Tuesday, 22 January 2019

What an ex-insurance agent will tell you about Insurance agents/companies

  Posted at  January 22, 2019 13 comments
Disclaimer: I am no longer an insurance agent but from my 2 years in the industry I have seen quite a bit of the ugly side of the industry. This post contains my personal opinions. They are meant to educate and not to constitute personal financial advice. For any decisions undertaken to purchase insurance policies, please do your own due diligence.

Recently, I saw an agent post a rather "click-baitish" post titled "Things Agents don't tell you about Whole-Life policies". He went on to summarise what he thought consumers should take note when buying whole-life policies. (It would be good to know what Whole life policies are and MoneySense has a good page informing us what a Whole Life policy is.)

His summary on his post read:

Bottom-line:

1) ALWAYS ASK FOR A COMPARISON
2) cost =/= coverage
3) Same name but different definition


Firstly, there are a few problems with this kind of over-simplified posts/trail of thought, so I would like to expand the discussion further:

1. Always ask for a comparison: 
I assume that this agent belongs to a group of "Independant Financial Advisors (IFA)". Usually, some of these IFA agents try to sell to consumers by telling them that they carry more products than a tied-agent (an agent who can only represent a single insurer) and therefore they are less biased. Is that really true?

My opinion: Just because they can carry a few more products and can do a comparison between the few products/ competitor products does not mean they are always impartial/ fair/ ethical. Many are still just product sellers. 

"Asking for comparisons" won't help much because the information is still stacked against the consumer unless the consumer is less lazy to do homework himself. A better suggestion might even be to ask for comparison from different agents/companies and doing that last lap yourself as a consumer so you know that you are not tricked by anyone!

NEVER TRUST ANYONE ELSE WITH YOUR OWN MONEY

If we rely on the agent for due diligence, we are at the mercy of the agent's mistakes. They may also be motivated by "promotions/incentives" for pushing certain products because there are better commissions to be earned for a particular period. There is just no way the end consumer will know about all these sweet deals behind the back. The only way one can eliminate the risk posed by an insurance agent is to do your due diligence, find a very trustworthy/reliable agent or eliminate the risk of the agent altogether. 




2. Cost =/= Coverage:
This can just be a lame excuse to up-sell you a more expensive plan than what you really need or push you extra coverage you may not need. Generally, similar insurance plans don't really differ by that much.

My opinion: I would rather you check with the insurance agent the ease of claim or claims history pertaining to similar policies that you are buying. Of course, if you are very rich, you can cover any thing you want as long as you can pay for it. But chances are, ordinary folks don't need excessive coverage. Lower cost and bang for buck should be what consumers go for. In fact, this is why the government came up with a way to do off with paying insurance agent's commissions!

Did you know? 

You can now go direct to insurance companies WITHOUT going through the agent? This is meant to benefit the consumer (who does not need advice). Times have changed. With the smart phone and a click of a button, you can easily become a consumer who does not need "advice" from an insurance agent.

In the past, if we wanted to buy stocks, we had to go through brokers. Nowadays, this middleman role is increasingly diminished because of online platforms and mobile apps that allow us to directly deal with stock brokerages without the middle man, thereby decreasing fees paid. The same can be said for the insurance industry. 


As long as one is not lazy he/she can easily find out what type of insurance cover they need from various resources online. There are also some very experienced advisors online who share information freely, for example, you can find alot of information regarding insurance on Wilfred Ling's page. Wilfred is a fee-based advisor who frequently posts about certain phenomenon and updates in the insurance industry. Fee-based advisors such as Wilfred plan for clients which sometimes do not result in purchase of financial products at all and hence have little to no conflict of interest (we shall touch more on that later on).

The government has even built a website meant to educate us on what is insurance, and what our needs, to even comparing direct purchase insurance based on our criteria. IF ONLY ONE ISN'T LAZY.


Introducing: CompareFIRST

3. Same name but different definition:
This at least is a sound and valid point made by the agent who describes certain differences in how companies define certain insurance jargons. The agent claims that differences in how the terms are worded can mean they are easier or harder to claim. (This is quite subjective)

My opinion: Again, this is subjective. I would again stress the importance of asking about claims history like how long it takes and what is the process like. Claims history is exactly the ease/difficulty of claiming. For example, I remember a certain case where a pregnant lady was not covered for a very specific pregnancy complications condition under other companies' Medishield plan but that particular condition was covered for one single company. But these are rare cases. Usually, these kind of complications might be hereditary (meaning they don't just happen). If you have family history, do check whether these are covered.

