New revenue streams: risk insurance

While there is no direct legal responsibility for brokers to offer risk insurance, an increasing number of industry figures have formed the view that there is a strong moral responsibility to offer loan protection. And under NCCP guidelines, brokers are obligated to not put clients in a position where they could face financial hardship.

Insurer ALI Group was established over 10 years ago and now boasts more than 2,500 authorised brokers who sell its risk insurance product.

Over the past 12 months the group has noticed a significant rise in the number of brokers offering loan protection.

“We’ve had over 300 brokers sign up with us in the last two months, and I think more and more brokers are showing interest because the misconceptions surrounding loan protection are being broken down,” ALI Group CEO Huy Truong says. “Groups like Aussie, Mortgage Choice and Loan Market now have life risk as a core part of their business strategy, with ALI as a key partner.”

Why risk it?

Robert Trewin, managing director of Robert Trewin Mortgage Broking, feels he has a duty of care to ensure that he at least brings up risk insurance during conversations.

“Brokers shouldn’t need to make up their own mind as to whether or not they should offer risk insurance,” he says. “It should just be a given that it’s at least discussed with clients.”

“If brokers want to look after their customers, they should be offering it to anyone who is eligible. It’s also a good idea to offer risk insurance in case something goes wrong with a client and they come back asking why you didn’t offer it.”

Some brokers sell risk insurance because they have a personal attachment to it – they may have been directly impacted or know of real-life cases where loan cover should have been taken out by a client.

Mortgage Choice franchisee Robert Shearwood says that, unfortunately, it can often take a tragedy for the importance of loan protection to be fully understood.

“Initially, I was very sceptical about it,” he says. “But then I had a case where a client died and didn’t have any cover, which made me realise the importance of risk insurance.”

“I’d never had risk either, so I went and covered myself.”

Mr Trewin also learned firsthand the importance of loan protection when his best mate passed away from a blood clot during a routine knee operation, leaving behind a wife and three children.

“How would you feel if one of your clients passed away or is diagnosed with a terminal illness and you didn’t discuss loan protection with them?” he says.

Mr Truong observes that brokers are beginning to realise that fewer people are seeking financial planners to discuss protection such as risk insurance, and that the responsibility rests with them.

“Brokers are realising that referring clients to financial planners is only effective for a small percentage of their clients who are seeking financial advice,” he says. “The majority of mortgage broker clients do not have the assets or ability to pay for financial advice.”

The benefits

Industry figures agree the advantages of selling cover far outweigh the disadvantages.

Ballast general manager Frank Paratore says that adding risk insurance to your business enables you to offer multiple services to your client base, and therefore increases your ability to attract and retain clients.

“The more products and services brokers provide, the less likely that their customers will go elsewhere,” he explains. “And if you’re not going to do it [sell risk insurance], then someone else will – and the market is moving that way.”

Mr Trewin agrees that offering loan protection gives brokers a better chance of gaining and retaining clients.

“From the client’s point of view, you’re taking care of more than just one of their needs, and it shows them that you actually care,” he says. “It makes you that much more of a trusted adviser.”

“If you look after your client, they come back to you because they’re not going to get that level of service anywhere else. I operate in a regional area, and reputation is everything.”
Choice Home Loans brokers Pieta Davies and Tricia Masin say the main benefit of offering risk insurance is that it reassures both the broker and the client that the option has been made available.

“The main advantage for me is that I know I’m looking after my client – that way everyone sleeps easy,” says Ms Davies.

Ms Masin says it gives her peace of mind knowing that her clients have been given the opportunity and the choice to take risk insurance.

“I feel satisfied that I’ve done my job by bringing risk insurance to their attention because some people aren’t aware of what it is,” she says.

Mr Truong says brokers who have started selling loan protection and have been doing it for a while are realising how financially attractive it is.

“Obviously, the core of their business is to provide home loans, but some of our better brokers are earning a quarter of their income from an extra 10-minute conversation,” he says.

“If brokers head down this path of offering risk insurance as a general advice solution, that extra 10 minutes of effort and care can earn them 20 to 25 per cent more income.

“Many of our authorised representatives are earning over $20,000 in commission and rewards.”

The misconceptions

While selling insurance is profitable, common misconceptions often deter brokers from offering it. ALI Group’s chief executive says that these misconceptions tend to come from brokers who left the banks 20 years ago because they were pressured to cross sell “just about anything”.

