by Darrin Franks
You can feed in precisely what is required to draw out results that suit your purposes
A critical part of soft analysis is to keep up with and understand an insurer's philosophical process.
What do advisers have a responsibility to consider when making policy recommendations to clients? It's a question I've been pondering lately: what we've come to see over the past six months, as we have refreshed our core stable of products, is that advisers - generally speaking - are giving too much weight to the calls made by product ratings houses.
Why is this problematic? Well, simply put, because it can diminish the value of advice and it does not shift the responsibility for the product recommendations. What credible criteria should advisers use in evaluation of these trading partners they will entrust their clients' lives and lifestyles with?
Making product ratings-driven calculations in isolation - which can be very subjective in their approach - is to fail in the job of proper due diligence on your trading partner. Product ratings is a game - the process is open to manipulation in that in some instances you can plug in certain criteria to get specific results. That is, you can feed in precisely what is required to draw out results that suit your purposes. It's not hard to see how this may be abused.
Furthermore, the process also depends in part on the "analyst's" interpretation of policy wording. It has happened that the change of a single word has caused a product's rating to be moved from B to A - yet the company's philosophical approach to that product, and indeed the product itself, have not changed.
In relation to advisers, the problem with ratings is that some advisers (and this is where the sense of responsibility felt by the individual comes into play) may choose to defer or offload responsibility for product selection based purely on the decisions of ratings houses. The flaw in such a strategy is that a company's rating is only one of several elements that need to be considered when making recommendations to a customer.
As I see it, the essence of product recommendations and where ratings houses land in the process is in hard analysis. Some of this can be captured in ratings houses' assessments of product, but then there's appropriate financial information about organisations and how they operate. Recently I have heard advisers openly discuss company capitalisation and perceived company strategy in the medium term.
For example, one positive result of the past year's upheaval is that for the first time, the New Zealand insurance industry has become more transparent, specifically in terms of the reinsurance relationships that underpin the business of insurance companies in this country.
To an unprecedented degree, advisers are asking insurers about their reinsurers, the arrangements between the parties, what skin each player has in the game. This is part of the information pool on which advisers should base their recommendations, because such arrangements will influence the decisions insurers make about assessment of risk among policyholders.
Indeed, risk is central to the insurer-reinsurer relationship. How much risk is borne by each party, and what influences the decision-making criteria under which each accepts risk? Who makes which rules? On what issues does the insurer have to answer to the reinsurer? If it is limited, that may not always be good. But not enough of these conversations are filtering into product and company recommendations by advisers.
Soft analysis is different. This focuses on the customer experience at each stage of the process, from application to underwriting to claim. A critical part of soft analysis is to keep up with and understand an insurer's philosophical process. Who are the leaders (without being Guru centric about it), and how are claims handled? What is the claims philosophy: if it's sticky, who makes the ultimate decision? Does it default to general claims staff, or will it be resolved by senior executives?
Keeping abreast of this is not only good practice, it's an opportunity for an adviser to demonstrate further what value they bring to the table, by showing clients precisely what they could expect as a customer of a given company.
Advisers have a greater responsibility than some are exhibiting, and though many are applying common sense and thorough research principles, the industry needs to open up still further, and encourage more dialogue.
In the end, the burden of responsibility lies with all parties described - but the natural dependence of the consumer on the adviser makes the latter the fulcrum in the equation. Advisers must know the companies they are trading with and what is behind them. Product knowledge is only the beginning.
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