those who do join financial advisory firms do so because they can now recommend products that give more attractive commissions.

 

By guest contributor Seth Wee, an Independent Financial Adviser representative who blogs at Seth’s Blog on Finance.

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{ 2 comments… read them below or add one }

Elvin March 24, 2013 at 5:18 pm

I’m no expert, but perhaps through observation and from discussions from friends and networks, this is just my 2 cents worth.

First, one must understand where the supply of the agents come from. Do they come from a finance background? Are the agents planning or taking additional steps to continuously learn and improve their knowledge of the industry and the products, as well as then being objective to provide the necessary solutions tailored to their clients’ needs and affordability? Are they held accountable for the standards of the industry? Are they getting enough financial literacy training (instead of sales and marketing training, motivational training)? Benchmarks should be raised, in order to groom the best.

One way is to encourage agents to gun for at least a professional certification which is recognised and have a code of ethics to follow through (eg. CPA, CFA, CFP, ChFC, CLU etc). After all, agents aren’t supposed to be salesmen, but consultants. They have the implicit trust of carrying out their conduct and business ethically, hence these qualifications should be necessary to drill into them a solid financial foundation, fundamentals as well as bring to their awareness strict standards which is practiced by the industry in other countries.

Then comes their purpose and motive of joining the industry. Most people I know have heard and have seen from their friends or have been led to believe (through misrep, misleading distorted facts) that this career is for everyone who wants to get rich, and pronto. All that is required of them is to sell products, through whatever marketing gimmick / technique (eg. emotional based selling, hard selling, now they have coined a new term “Heart selling” which in a pretty description, is still emotional based selling, other techniques include pestering, confrontational and aggressive product pushing etc.)

In this case as above, it’s as if any salesman can do the job. Why would the agents care if they could get a huge commission from the product sales, yet know nothing about basics such as capital asset pricing model or how ILPs are managed? The commission from the products is also much much more than selling any other FMCG.

An example, some agents sell in this way, “I have tonnes of clients under me. Why did they choose me? There must be something unique about my service that’s why they choose to stick with me. They are even coming down from China / Korea / Japan to sign a policy.” But when you ask them, so how was the performance of the fund the last 10 years or why should I invest so much into equity in a time of uncertainty and economic instability? They start their deviation techniques and fail to provide any hint of knowledge on the product. Why is this so?

I’m pretty sure there are agents who fall into the category above, and one may wonder, so how come these agents still can manifest and carry on their conduct in this way? The sad truth, but very real reason, are the managers or directors above them. Most of them, from the 1960′s till 2000′s, who have stayed on in this line, were the hard sellers and pushers (read: Top Performers) during their time.

During the period from 1960′s till 2000′s, the MAS regulations were not very strict and there was practically little / no enforcement. So you can reasonably expect malpractice and all sorts of unethical conduct to fester in the industry, so much as to even become the yardstick for success. People were gunning for Million Dollar Round Tables, Top of the Tables and all possible accolades of sales recognition.

The question is (tongue in cheek): So what if you get the top sales, but the clients under you are fleeced out of their hard earned income, only to realise that the products pushed to them were insufficient, or have expired, or they were neglected soon after they signed along the dotted line? Or even worse, products with participating components eventually were reduced to zero, and the savings were eroded after 10-20 years.

Now the very same Star / Top Performers of yester-years seem to continue to cascade down their mantra of success. They continue to teach and mentor their subordinates the same way they attained their success. Some don’t explicitly teach their subordinates or associates how to advice responsibly, they simply just mention, “I want to see you go up the stage to be recognised for this award. You need to acquire S$250k of business.”

When the industry reputation has been badly damaged, tainted and tarnished, the regulators should seek to flush out all the bad eggs / most of the bad eggs as much as possible. Why should they care if these people lose their jobs due to malpractice or incompetence? Rules are rules and rules should be carefully construed for the better conduct of professionals, FAs included. If money was so important that rules have to be bent, it will undermine the fundamentals of the profession which in turn makes the industry dodgy, unethical and profit driven. If anything, standards need to be raised.

Is your success being recognised as being a responsible consultant who has provided good advice and introduced products specific to your client at every stage of his life? Or are you deemed successful for helping your agency, insurer, FA firm hit targets of millions of dollars in the shortest possible time?

It’s common sense that to be good and skillful in one’s profession, one needs to learn and practice, which takes time. This will definitely take time and it is painstaking. It’s really hard work and determination, as opposed to closing deals in an hour like playing speed chess.

If a person wants to succeed in this industry, does he want to make it a career and be established, or just earn as much as possible, and then hop to a next better option (like property), or open his own agency (like a business), recruit as many people (who can hard-sell) and then reap profits like it’s his / her raison d’etre?

This should be the starting point for every agent before considering stepping into the industry. Those in the industry should also reflect if they are a slave to money, or the master of money.

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MoneyMatters.sg April 12, 2013 at 11:20 pm

Great comment thanks for sharing Elvin!

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