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Vero survey shows small businesses
Vero survey shows small businesses are keen for insurance advice following Covid-19
New research released by Vero Insurance this week shows nearly two thirds of New Zealand’s small and medium enterprise owners and decision makers (SMEs) want insurance advice following the Covid-19 crisis.
Most wanted advice on how their policy might respond at times like this. SMEs also wanted to know what other types of insurance would benefit their business (18%), and how to defer or adjust insurance premium payments (17%).
The survey shows 85% of SMEs have experienced a decline in revenue following Covid-19 with 53% reporting their revenues have shrunk by half or more.
Vero Executive General Manager Mark Wilkshire says, “There’s never been a better time for SMEs to use a professional insurance broker to get the right advice and support across a range of topics, including financial support options that might be available to them.”
The report shows that 57% of SMEs currently buy their insurance through a broker most or all of the time, while only 29% buy all their insurance directly.
Mr Wilkshire says Vero’s SME Index is designed to provide brokers with up-to-date insights about small business, enabling them to offer more value to their customers.
“We’re in an unprecedented situation and many SMEs are looking for assistance, but a third don’t access the advice and support that a broker could provide,” says Wilkshire. “We’d like to see more SMEs taking advantage of that expertise to help them with decision-making around their business insurance.”
Another survey previously released by Vero showed that around 30% of SMEs were considering making changes to their business insurance.
Along with insurance advice, Wilkshire says the SME Index also highlights risk advice as a growing area of focus from small businesses.
“Covid-19 has changed the risk landscape significantly. 79% of New Zealand businesses report that they are making changes to their businesses
Impact of COVID-19 pandemic on SME revenues
12% 3% 11%
No impact Declined by 25% - 49%
21%
Increased Declined by 50% or more
53%
Declined by 1 - 24%
Applied for the NZ Govt. wage subsidy to pay their employees Reduced costs
Moved to working from home / remote working
Closed the business temporarily
Reduced staff hours Created or refreshed their businesses online presence (i.e. website, online store) Changed the business focus to align with customer needs Decreased marketing activity
Increased marketing activity
Stood staff down Made staff redundant
44%
33%
28%
24%
17%
15%
12%
10%
6%
5%
1%
as a result of the pandemic.
“Changes like temporarily closing your premises, remote work and adjusting staff levels all have an impact on the risk profile of a busines,s and there is considerable scope for SMEs to connect with insurance brokers for support with risk analysis and insurance decision-making.”
Wilkshire said that Vero will soon be releasing a suite of risk management tools to help brokers and SMEs work together to understand a business’ risk profile.
“SMEs are really looking for support, not just on keeping a tight rein on the value and cost of their insurance, but on understanding what changes they could make to minimise the risk to their businesses, outside of insurance.”
Wilkshire says that Vero has made $10 million of hardship fund available that its SME customers can access to help them through the Covid crisis, and encouraged Vero customers to reach out to their brokers if they needed financial assistance. SURVEY FINDINGS: • 64% of SMEs wanted insurance advice in regard to the current market. • More than half of the businesses surveyed said their revenue had declined by 50% or more following Covid-19. • 79% of SMEs reported making changes to their business as a result of the pandemic. • 80% of SMEs think that it is important for brokers to assess their risk profile and recommend insurance cover accordingly. • 1 in 4 direct insurance buyers say that understanding the risks facing their business is difficult. • 28% of SMEs are considering making changes to their insurance as a result of the pandemic, and 50% of these would like advice.
FINANCIAL ADVICE DISCLOSURE ISSUES FOR INSURANCE BROKERS
By Crossley Gates
On June 22, the Governor-General made by Order in Council the Financial Markets Conduct (Regulated Financial Advice Disclosure) Amendment Regulations 2020.
They require financial advisers (including insurance brokers/advisers) to disclose certain information when providing regulated financial advice to retail clients.
The regulations require disclosure of information in four separate circumstances:
Circumstance 1: Information disclosed on the financial adviser’s internet site at all times,
Circumstance 2: Information disclosed when the financial adviser knows the nature and scope of the advice sought and reasonably expects to give the advice,
Circumstance 3: Information disclosed when the adviser gives the advice,
Circumstance 4: Information relating to a complaint received.
Note that the disclosure required at Circumstance 3 can be given earlier and at the same time as the disclosure at Circumstance 2.
All information must:
• Be presented in a clear, concise, and effective manner, and • If it is presented with other information, be given prominence, and • If it is presented in writing, be in a format, font, and type size that is easily readable, and • Be made available or given free of charge.
The information to be disclosed in Circumstances 1 to 3 above
includes information about the following three matters: Fees, expenses, or other amounts payable, conflict of interest, commission or other incentive.
We expect three matters will be of greatest interest to the insurance industry: Fees, expenses or other amounts payable.
In relation to Circumstance 1, if the client may or will have to pay any fees, expenses or other amounts to the Financial Advice Provider (FAP) or to another person connected with the giving of the advice, the FAP must give a brief explanation of when, or in what circumstances, those amounts may or will become payable.