“Now that they’ve become a broker, they don’t really want to do anything that’s remotely similar to cross selling,” Mr Truong says.

“Our message to those brokers is that the reason ALI Group was created is not for all of you to cross sell – it’s not about that. It’s one seamless discussion about putting the mortgage in place for the client, and part of the broker’s service is to offer protection for their mortgage,” he says.

Some brokers think their clients only come to them for a home loan and don’t want to discuss risk insurance with them, and fear that they could lose the loan if they try to offer them protection for it.

“That’s a big misconception,” Mr Truong says. “I’ve never witnessed a situation where a broker has lost a loan from trying to protect their client.”

“We see the deep gratitude from clients to their brokers when they subsequently had a major illness and were paid out $200,000 or $300,000 from ALI.”

Mr Truong explains that if any of ALI Group’s authorised brokers don’t offer loan protection, the insurer contacts the client on the broker’s behalf.

“Often the response we get from our clients is ‘I wonder why my broker didn’t raise it in conversation?’ We then share the feedback we get with brokers to prove to them that their clients would’ve liked to have had that conversation with them,” he says.

Another reason why brokers object to offering risk insurance is because they are too busy and fear it may distract them from writing home loans.

“A good broker should never be too busy to have a conversation about risk insurance,” Mr Truong says.

“An extra 10 minutes is all brokers need to discuss risk insurance with their clients, which doesn’t constitute a lot of time.”

Mr Paratore agrees there is a common misconception among brokers that they feel they have to sell risk insurance “all off their own back”.

“If a broker has the competency to take on the requirements and do financial planning, and wants to provide risk insurance as well – that’s fine,” he says. “However, if a broker may want to offer risk insurance but doesn’t want to complete the necessary qualifications and requirements for it, there’s no reason why they simply can’t refer it. Either way, they are still satisfying the requirement for their customer by at least asking the question.”

Mr Truong adds that if a broker wants to become a financial planner and sell a fully underwritten risk product, it can take up to two or three days to process the policy.

“To me and to many brokers, this doesn’t work because their core business is mortgage broking – it would mean more time spent finalising risk products and less time writing loans,” he explains.

Ms Davies began offering risk insurance as a certified financial planner, but soon realised that mortgage broking was the core part of her business and would always take priority.

“I used many different models over the years to try and find the right fit for a risk insurance add-on product, and nothing seemed to work as well as the ALI Group product does,” she says.

Another reason why some brokers refuse to offer risk insurance is because they think it’s too complicated, but Mr Truong disagrees with that reasoning.

“The product solution that we provide brokers has guaranteed acceptance for clients who are Australian citizens or residents and are aged between 18 and 59, so it’s very simple for brokers to figure out if they qualify for risk insurance,” he explains. “Our model takes an extra 10 minutes without any paperwork involved – it’s all electronic.”

Building your business

According to ALI Group, there are three different options for brokers to introduce risk insurance to their business.

Brokers can become authorised to give specialist risk advice by becoming RG146 compliant, acquiring a financial planning licence and doing the job of a financial planner as well as a broker.

For those clients that have a general need for more personalised advice, the broker will refer them to a financial planner as part of a formal or informal arrangement.

Mr Truong says the broker will earn approximately 15 to 20 per cent of the commission or receive a flat referral fee under this model.

The third option, which Mr Truong thinks most brokers adopt, is to use a service such as ALI Group which allows brokers to find a product that provides cover for mortgages and can be easily incorporated into their overall loan process.

“This works well for a broker, as they can put it [risk insurance] in place within 5 to 10 minutes as part of the loan process,” he says. “The broker keeps the full commission and rewards in this case.”

A typical broker who sells a joint ALI Group policy to a husband and wife will earn approximately $500 in commission and rewards, and depending on that agreement, that $500 will be a combination of upfront commission, trail and rewards, the insurer says.

Mr Paratore believes the best way for brokers to introduce risk insurance to their business is to set up a referral system with a group such as Ballast, as there is no risk or added cost apart from simply referring their customer to someone else.

“Once brokers can see how it works and are referring enough business, there’s no reason why they can’t introduce their own financial planner,” he says.

“Where Ballast comes into play is that you can license those services under us.”

Ms Masin says that if you are in doubt about implementing risk insurance, turn to your aggregator for help.

“I get great support from our aggregator, so if you aren’t sure which insurance company to go with, I’d certainly go to your aggregator,” she says.