It is important to read the insurance contract and Product Summary for the exact terms of coverage and the technical jargons and clarify anything you are unsure of. Usually people fail to read them because they are unfamiliar but these plans will follow us so it makes sense not to buy anything we don't know/fully understand.

Sometimes, newer policies such as health policies tend to cover MORE conditions compared to older policies. But, older polices tend to be worded LESS specific and hence may be easier to claim. In this case, more might be less. Regarding health policies, some agents will therefore try to tell us that we should switch plans, so that we can get "More coverage". This is actually unethical and not recommended by the industry as it may be detrimental to the consumer. Try not to cancel any policy, especially health/medical insurance policies without verifying if you might be excluded certain conditions as you may not be as healthy as when you bought the old policy.



THE INSURANCE INDUSTRY's FLAW: COMMISSIONS

Now, we come to the main point. There is an inherent flaw with insurance agents in Singapore being compensated on a commission structure. This means that if they sell you a policy, they get a cut of money from your premiums. If they don't close a deal, they don't get anything. Usually an agent stop receiving commissions from us after 3 years into a whole life policy or investment linked policy. This is why they have to continually find new clients or try to sell us newer plans, or make us switch plans.

Linking back to the previous point about agents being able to make comparisons between different insurance products, I do know for a fact that many unethical agents just do product selling. And they tend to push products that give them the most commissions at that time so that it favours them. To them, it is just a win-win situation. (it is just human nature)

They may claim to compare for you, but they can certainly favour certain products that they are incentivised to push to you by claiming that comparably it is better. There is just no way for the end consumer to know anything about this and therefore the odds are stacked against the end consumer.

Of course, I'm critical of it, but I guess there are still some ethical agents out there, but let's just be honest to say. If rubber hits the road, we cannot be sure if the agent will take care of his own wallet or ours. The commission structure therefore may force our insurance agents to put their needs before our needs or even influence them to make detrimental decisions for clients.

At the end of the day, agents come and go. But we will be the ones to be "stuck" with the insurance plans for life. Therefore, I would urge us not to spare that little time and be diligent in our whole planning of finances, including insurance.

This is why as long as the insurance industry stays as a commission structure, there will always be a conflict of interest. This rings true even for agents who claim to be from "independant agencies". We should take ownership of our own insurance portfolios because there will be none to blame other then ourselves when disputes of claims arises.

Did you know? 
There is a difference between how insurers sees what a good agent is vs. how a consumer sees it. The good agent for the insurer is the one that brings in the most sales and the insurer rewards them with monetary incentives and other incentives such as paid travel trips for hitting sales quotas and targets. The good agent for the consumer is the one that takes cares of the needs of the consumer and we hope that he is ethical. Unfortunately, we cannot be sure that ethical agents won't be moved/ influenced to make decisions to maximise their own benefit at the expense of the consumer.

Indeed, there has been much criticism of how the industry's commission structure and how it has led to unethical practices such as switching or churning. (as described in article below)

On 30th November 2018, an article came out in the Straits Times:

Singapore life insurers in growing unease as MAS zooms in on agents' compensation


SINGAPORE - Singapore's financial regulator has ramped up efforts in recent weeks to look more deeply into life insurers' compensation structures for agents, triggering a sense of nervousness in the industry.

The Straits Times understands from market sources, who spoke on condition of anonymity, that senior agency leaders of Prudential - one of the major life insurance players - were roped in to help with queries from the Monetary Authority of Singapore (MAS) more than a month ago.

Separately, the MAS also paid a visit to an office linked to Aviva, one of the smaller players, although details are not clear, they added.

Prudential has declined comment while Aviva could not be reached.

Some others have been asked to furnish the regulator with information on how they compensate agents or advisers if they also have their own financial advisory arms.

The line of questioning, ST was told, is centred on whether insurers who rely on agents or advisers to distribute their products have breached any rules in their compensation structures.

"They are reviewing all the big deals that are going on and how various parties are being renumerated," one industry veteran said.

Recent developments have triggered a sense of unease in the industry, with two senior executives saying there are concerns there will be "draconian" rules dictating how insurers pay their agents or advisers.

A chief executive of a financial advisory firm told ST: "I think it's good that MAS takes proactive steps to look into this (issue)." He added that he believes MAS will not "try to meddle too much into how a firm compensates", as a framework on this is already in place.

