Dutch Authority Financial Markets states: Dutch Insurance still don’t put their customer in center, like they promised. Measures to secure the return-on-investment for insurance policies prevail.

The Dutch Authority Financial Markets (AFM), the independent supervisor on company behavior for savings, loans, investments and insurances companies, executed an investigation into disability insurances (AOV’s) for free-lancers and independent entrepreneurs.

The conclusions (link in Dutch) were presented in a report on June 17th, 2011. I will show here the pertinent snips of this report, accompanied by my comments.

The Authority Financial Markets (AFM) executed between August 1, 2010 and May 1, 2011 an investigation into disability insurances (AOV’s) for free-lancers and independent entrepreneurs. An independent entrepreneur that wants to enter into an insurance policy, stands for a difficult choice. 

He needs to decide whether he wants an extensive coverage or just coverage for f.i. accidents and serious illness. And does he choose coverage for mental illness as an independent? Also he needs to decide how long he can stand a drop of his income and how long he needs the disability benefit. He needs to understand technical subjects, like sum and damage insurances and indexation. On top of that he wants an insurer that addresses a claim meticulously, but is not unnecessary expensive.

These and other choices are very influential on the insurance payments that the entrepreneur will receive, but also for the premium he has to pay for his policy. Making the right choice is paramount here: when the entrepreneur cannot work anymore, due to illness or accident and he doesn’t receive the financial benefit he expects, the financial impact may be large. The quality of advise here is very important. Also the insurance companies play an important role. Their products and ways of distribution (together: the proposition) should put the customer in center. A proposition puts the customer in center when it’s:

• cost efficient; 
• useful; 
• safe;
• understandable;

Everybody that once entered into an insurance policy, knows what the Dutch AFM is talking about: the small print of the insurance policy, the complex calculations, the medical investigations, the exclusionary clauses and the empty promises of slick insurance advisors make entering into an insurance like an unprepared walk in the jungle.

The AFM investigated whether the propositions of the nine most important insurance companies on the AOV market met these four criteria. A total of 49 AOV products has been investigated. These 49 products represent €1.24 bln in premium revenues and include 73% of the Dutch AOV market. 

The AFM concludes that insurance companies need to make important steps to put the interest of the customer more in center. There are AOV’s on the market that don’t meet the expectations of the customers, which could lead to a substantial risk of disappointment among customers. On the other hand, many insurance companies try to make those steps towards customer-friendliness.

With an AOV, the customer often only notices that his insurance was not sufficient or fit for him, at the moment when he needs it most:

·    For instance, when the customer’s illness, medical affection or cause for disability is not covered by his insurance, while he expected it to be, due to the “small print” of the policy.

·    The insurance payment is so low that it is impossible to live from it,

·    Or the duration of the insurance payment is much too short to recover from his illness or cause for disability.

Where you could blame the insurance companies, is when they deliberately try to double-cross the customers. This seems not to be the case here.

• Most important observations where:

• Insurance companies too appreciate a meticulous settlement of claims. There was no indication that insurance companies handle and settle claims structurally inaccurate / inadequate
• Consumers experience the AOV products as expensive.
• There were various AOV’s available with a stripped coverage; these were excluding large numbers of medical affections, or reduced the height and duration of the insurance payments. At the market, these AOV’s are known as starters or budget AOV’s.  

•  Although these budget AOV’s can be useful, the advisory traject is essential to match up customer and AOV-product.

• However, some AOV’s exclude so many medical affections that it is not clear for which target groups these insurances are meant. 7 of 9 investigated insurance companies offer these products (equal to 20% of total number of AOV-products). 

• According to the AFM, it was not so much the customer need that led to development and sales of these products, but the (lack of) budget.
• Some AOV’s exclude so many medical affections and other causes for disability that these lose their usefulness.
• Insurance companies supply information on their AOV’s to the customer, for instance with brochures; however, none of these brochures states all relevant product features 

• Also these brochures and the policy conditions are not clear and understandable. A lot of vague terms and lingo are used.

I wished that the AFM had better investigated the question, whether the coverage stripping of the AOV and the vagueness and lingo of the brochures are deliberate attempts to make more money, while keeping the customer in the dark.

In 20% of the AOV-products, the coverage was stripped so much that it was in fact useless for the customer, but:

• Was this because the premium (hence: the budget of the insurance) on the policy was so low that the insurance company couldn’t supply a more decent coverage, or
• Were these deliberate attempts to get more profit. That doesn’t become clear in the report.

• The results of this complexity of the brochures are that consumers are highly dependent on their insurance advisors; however, from the investigation it becomes clear that insurance companies take hardly any responsibility for the quality and reliability of their advisors
• The commission that insurance companies pay to their advisors is in many cases not fitting.
• Insurers pay out 18% of the premium as commission, regardless the height of the premium. 
• Premiums of AOV’s differ strongly, dependent on the chosen insurer and coverage.
• Therefore the advisor can receive a commission on his services to an average customer, that spreads from € 73,89 to € 935,47 per annum.
• When the budget of the customer is not leading, there is an incentive to advise an expensive AOV, even when this is not in the customer’s interest.
•  Besides that, the AFM suggests that the commissions received on AOV’s with extensive coverage is not in proportion to the services rendered.

This is an example of moral hazard within the insurance world: do we sell the insurance policy that the customer needs or the one from which we earn the most money. The only way to prevent this, is charging a fixed services amount to the customer, independent of the policy he purchased. Most customers, however, are not in favor of such a system of payments for advisors.

·    In order to gear AOV products to the criterion cost efficiency, it is necessary that insurance companies have insight in:

•      Costs
•      Damages
•      Provisions
•      Premium volumes

per product. This insight was lacking partly or totally with 6 out of 9 insurers.

According to the AFM, these insurers are not capable of measuring the cost efficiency of their AOV-products.

It seems to me that one of the prerequisites of running an insurance business, is knowing per product what your forecasted expenses are vs your forecasted policy revenues. It puzzles me that 6 out of 9 insurance companies were partially or fully clueless on this subject.

All in all, it seems that in The Netherlands insurance companies don’t practice the kind of malicious acting with their AOV-policies, that we know from the infamous Michael Moore documentary ‘Sicko’. However, it worries me that insurance companies don’t know what their projected expenses and revenues are for an insurance product, like the AOV. It worries me also that insurers still use small print, lingo and vague information on exclusions and terms of insurance payments to ‘seduce’ their customers.

And unfortunately, your ally in this battle – the advisor – is probably more interested in earning a high commission on your deal, than selling you the right insurance policy.