I always thought selling insurance to people through their employers was the flimsiest of propositions – why would anyone talk to you about insurance in the work café, with their mates hanging around for the ‘convenience’ of paying for the same thing they can buy in the plush, private, offices of the bank for the same price?

But in many markets, the UK, the US, to name just two, employer-facilitated (voluntary group) insurance is a big market. So why does it work?

For employees it works because you reach them at one of the moments when they are thinking about financial matters more seriously than they usually do: at the time when they are hired, just after a raise, or when the payroll officer suggests to them that it is a good idea. That immediately puts them in a better frame of mind to discuss insurance. Placing an insurance discussion in the same context as their salary payment immediately helps them to remember what’s at stake – their ability to earn. They can’t earn if they are dead, disabled, or sick for too long – so the ground is prepared. They like the idea of paying out of salary because it means ‘don’t see it, so don’t miss it.’

For employers there are some good financial reasons why they should prepare the ground for you. Southern Cross got some research done by TNS a little while ago which showed that time off was reduced when employees have private medical insurance – why? Because they do not wait to seek treatment, and with many conditions early intervention is the key. Then there is the matter of a disabled employee – often the employer faces strong moral pressure to keep a job open for a member of staff who is disabled without knowing when, or even whether, they will return. If employees have good personal cover they won’t need to lean on the employer – who can then make a straightforward business decision when sick-leave runs out, and do the right thing for the business, because years before they did the right thing by encouraging the employee to take disability insurance.

It works best of all if the proprietor, general manager, or team leader, stands up and introduces your initial presentation. Being older and having a little more money they say that they have disability insurance, medical cover, and some life insurance and every sensible person should do the same. If you are exceptionally lucky they may have some personal experience of its value from family, friends, or employees. With the HR team you’ve negotiated a 15 minute appointment in work time with each employee. You have limited objectives – just to sell the concept and fact-find sufficient information to make a more detailed presentation in non-work time to the employee and their spouse or partner.

Too many advisers remain fixated on the outmoded income or growth bias when constructing portfolios.

This is short-sighted and leaves the client losing out on returns they could achieve in many economic cycles, as well as living less comfortably than they could.

There is only one optimal way to construct a portfolio – to maximise Total Returns (within a given risk profile).

Then all one needs to do is manage drawings as an annuity, keeping the portfolio in line with future financial planning.

The objective is to put the investor’s needs first.

The individual’s cost-of-living does not change with the fluctuations of a portfolio’s ability to produce income, and nor should it.

Those still trying to construct a portfolio looking for income investments to match clients’ cost-of-living are doing their clients a disservice.

They may also be subjecting the client to more taxes than is necessary.

Part of this misguided mode of constructing portfolios comes from old trusts that were structured with ‘Income’ benefits to surviving partners and residual ‘Capital’ to other beneficiaries.

We all know the court cases of this misguided approach when trustees focused excessively on the surviving partner not taking sufficient account of capital beneficiaries’ rights – and hence not growing capital to even modestly keep pace with inflation.
‘Income’ and ‘Capital’ beneficiaries’ interests must be, and can be balanced.

Another reason for some advisers not pursuing total returns may be that they do not manage the cash component of their clients’ portfolios very well. Cash is an asset class.

Beyond receiving interest, coupons, dividends and distribution, a cash component to a portfolio is essential to facilitate rebalancing and re-investing.

People giving free advice in the mainstream media have recently bewailed a perceived ‘gap’ exists in New Zealand with few annuity funds available for people to utilise when they get to the age they can pull money out of their KiwiSaver scheme savings.

A balanced fund is just such a scheme and can readily be utilised to meet cashing-up KiwiSaver’s required expenditure in retirement.

Also consider, that annuities (and I am sure there will be a plethora of them in New Zealand shortly as the insurance companies look to make a buck) consist of an underlying pool akin to balanced fund, one from which the insurance company pays out the regular annuity and pockets the remaining portfolio for itself as the profit.

Of course the annuity does spread the risk that an investor will outlive drawings from their own portfolio, by packaging their odds with another poor devil who dies early and misses out on both income and capital.

But this can be countered by really good financial advice, calculating and fostering sufficient client savings (portfolio) to outlast their lifetime of drawings.

Investors with a good level of savings will be more efficiently served to go for the self managed balance portfolio or fund approach.

A warning – don’t get glassy-eyed when the avaricious insurance companies come to town with their glossily packaged, ‘new’ annuity products.

You can be sure their actuaries will have worked out a handsome profit. Doing what is best for clients may be managing the portfolio for Total Returns, keeping residual capital for the client’s estate. Added value for your clients is a fee well-earned.

