INSURANCE

INSURANCE By Steve Wright

COVER REPLACEMENT

Assessing exclusions and premium loadings is a vital part of any insurance adviser’s job writes Steve Wright .

You recommend replacing a

client’s existing policy with one with better features and benefits but the underwriting comes up with an exclusion or a premium loading, does this mean moving the client is wrong…? Not necessarily… this is where good advisers really become worth their salt!

An underwriting exclusion should be compared with the exclusions the client currently has, which are there even if initial cover was issued with no special terms! What do I mean? Usually existing cover has many built-in exclusions. Exclusions can be specifically detailed – under the exclusions clauses; or simply exist due to the lack of a benefit that will be covered under the proposed new policy. Let’s consider some examples… ➤ Your client’s new trauma cover application comes back with an exclusion under the TPD benefit for a dodgy knee. The new trauma cover includes built-in ‘own occupation’ TPD. If the clients’ existing trauma cover does not include ‘own occupation’ TPD as a covered condition, the new exclusion means nothing – no claim for disability caused by knee issues would have been covered under the existing policy! ➤ Your client’s Partners Life trauma cover application comes back with an exclusion under TPD benefit for the dodgy knee. However, the client’s existing cover has TPD. Is this the end of it? Probably not, it depends on the likelihood that the dodgy knee (which might already be covered by ACC)

would ever affect the client’s ability to work, while remembering that every condition covered by the new policy but not their existing one, is in effect an existing exclusion on their existing policy also. Aneurysm, Hydrocephalus, Lupus, Benign Tumour of the Spine, Pneumonectomy, to mention some for example, are conditions not universally covered by trauma policies.

Just as every trauma cover condition not covered by the existing policy is an exclusion, deficiencies in the existing condition definitions relative to the new policy trauma condition definitions are an existing exclusion. Good examples of which are, early stage cancers, as I pointed out in the previous two issues of TMM. Of particular importance is breast cancer requiring breast conserving surgery, not a full mastectomy – quite an important claim occurrence!

It’s not just an issue for trauma insurance though, let’s say your clients’ new medical insurance application comes back with an exclusion for any number of the following conditions… ➤ Allergies ➤ Pre-existing conditions ➤ Weight loss surgery, Breast reduction surgery etc.

Their current medical policy doesn’t cover these – they are specifically excluded. The new exclusion means nothing – condition not covered! Restricted coverage for nonPHARMAC funded drugs is a particularly very large and risky ‘exclusion’ because if a drug is not funded the client cannot fall back on the public health system because it won’t be funded there either.

Also remember, some medical insurance policies can be amended unilaterally by the insurer, usually on as little as thirty days’ notice. This means your client has no certainty – ‘new’ exclusions can suddenly arise!

As is the case with all client existing products, the existing product weakness or deficiency in cover is effectively an exclusion. Good advisers will compare all these inherent existing exclusions with any new underwritten exclusion and advise the client.

Often underwritten exclusions are existing problems which might be well managed and unlikely to result in a claim or the unexpected! This may be a risk client can afford to take! An analysis must be made about which exclusion is least risky for the client? Leaving them where they are may mean less cover and less likelihood of a claim even after accepting the new underwritten exclusion.

What if the underwriting delivers a loading? Loadings are good news, usually better than exclusions. Loadings mean the client gets cover, cover they really need because they are at higher risk. Clients are unlikely to complain about the loading at claim time but they will complain if their condition is not covered.

So if the client is already covered at standard terms why should they accept the loading? Well simply put, the new policy premium with a loading may yet represent better value for the client. Let’s consider an example… ➤ The client is a 40-year-old male nonsmoker. The client has existing agreed value income protection, the ‘good’ version with the optional add-on benefits ($5000 per month, to age 65 with a four week wait). Their premium is $209 per month. The ‘same’ income cover costs $155 with the new company, but… underwriting requires a 50% loading, meaning the premium will be $232. Do you just leave the client where they are?

❝A policy with better benefits will represent good value for money if the clients’ existing cover does not include them.❞

The existing premium is more expensive than the new company’s standard premium, so the loading is really only 11% and if the income cover is just part of a bigger package of covers the new policy may yet be less expensive. In any case, if the premium structure is rate for age (stepped) then who knows what the premiums will be after the first year anyway! In this case is the loading significant?