In the past two years, there have been reports of buyouts from several life insurance players including AIA and Aviva.

It is common practice to offer migration or buyout packages when poaching, not unlike practices in other sectors including the legal sector.

But renewed poaching activity in the later half of 2017 caught the attention of the MAS, which previously said it would keep close tabs on mass migration developments.

Observers have pointed out that poached agents have to meet their new targets set by the insurer, in turn creating higher risks of switching or churning of policies.

Policy switching refers to the replacement of existing insurance plan issued by another company under the inducement of agents or advisers, while churning occurs when an adviser or agent buys and sells different policies frequently under a policyholder's account, thereby generating a lot commission but does little to meet the needs of the client.

Currently, the MAS is finalising regulations on proposed measures to govern large scale movement of advisers from one financial advisory firm to another.

The regulator issued a consultation paper in March this year on these suggestions.

In the same month, the Life Insurance Association Singapore also issued industry guidelines on sign-on incentives to promote more responsible recruitment practices in the industry to safeguard the interests of consumers.

These include setting sales targets at a reasonable level, paying sign-on incentives over a minimum period of six years and enhanced monitoring of the agents for at least two years.

I would humbly suggest:

1. EDUCATE YOURSELF: Find out what Insurance is and how it works 
http://www.lia.org.sg/ (Life Insurance Association, Singapore)
https://www.moneysense.gov.sg/insurance (MoneySense)

First and foremost think about your own insurance portfolio as a whole. It's aim is to prevent us from financial disaster. If we have dependants (family) who will be affected adversely if we meet any misfortune, we need to plan our insurance accordingly. Understand what insurance policies are used for. Always question what is their purpose in your financial portfolio. If you do not have a purpose for any of them, you don't need them!

2. Ask for facts/ figures and terms:
When you meet the agent, ask for the benefit illustration and the definitive terms of the insurance contracts. See the numbers and look at the facts and defined terms instead of being sweet-talked into buying a plan just because you trust your friend/agent. This is not being offensive, just pragmatic since we are on the receiving end of it. Do some research on the policy. Ask about any Claims history the policy has from the agent. Take note if you have medical conditions or anything hereditary that runs in the family. Find out how those conditions may affect you.

3. Protect yourself as a consumer:
When you sign an insurance plan, do be aware that there is actually a 14 days "free-look" period where you can cancel the policy without suffering any penalty. This is a feature to protect the consumer such that we can cancel any policy after we go back and really evaluate our situation and how the insurance policy makes sense for us.

Did you know? 
You can also look up an insurance agent's Representatives Notification Framework (RNF) code or number which at the MAS website to see if the agent has any previous records of disciplinary infractions on his conduct. (Currently under maintenance, I will update the link here later on)

LINK UPDATED (1/3/2019): https://eservices.mas.gov.sg/rr

 http://www.mas.gov.sg/fi_directory/RR_index.html 
http://www.mas.gov.sg/Regulations-and-Financial-Stability/Regulations-Guidance-and-Licensing/Financial-Advisers/Register-of-Representatives.aspx (Links are still broken on this page, they are updating the site)

It is important to know who you are dealing with and he/she should be someone competent without any integrity issues.

4. Never, never never mix insurance and investments:
The cost of investing with an insurer is akin to eating a sweet with a thick layer of wrapping paper to make the sweet look big. Retail investors should seek to keep costings low so as to maximise returns over time. Tip: Look at the "Cost of deductions/ Effects of deductions" on Benefit Illustrations.

I would encourage retail investors to try to look for lower cost investment vehicles such as ETF with banks or even Singapore savings bonds than put with endowment or Investment-linked products because of lower cost and there is no lock-in period or penalties for early withdrawal of money.

Recently, Kyith at investment moats also wrote a very interesting article for which I leave you to draw your own conclusions:
Does your Insurance Saving Plans (Endowment) give you 3 to 5% returns?

Of course, there are people who are lazy but are rich and can afford it.

If you are lazy and still want to be rich, something has gotta give. The Singapore insurance industry has come a long way since but there is still work to be done to better protect the consumer. But, there are just some things we do not want to leave to chance.


Until Next Time,
K.C.

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You don't need to pay anyone/company to have a plan of your own and work towards achieving Financial Independence. Only we alone have no conflict of interest with our own money. "30 Year Old Investor" is a personal blog about a Singaporean's savings and investing journey.


Being the average Singaporean, K.C. is also interested in good food, a little bit of politics and a good slice of humour.

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