Whether it be devastation on a grand scale like Canterbury’s earthquakes, or localised events like the tornadoes that have hit Albany, Northland, South Auckland and the Kapiti Coast in recent weeks, the costs of cleaning up and replacement have been widely discussed.

The reluctance by international reinsurers to cover further risk in New Zealand and the need for central government to insure Christchurch City and Waimakariri District councils is understandable.

What has been less exposed is the parallel lessons to be learnt about the risks people face.

Life risks are very different from material risks, but statistically it seems that we place more emphasis on possessions than ourselves. Parents are quick to teach their teenagers about the merits of insuring their cars, but less agile to explain to their children that once they are responsible for more than themselves, they need to measure and mitigate those risks too.

A family needs protection just as much as the car and the household contents. A business owner, especially those employing staff, needs protection as well.

Many life risks companies have worked hard in support of the real family treasure and paid where they didn’t need to in the interests of doing the right thing in the face of an extraordinary series of events.

But what is needed is more risk management education. The Government’s financial summit on August 11, chaired by Sir John Anderson, is looking at responsible lending, debt management, credit advertising, financial literacy and dispute resolution.

We need to ensure that risk management when it comes to the lives of New Zealand’s most valuable resource – people – is included in the mix.

New Zealand would have an untapped source of energy if we had the ability to harness the hot air that’s permeating the insurance industry. That’s if the comments arising from the article “Changing channels” (Good Returns June 3) are anything to go by.

It couldn’t be labelled “clean energy” though, because the public scrapping generating it is masking a dirty little war for territory that has engaged the industry for far too long.

Nor could it be called sustainable, because the spectators, aka consumers, are going to wonder if their needs are really being managed or if it is more about their adviser’s needs and wants.

The sector’s unabated introspection is getting in the way of delivering better service to consumers.  It’s time for the sector to reconsider its reason for being. It needs to be collaborative in terms of its value proposition for people.

Don’t count on regulation to be the panacea of the sector’s woes, or the public’s desire for improved confidence.

Competitors first should take a customer focused attitude and then their differentiated offerings to the marketplace. Attitude is everything. It’s time the hot air bubbles burst.

The recent focus on Pharmac’s place in the progress of trade talks with the United States has been more than a bit myopic.

It has centred on powerful and politically connected US pharmaceutical companies being a real threat to the longevity of our own ‘dedicated minder of the New Zealand public purse’.

Pharmac will no doubt relish repeating some of the supportive comments from previously critical quarters in its annual report.

The irony aside, the debate about whether Pharmac should be a victim of change so New Zealand can become an acceptable part of the Trans-Pacific Partnership – a free trade agreement between Asian and Pacific countries – needs to have wider scope. If the National coalition government allows its negotiating team to tinker at the edges of the Pharmac structure, it must be with clear understanding of the domino effect.

Take health insurance for example. Concessions to the US pharmaceutical lobby are generally accepted to mean the cost of US drugs to New Zealand will go up, ultimately pushing up insurance premiums and altering payouts.

Alternatively, India’s generics may get a bigger look in. You can be sure they are standing by, ready.

New Zealand’s health insurance industry needs to speak up and get the calculators out.

There is a place for regulation – an underregulated financial services industry is not in the best interest of consumers, as we have seen – but we need to be mindful of the task that is now at hand.

What is needed is true effort from insurers to make their businesses more consumer-focused. Regulation is just one element of what should be a comprehensive renaissance in this industry. When New Zealand has one of the lowest rates of insurance take-up in the OECD, that’s not just about law. And the current crisis of consumer confidence only makes it hard to increase take-up.

Clearly, we need to strive for relevance, simplicity and honesty in our relationships with customers, suppliers and partners.

Loss of trust is one of our biggest challenges, because it prevents engagement. Consumers don’t respond to the advances of organisations they don’t trust – particularly when, they can justify not making that insurance purchase.

The absence of trust puts the onus squarely back on the industry – we the insurers – to tell Kiwis why our services are necessary, and to make it easy for them.  We need to get back to the core of what our business is really about: protecting people.

This will require substantial changes in how our industry operates, and has very little to do with regulation. Rather, we need to address key problems such as churn, in which policyholders sit on an insurance merry-go-round while little is done to increase the overall number of insured. Too many people remain unprotected.

In 2011 we will tick the box marked ‘regulation’. The new challenge is consumer engagement. Sooner or later, insurers will have to get real.

