Treading a fine line with insurance cover

PUBLISHED : Sunday, 06 February, 1994, 12:00am
UPDATED : Sunday, 06 February, 1994, 12:00am

OVER the last few weeks or so, the dispute within National Mutual has been headline news. The chairman of National Mutual - and one of the guiding lights that saw it come of age when it was floated on the Hong Kong stock market - resigned.

It now appears that Andrew Yang will be taking over the reigns of NZI Life, another insurance company based in Hong Kong.

At the outset, it should be pointed out that one factor not in dispute is the financial credentials of either company. Both are large with substantial international backing and support.

What is of concern, though, is what the new agents of NZI, some of whom undoubtedly will be ex-National Mutual salesman, may say to their clients as far as maintaining their National Mutual policy or, alternatively, cancelling it and taking out a fresh one with the new insurance company.

Most, if not all insurance salesmen in Hong Kong are salesmen and not advisers. They are rewarded with commission based on sales.

As agents for a company, their loyalty is not to the client but to their paymasters, the insurance companies. Therefore, their objective will be to try to sell a policy.

While it would be totally incorrect to suggest that all insurance policies sold in Hong Kong are inappropriate or poorly sold, similarly only an optimist would suggest all policies sold are appropriate and in the client's best interest.

As a recent SCMP article stated, if a member of the public requires insurance, it is better to go to an independent financial adviser who can scour the market for the best deal.

In general, an independent adviser can get life insurance at a substantial cost saving of about 20 to 50 per cent, depending on the client's age and state of health.

These savings are based on the price that the vast majority of Hong Kong policyholders pay when buying insurance from those companies that dominate sales in Hong Kong.

So why is it that prospective insurance buyers do not scour the market for the best possible deal like other consumers do when it comes to buying food in a market or booking a flight? The answer is that insurance is not bought, it is sold. Therefore, the better the salesmen, the more the sales, as opposed to the product itself offering ''value for money''.

That said, generally once a client is involved with an insurance product and with the nature of the costs involved it is not advisable in most cases to stop one product and take out an almost identical product with a new company when the initial one has not run its full term.

The majority of the industry fears this prospect, which is known as ''churning''. It entails cancelling one insurance product for a similar one operated by a different company.

The result of the switch, it is suggested, is of no benefit to the clients while it results in a second layer of commission for the salesman.

Rumours of hundreds, if not thousands, of National Mutual agents leaving their company and going to work for a new company have led to some concerns.

In Money Matters' experience, these concerns may be justified because the easiest source of new business is the existing client.

Certainly, the amount and type of insurance does need constant review to reflect changes in the client's standard of living, etc. However, it is highly questionable whether cancelling one product and taking out a new one is justifiable.

Policyholders who have only recently taken out an insurance policy will lose the most because premiums already paid in the early years of a policy tend to be eroded largely by expenses such as setting up the plan, commission to the agent and his or her manager, etc.

So the actual surrender value of a recently issued policy will be considerably lower than money already paid in, which is effectively lost forever.

Furthermore, because a new policy is taken out, a new set of expenses/commission is incurred, hurting the client financially all over again.

Finally, there is one further point to consider if a client is persuaded to start a new policy by cashing in a previous one.

They should ensure they do not cash in a policy before being accepted by the new insurance company.

If their health has deteriorated, which will only appear perhaps during the medical examination accompanying the new application, they may not be able to get insurance. It could mean they may die early with no choice of protection for their dependents.

There is no doubt insurance is a vital commodity to those who need it, particularly those who have dependents.

It is irresponsible for a man or woman with children or parents that are financially dependent on them, not to cover the risk of dying, or indeed of falling critically ill.

However, beware of: Taking out insurance that is surplus to requirements; Cashing in a policy for no true personal benefits; Buying overpriced insurance. If you have any queries or practices you wish to have answered or investigated, please contact me confidentially by facsimile on 565-1423.