Strategic life insurance advice is the foundation upon which the future of advice has been built. But what exactly does it mean? Here’s how Craig Parker, General Manager Affinia Financial Advisers, a risk-specialist adviser group, defines it…
Life insurance advice has been under the spotlight for all the wrong reasons. The Australian Securities and Investments Commission’s (ASIC) late 2014 Review of Retail Life Insurance Advice made for stark reading, regardless of your personal view of the report’s scope and breadth.
One of the key callouts from the report was the role of ‘strategic life insurance advice’, but to date there has been no industry-accepted framework to define it accurately and specifically. The ASIC report provides a brief description as well as a checklist, but it’s essential that we get clear, very quickly on what strategic life insurance advice actually is, and then evolve our advice businesses on those foundations.
The role of risk management
Affinia defines strategic life insurance advice as advice that leads to financial protection solutions that match the specific circumstances of the client and takes account of a whole-of-life approach to risk management.
As Affinia defines it, strategic life insurance advice has a direct correlation to the globally accepted definition of risk management.
This global standard says risk management is the ‘coordinated activities to direct and control outcomes with regard to risk … (and) is fully integrated into the planning and management of an organisation (or person or entity) across all levels’.
As we see it, ‘planning’ and ‘control’ are key.
The planning and control process involves fully understanding all aspects of the entity (or client). To know their personal and business risks and needs, expenses and incomes, their goals and objectives, dependants and obligations, their investments (SMSF, pooled super, etc) and professional and personal plans.
In effect, the ‘P&L’ or ‘balance sheet’ of each client needs to be fully understood, as if they were being treated as an organisation or entity. Then an adviser can understand how to best risk-proof them, and review at regular intervals.
But to do this, an adviser needs a solid risk management framework within their practice.
Key elements of a risk management framework
This framework demonstrates an effective approach to achieve strategic life insurance advice and meets the global risk management standard:
- A diagnostic tool that is purpose built to record all of the client’s revenue and expenses, and takes into account their needs and objectives.
- A risk identification process that uncovers all the risks a client has.
- Exposure analysis that determines a financial impact amount for each identified risk.
- Strategy formulation that aims to develop a customised strategy for the client to mitigate their risks. This must include a review of assets and involve both risk retention and transfer recommendations.
- Implementation involves executing the strategy and structuring any required products to align the purpose of the strategy and duration and nature of the risks.
- Regular and ongoing audits and reviews involving updates and adjustments to test that the overall risk management plan remains relevant to the changing risks of the client/entity.
Risk management in practice: The four pillars of risk advice
For a risk professional, the risk management framework is best applied under the four pillars of risk advice, which targets client discussions around cash flow, risk, superannuation and estate planning.
- Risk – Instead of jumping to solution mode and selling insurance policies, first work with your client to understand the potential risks in their financial position and help them see the need for a robust risk management strategy to mitigate them. The solution may or may not be an insurance product.
- Cash flow – Understanding cash flow is essential to a discussion about risk, and it should go deeper than just income versus expenditure. A detailed analysis using a diagnostic tool can help you determine the funding mechanism for a client’s risk management strategy.
- Superannuation – Super is more than just an alternate funding solution for an insurance policy. Walk your client through their options, and explain the full implications of using what is effectively their retirement savings, to achieve risk mitigation.
- Estate planning – A risk management discussion isn’t complete without the inclusion of estate planning. Wealth security and the transfer of wealth is a technical field, so if it’s not your area of expertise, bring in the right specialist.
Life insurance advice is complex and highly specialised and rightly should be subject to a strategic framework
Successful implementation and the fee for advice model
The first and most obvious point to make is that strategic life insurance advice is not about product. Life insurance itself is a valuable risk management tool, but the advice process that leads to that strategy is equally (if not more) important.
Life insurance advice is complex and highly specialised and rightly should be subject to a strategic framework. But where the focus is on strategy and not on insurance you need to ensure that you’re being remunerated appropriately for your expertise and advice.
In a time of changing remuneration structures, influenced by both regulatory and consumer actions, you need to adopt a sustainable business model in order to future-proof your business and get the best outcomes for your clients. So if you haven’t already, start to carefully consider your service offering and the implications of changing remuneration structures on your practice.
While the industry evolves, risk professionals should move
At a macro level, the industry will continue to develop the funding, education and training models we operate on – and there is still a way to go. But rather than waiting for regulation to shape the future of our industry, risk professionals and advice businesses should be proactively taking steps to evolve their businesses, starting with a clear definition of strategic life insurance advice.
Craig Parker is the General Manager of Affinia Financial Advisers, a risk-specialist licensee backed by life insurer TAL.