Transition from Life Insurance to Financial Planning

The tidal wave of changes that swept across financial intermediaries in Asia pointed out some interesting lessons from other countries. The Thai life insurance industry is going through its own evolution of sort with weak players pulling out and consolidation among the medium size companies. We shall look at what all these changes will mean to the consumers and what we can expect from the life insurance companies 5 years down the road as they gear up to transform themselves from risk managers to financial planners.

Using Australia as example, back in 1986, there were more than 30,000 tied life insurance agents. Today, there are only 3,000 agents to serve a population of about 16 million people and this number is expected to dwindle even further in the coming years. The main drivers for this transition were changes in regulations and a shift in consumers' demand. In terms of regulations, a series of law were passed in Australia requiring that insurance agents must disclose to the consumers how much commission they are getting for each of the policy sold. At the same time, intense competition among the insurance companies has led to a move towards greater transparency regarding fees disclosure and innovative customer-oriented products. For example there are many kinds of insurance products sold in the 70's and 80's, like whole life and endowment products, that really do not get sold anymore. These products sounded like a good idea at the time but they were not necessarily the best products for the consumers. As consumers become more educated about financial matters, they require comprehensive financial planning strategies over their lifetime – not just risk management. And it did not take long before consumers figure out that a tied insurance agent can only deal in one company's products. Hence, the only way to meet clients' needs was to become independent financial planners (IFP), whereby they can source from multiple vendors depending on the distribution arrangements. IFPs are better positioned to offer a best-of-breed solution. Besides having a wider range of products to choose from, an IFP can demonstrate that client's interests come first by delivering products that fit their needs. This marks the beginning of a transition from what is now largely a tied agency model to an independent advice model. In the case of Thailand , it will not take 15 years for the life insurance industry to change like in Australia . The increase in competition and the use of technology means that the process of attrition is likely to be completed within 5 years. Essentially, there are three main drivers for the transition towards financial planning or wealth management as follows:-

Deregulation. As far as the regulators are concerned, the trends driving wealth management and financial planning started several years ago when big corporations switched from traditional pension schemes (defined-benefits) to registered provident funds (defined-contributions). This major shift has put an end to the “job for life” mentality where one stays with one firm through out one's professional life and the company will take care of one's retirement needs. These days, companies cannot afford to look after their employees from cradle to grave; the financial burden is just simply too much, even for big conglomerates. As more and more companies switched to provident fund schemes, the burden of financial planning has also shifted to the employees to look after their own asset allocation strategies and portfolio monitoring. But in a way, this is a change for the better for many people. At least real money is being invested with a purpose in mind, instead of having to rely on a set of actuarial statistics, which may turn out to be insufficient for a comfortable retirement.

The government sector soon followed the private sector with the establishment of the Government Pension Fund (GPF). This trend is very much universal in the sense that governments across Europe, Japan and to a lesser extent the US, can no longer afford to provide its citizens with traditional pension schemes (defined-benefits) without a major change to the level of benefits and retirement age level. Currently, the GPF handles all investment decisions on behalf of its members but sooner rather than later, this arrangement will have to change because GPF has over one million members, ranging from 20 to 55 years of age, and it would be impossible to come up with a single portfolio that would serve the needs of such a diverse group of people. In the future, GPF members shall be given the liberty to decide how their retirement savings are invested and this would lead to a significant growth for professional advice of IFPs.

Consumers' Awareness is the second major driver of this trend. As consumers become more affluence and better educated about financial planning, they begin to have expectations about what the financial planner should be providing and demand greater professionalism. This, of course, will have profound effects on how insurance companies operate in the future. Essentially, this transition will replace upfront commission-based business model with a business that relies on asset under management and fees based income. In other words, insurance agents will not be paid to sell products but they shall be paid for giving on-going advice and care to clients. The key transition is learning how to become financial planners and this can only be achieved through serious education. In fact, Thailand Securities Institute (TSI) is currently working on a plan to bring Certified Financial Planners (CFP) curriculum to Thailand . Unlike, the existing licenses such as Fundamental Guide (FK), Investment Planner (IP) and Certified Investment Advisor Representative (CIAR), a CFP charter is internationally recognized by the CFP Council in the US and the course will require about 2 years worth of study time instead of the usual 5 days for current licenses.

In addition to consumers' awareness, longevity and changing social norms in the Thai society will add further demand for professional advice. As people live longer and younger generations of Thai people can no longer look after their elderly parents the way they used to, people will have to rely more on themselves. Longevity will bring added pressure to people's retirement plans. It is now not uncommon for people to live into their 90s, meaning that they need to provide for about 30 years worth of retirement savings, assuming a retirement age of 60. Long Term Care (LTC) insurance coverage should be another great business for insurance companies to get into as the Thai demographic profile changes and more resources shall be earmarked for this group of people.

Competition among the financial institutions, not just between insurance companies both local and foreign but between banks, brokers and fund managers, will bring about unprecedented transition in many shapes and forms. Already, the distinction line between insurance companies and commercial banks is not as clear as it used to be with the introduction of Universal Banking Services and Bancassurance . Nowadays, banks want a bigger share of our wallets, so they are gearing up to sell everything under the sun from life policies, credit cards to personal loans. A classic example of this transition is the evolution of Citi Group, one of the biggest financial conglomerates with significant market shares in commercial/investment banking, insurance (both life and non-life), asset management and credit cards business. The other major trend that will bring about several changes regarding the way financial institutions do business is the so called Open Architecture Platform , where commercial banks provide shelf space to third party products. The idea of Bangkok Bank selling SCBAM or K-Asset mutual funds may seem farfetched but it has already happened in other countries where banks act like financial supermarkets and they need to have “the best products” on their shelf. Once this happens, products such as life insurance, mutual funds, credit cards, home loans will be “commoditized” , meaning that they are essentially the same products on the inside with different labels on the outside. However, financial products are not as simple as tooth paste or shampoo, people still need advice with their selection and monitoring process and this is where IFPs come in. The “value added” will be in the advice given and not in the actual product itself. This is where consumers will be willing to pay for such services.

In Chart 1 above, represents Client Segmentation & Life Cycle Needs. As people age they will need different kind of financial advice. During the early years, most people won't have much asset to invest, the primary concern will be on cash flow and debt management. Once they move into their mid 30s, hopefully they will be more affluence and will start to think about college planning, retirement and asset protection. Here again, the type of advice needed shall be different from younger people. As people approach their retirement, they will be thinking about cashing out their stock options, long term health care and asset transfer to their children. The older and (richer) the client become, the more complex the advice they will need. As far as the consumers like you and me are concerned, the next few years will be quite interesting as financial institutions gear up to serve us better, so stay tuned and M&W will be the publication to bring you the good news.