Don’t be pushy

Mr Paratore says brokers should not be “pushing” risk insurance onto their clients. Instead, it should be presented naturally within the suite of what they are offering.

“You’re looking for a commitment on a home loan, and one of the natural questions following it should be ‘what if?’

“All you’re really doing is creating a prompt in their mind for them to process the thought of whether or not they need risk insurance,” he says.

According to Ms Davies, it’s all about educating your clients.

“The most important thing to get across is that as mortgage professionals, we’re obligated to have that discussion about mortgage protection with clients, and you’re not doing them any justice on their loan if you don’t have that discussion with them,” she says. “It’s crucial to make them aware of how reliant they are on their income so they can then make an educated decision as to whether or not they want or need risk insurance.”

Mr Trewin explains he has a quick discussion initially about risk insurance, and then he includes a risk insurance brochure in his welcome packs for clients.

“You get to the nitty gritty once they’ve signed the loan documents,” he says.

Clients are most receptive to insurance when it’s at its most relevant – which is when they are being guided through the terms and conditions of their new mortgage, Mr Trewin adds.

“All I basically say is, ‘I don’t mean to get morbid, but we really need to have a chat in case something happens to either of you,” he told The Adviser.

And if brokers need training in how to talk to clients about risk insurance, how to handle the process and what they can and can’t do, Mr Trewin recommends asking their insurance provider.

Ms Masin says that ultimately it is up to the broker to decide when and how they bring up risk insurance as a talking point during client discussions.

“Everyone does it differently,” she says. “Some brokers will do it at the sign-up stage of the loan contract, whereas I present it at the application sign-up stage. I also touch on it during my analysis of the client’s needs.”

Ditch the negativity

According to Ms Davies, some brokers shy away from having the insurance conversation with their clients.

“No one likes talking about death or illness or injury, especially when people are buying homes and it’s all fun and exciting,” she explains.

Mr Shearwood says that it come down to your demeanour.

“It’s important to be positive and have a personality,” he says.

“You have to make your clients aware that they are making a big commitment by taking out a home loan, and point out why cover is beneficial to their loan.

“Judging by their reaction to what you say, you can generally work out which way to go.”

The easy sell

ALI Group CEO Huy Truong explains the three steps to selling risk insurance successfully

I think there are three steps to selling risk insurance for brokers who do it well. The first step is sitting down with the client for the first time and setting the agenda – explain to them that once it’s worked out what loan best suits their needs, part of your service as a broker is to discuss what options are available to protect that loan in case something unforeseen happens. That way the client is aware that risk insurance will be brought up at some point in the discussion rather than just being added on by the broker at the end.

Once you have gone through the agenda with the client and worked out how much income is needed to service the loan, it’s time to ask the client how they would service the loan if their income disappeared due to unforeseen circumstances. It is then in the conversation that you suggest risk insurance as a solution to the client and provide them with a product brochure for them to take home and read while you finish completing their loan application.

When the client returns to sign the loan documents, you then ask them whether or not they would like to put loan protection in place. They then submit the loan document to you and the loan protection application to us, and then it’s all done.

A client's perspective

Andy Welfare tells why he purchased risk insurance through his broker Steve Morrison, owner of The Loan Operator in Melbourne

What made you decide to purchase risk insurance?

I really didn’t – and still don’t – know much about it. I start nodding off at the very mention of insurance, so it came down to a matter of trust. Having met my broker, Steve Morrison, a number of times and trusting his recommendations, I thought it was probably prudent to take notice. That, and the fact that my wife made me.

Also, I like that a broker should ideally give an unbiased overview of who’s selling what and what package would best suit. It’s best to leave the leg work to the professionals rather than spending time I don’t have on subjects I’m not interested in.

I’ve never been concerned with any non-compulsory insurance before, but there are now other people that rely on me.

Why not purchase it through an insurance company?

I don’t have a great opinion of insurance companies. If I had to deal with them, I would prefer someone else do the talking, otherwise I would fall asleep. Trust would also be a major concern. I would not have bothered to get insurance at all if I was to deal with them directly.

How was your experience taking out risk insurance using a broker?

It was like having a friend over by the time the papers were ready to sign, so pretty good. The whole process was very easy because my decisions were made on recommendations, and no real research was required on my behalf. I would definitely recommend that a broker takes care of risk insurance.