The new policy’s many additional benefits may well be worth the extra premium. A policy with better benefits will represent

good value for money if the clients’ existing cover does not include them. There are several valuable benefits that are not universally included in income protection policies, even with their ‘up-grade’ optional benefits, for example…critical illness benefit, ‘own occupation’ additional lump -sum paid on TPD, specific injury benefit and so on. The new policy may also offer a TPD booster option (make sure its own occupation TPD) typically increasing monthly benefits by a third if totally and permanently disabled.

This can efficiently deliver big TPD benefits at tiny cost, allowing significant savings on TPD benefits. This may allow clients to reduce existing separate, now redundant, TPD cover the client might have. For example, our proposed client (40 year old male nonsmoker, Occupation class 2, with $5,000 to age 65 and a 4 week wait) will pay just $13.93 (with the loading) per month for what is effectively…$600,000 TPD Cover (0% indexing), or, better still… $1, 3 million (if you select a minimum indexing option – an option which might cost the client nothing to add!).

Separate standalone TPD cover of $1.3 million without loading would cost this client around $95 per month! That’s more than the 50% loading and more than a third of their total proposed new income cover premium. Great efficiency and value for money!

There are other matters to consider though, the new income cover benefits might allow a longer waiting period.

Many income cover policies pay monthly benefits in advance, not arrears so they could be paid benefits sooner. Some policies will pay the specific injury and critical illness benefits without the waiting period applying!

These two benefits, combined with Accidents – ACC generally has a two week wait – represent a large number of disability claims.

These benefits might make an 8 week wait instead of a 4 week wait much more tolerable and affordable (The premium for our proposed client with an 8 week wait (plus loading) drops to $185 per month.) This is less than the client is currently paying even with a loading, and they arguably get much better cover!

Great value for money cover! Isn’t that why they use you? ✚

Steve Wright is General Manager Product at Partners Life.

NON-BANK LENDERS

By Miriam Bell

Thinking outside the box

The tightening up of bank lending means times are heady for nonbank lenders as borrowers’ look for alternatives to the mainstream. This is part one of a series on non-bank lenders.

We all know that the

mainstream banks have tightened up on their lending and become more selective about who they will finance, making life much harder for those seeking a mortgage.

In this growing vacum the non-bank sector is thriving and presents a very viable financing option for mortgage advisers to help their clients.

The return of Australian non-bank lender, Bluestone Mortgages, to the New Zealand market shows how the sector is widening to meet the real demand out there.

RESIMAC Home Loans is one of the leading non-bank mortgage lenders and is about to celebrate its fifth year in business in New Zealand.

RESIMAC general manager mortgages Adrienne Church says non-banks offer a good alternative for advisers to use because they offer different products.

“That creates opportunities for borrowers to get lending that they would not otherwise be able to.We are not as cheap as the banks but, now the banks are enforcing increasingly stringent lending criteria, our rates are pretty attractive.”

RESIMAC has standard prime products, but a key strength is its more specialised products on offer which can help people who have adverse credit ratings. There are also low doc products which are aimed at self-employed people who may not have the level of documentation the banks want.

Church says they provide options for people. “As the mainstream lending environment gets tougher for investors and others, the nonbanks provide people with the opportunity to borrow, to get finance that they would not otherwise have.”

“For us, the volume of loan applications that we are receiving and processing is going up month on month, and has been for the past nine months.”

While RESIMAC is one of the bigger and higher profile lenders, there are also smaller, more specialist players in the market like Core Finance.

It specialises in second-mortgage finance and mainly does bridging finance, with six or 12 months interest-only terms. The loans are then taken back to the bank by the adviser or refinanced.

Core Finance director, Grant Donoghue, says they have a strong appetite for lending on property and these days there is a lot more business for lenders like them in the non-bank space.

“I absolutely expect demand to increase. Finance is the second-oldest profession in the world. People need to get money. If they can't get it from banks they have to look elsewhere and they are looking at non-banks.”

Avanti Finance chief executive Mark Mountcastle says non-bank lenders offer a wide variety of options for mortgage advisers. Often if they can’t do the deal they will refer advisers to another lender who may be able to provide a solution.

He says the main bank credit rationing won’t change any time soon and that means there’s lots of interest in serving this space. “More companies are coming on to the market to provide products that fill the gap and that means more flexibility for borrowers in terms of what is on offer.” ✚

TMM will be providing advisers with a comprehensive guide to the non-bank sector in a future issue of the magazine.