The regulation of pure protection and general insurance sales from January 2005 is not simply going to affect the process of giving information and advice to customers, it is going to materially affect the way most advisers think.
Selling insurance within a truly regulated environment will in part be about presenting the customer with the right information at the right time and in the right sequence, all the time creating an auditable trail.
However, it should also make us all think quite deeply about the risks we are prepared to take and the rewards we expect for advising clients on the insurance products they should buy and why. This in turn is going to affect the range of products and number of providers that advisers are prepared to consider offering to their clients.
Being a regulated adviser has to make sound commercial sense. In simple terms, you have to be able to earn enough money to reach or maintain your required standard of living. The new ingredient that statutory regulation of advisers brings with it is that in addition to looking at whether the income generated on a £ per hour of effort is worth it, we must also analyse the cost/benefit of carrying the additional “advice risk”. By this I mean the risk that despite your processes, skill and effort, a future review of your advice could result in others judging it had been inappropriate or in anyway incomplete.
Properly quantifying the advice risk today is almost impossible because we do not yet have sufficient experience of how the Ombudsman will asses customer complaints about mortgage and insurance brokers under the new regime. Most insurance contracts may be categorised as low risk with regard to the potential for customer detriment but they are pretty high-risk areas for an adviser/broker to be involved in, particularly if you are going to be offering more than one contract through a panel or even a whole-of-market proposition.
Imagine this. You have a panel approach to household insurance and, as part of a mortgage transaction, you recommend that a customer takes a buildings and contents insurance policy with ABC Company. The policy is £1.50 a month cheaper than the number two company on your list and the policies offer broadly similar cover. The customer later makes a claim for three stolen mountain bikes but ABC's policy only covers one bike per household.
The customer finds out that the alternative policy which you could have recommended would have paid out for all three. What is he going to do now? Will he complain that your fact-find was insufficient? Will he suggest that in conversation you told him both policies offered the same cover? If he does complain and you refute it, what judgement will the FOS reach?
The commission for advising on and arranging typical household insurance contracts is around 15-25 per cent of the monthly premium so for an average £35 premium, the income for carrying the advice risk on every sale is £5.25-£8.75 per month. Is it worth it?
Will the fear of the above happening mean that instead of offering a brokered solution, you will reduce the advice risk you are carrying by selling the products of only one company? Or will you choose to not even offer the product at all because it fails to pass your remuneration v risk assessment test? Makes you think, doesn't it!
For big general insurance brokers which sell nothing else, the risks of recommending such products from a panel is probably going to be something they as specialists just have to accept and try to manage as best they can. For mortgage brokers which are trying to turn customers into clients by offering a range of products around the mortgage event, the answer is probably quite different.
For the loan broker, choosing to run with just one household insurer can leave you exposed to increased competitive issues because individual insurers have different methods of pricing. As no single insurer offers truly competitive terms across the UK, tieing to one insurance company post-regulation cannot be a sustainable answer.
For me, the answer for the mortgage broker has to be persuading insurers with different attitudes to pricing to each quote for an identical range of cover and benefits. This can provide good UK coverage on a best quote provided basis while massively reducing the advice risk. Perhaps you have thought of a better solution? If so, please email me at email@example.com.
Richard Verdin is sales and marketing director of Lifequote