In relation to Circumstance 2, if the client may or will have to pay any fees, expenses or other amounts to the FAP, financial adviser (FA), or another person connected with the giving of the advice, the FA must: • Give a brief explanation of when, or in what circumstances, the amounts may or will become payable, and • Disclose the amount payable, or if not known at this point, give a brief explanation of how the amount will be determined and if practicable, an estimate, and • Give a brief explanation of the terms of payment, if known at this point.
In relation to Circumstance 3, this requires the same disclosure as in Circumstance 2 above (except most references to ‘brief’ are removed), but only to the extent the client does not already know it after receiving the disclosure required by Circumstance 2.
We note the regulations separate out these monetary payments from commission or other incentive payments. We suspect this was a
deliberate policy decision by the government to stop financial advisers bundling fees and commissions together into one lump sum.They must be stated separately.
The regulations do not specially define the words “fees, expenses or other amounts payable”, so they will have their ordinary dictionary meanings.
CONFLICT OF INTEREST AND COMMISSION OR OTHER INCENTIVE.
We deal with these together because they overlap. Both are specially defined as follows:
A conflict of interest, in relation to advice, means any interest of [the person giving the advice], [the FAP], or another person connected with the giving of the advice that a reasonable client would expect to, or to be likely to, materially influence the advice given by [that person giving the advice].
A commission or other incentive is a commission, benefit, or other incentive (whether monetary or non-monetary and whether direct or indirect)— (a) that is given to [the person giving the advice], [the FAP], or another person connected with the giving of the advice as a consequence of [the person] giving the advice or the client acting on the advice (for example, by acquiring a financial advice product); and (b) that a reasonable client would expect to, or to be likely to, materially influence the advice given by [that person giving the advice].
Both definitions only apply if in relation to the advice given, the reasonable client would expect to be, or be likely to be, materially influenced by the conflicting interest or the payment of the commission.
How do you determine the expectations of a reasonable client? Effectively, the judge does, based on common sense and his or her own previous experience as a practising lawyer.
How do you determine whether the influence exerted is material? The regulations do not specifically define materially, so its ordinary dictionary meaning applies, which is: “to an important degree; considerably”.
The word considerably is defined as: to a noteworthy or marked extent; much; noticeably; substantially; amply.
This gives some guidance on the degree of influence required but it is hard to know where to draw any particular line. As we will see below, the examples in the regulations may give a hint.
In theory, the definitions are independent of each other. In other words, it is technically possible to have a commission or other incentive (as defined) that does not amount to a conflict of interest (as defined) because the materiality test applies to one, but not the other.
However, as we will see, the language used in the regulations seems to imply that if the test of material influence applies to one, it will likely apply to the other one too.
In relation to Circumstance 1, the following must be disclosed:
Conflicts of interest and commissions or other incentives (g) if any conflict of interest (other than a commission or other incentive) currently exists or is likely to arise in the future in relation to advice given to [the FAP’s] clients,- (i) a brief description of the nature of each conflict of interest; and (ii) a brief explanation of the steps that have been or will be taken to manage each conflict of interest: (h) if any commission or other incentive will or may be given in relation to advice given to [the FAP’s] clients,— (i) a brief explanation of when, or in what circumstances, they will or may be given; and (ii) a brief explanation of the steps that have been or will be taken to manage the conflicts of interest:
What is interesting about this drafting is the wording implies that a commission is a conflict of interest, and that all commissions create a conflict of interest.
In relation to Circumstance 2, the equivalent of (h) above is expanded as follows: (b) if any commission or other incentive will or may be given in relation to the advice the client is seeking or given, for each commission or other incentive, a brief explanation or description of the following,- (i) when, or the circumstances in which it will or may be given; (ii) who it would be given by and to whom: (iii) its amount or value (or how that would be determined); (iv) the steps that have been or will be taken to manage the conflicts of interest
An example is stated as says:
EXAMPLE
Connor phones Ari, an insurance adviser, to ask about insurance on his home loan.
Ari’s explanation might be: “We receive commissions from the relevant insurance company if you take out insurance following our advice. The commissions are between 7% and 12% of the first year’s premiums of your policy—the amount depends on which insurance company and which insurance policy you choose. However, we follow an advice process that ensures our recommendations are made on the basis of your goals and circumstances.”
The example gives a clear signal that a commission as low as 7% is caught by both definitions.
The example gives some guidance about the steps required by disclosure (iv) above. The example refers to following an “advice process”. We speculate this envisages a compulsory internal instruction to all relevant staff that they must ignore the level of commission offered by one product provider over another when making a recommendation to a client.
In relation to Circumstance 3, this requires similar disclosure to that required in Circumstance 2 above, but only to the extent the client does not already know it after receiving the disclosure required by Circumstance 2.
WE DRAW THE FOLLOWING PROVISIONAL CONCLUSIONS:
Brokers must disclose any fees separately from commissions.
The regulations catch a commission of 7%. Does this mean they catch any commission at any level? In other words, there is no upper safe harbour figure?
The steps required to manage receipt of a commission appear to be an instruction to staff to ignore the level of it provided by product providers when making a recommendation to a client.
Crossley Gates is a partner at Keegan Alexander. Email: cgates@keegan.co.nz Direct Dial: (09) 308 1809