Simplicity, as we become more and more connected – online all the time – has become one of the buzzwords of our age. But what those of us working in insurance often find, as we seek to develop products and services that resonate with New Zealanders, is that simplicity is nearly impossible to come by. The industry does not deliver it, and consumers struggle to find it without our help. This lack of simplicity is one of several reasons that Kiwis are one of the most disengaged populations in the OECD, when it comes to insurance.

The irony is that for most people, the fundamentals of life – and by extension what needs protecting – are very simple, as this diagram demonstrates:

The Circle of Life

It shows all the parties at risk in ‘The Circle of Life’. The business is underpinned by its key people, who are subject to general life risks – accident or illness that could leave them temporarily or permanently unable to contribute to the business.

That financial impact flows on to the owner/s of the business (often also a key person), who is responsible for the debt, both visible and invisible.

Then there are the families; the people supported by the business. What does the owner’s lifestyle cost? What about their staff’s lifestyles? Who and what is dependent on the business, and what happens if that revenue stream drops or stops?

With good advice and guidance, these questions are easily answered and the right cover supplied. The onus is on insurers to put the power back in the hands of consumers, by ensuring everyone is furnished with the knowledge they need to make good financial decisions and streamlining the requisite processes. Simple, really.

In the immediate aftermath of the catastrophic earthquake of February 22, emergency triage centres were set up for injured survivors at key points in the stricken city, among them Latimer Square, Canterbury University and the Sanitarium factory in Papanui.

As rescue workers and medical staff carried out their brave and laudable work, attention began to turn to a different kind of triage: emergency financial help for those now without homes and jobs. Over the first three days after the quake, more than 6,000 grants (not asset- or means-tested) totaling more than $1 million were made by WINZ staff to survivors in need of Civil Defence support. Social Development Minister Paula Bennett said there was no limit to the number of grants people could get for emergency expenses.

And, with Earthquake Minister Gerry Brownlee calling February 22 “one of the biggest insurance events in the world,” (130,000 claims to the EQC are expected, on top of the 181,000 claims that followed the September 4 earthquake), the government conspicuously turned its attention to the role of insurers in supporting Cantabrians.

The Prime Minister, interviewed on Newstalk ZB on February 28, made it clear that the government was not shying away from putting pressure on insurers to pay out more swiftly. He was quick to praise banks for their rapid response to customer needs, but less effusive about insurers, agreeing with Mike Hosking that when it came to matters such as key person and business continuity insurance, “the issue can be the timing of payments.”

By this time AIA New Zealand was already on record as to our process for handling claims emerging from February 22. We quickly established a Christchurch claims committee, and are processing all disaster-related claims as a matter of urgency.

In times of crisis, it is not just government, social and emergency agencies that must step up; business has as critical a role to play in the ‘first’ triage response as any other party. (Companies such as Fonterra and Air New Zealand have responded with alacrity, and Fonterra chief Andrew Ferrier has spoken eloquently about the social responsibilities of business, that exist independently of concerns for the bottom line.)

Relevance is all: this is the moment of truth for New Zealand insurers.

It is sad to report that Ralph Stewart is leaving AXA – but little surprise really.

Ralph has been at AXA for nine years now and seen the company through a lot of change. Late last year when we were asking people who they considered as being the most influential people in the industry over the past 12 months Stewart’s name came up.

The comment made was that he “moved AXA into the independent market and released the aligned advisers from their shackles.”

Stewart’s history in the financial services industry is a good tale and one based in adviser land. He started off with a long departed firm Jardine Fleming in a BDM role, worked at TOWER and moved up the ranks there. While he was there he went off to Manchester to do his MBA and ended up running AXA.

Stewart could be called an advisers’ CEO. While he is running a pretty big ship he also spent plenty of time with advisers, visiting them, talking to them and listening to what’s going on.

This is a vital skill when your business relies on advisers to sell your products.

As I say it is little surprise he is leaving when the merger takes place. A number of reasons come to mind but one is the combined AMP/AXA business has a different management culture to what AXA had.

It is going to be interesting to see how it rolls out and that it is successful.

Ralph tells me he has no plans at present but hopes to find a new role in the industry. We hope he does.

I had a little chuckle the other day. When I was in Auckland I thought it would be useful to catch up with Naomi Ballantyne and her team at Partners Life (sometimes cheekily referred to as Sovereign Mark III) to see what was happening.

The address was in Takapuna on the North Shore and it seemed (for a country lad like me) that this was near where Sovereign used to be.

Well I was more correct than I thought!

Partners Life is in a building behind where Sovereign was, but in actual fact it was a building the old company used before it moved to its rather swish new quarters up the motorway in Smales Farm.

I reckon that if you moved the cars in the allocated Partners Life carparks that it would still have Sovereign painted on the tar seal.

Talk about going full circle.