Your Future: It's A Matter Of Life And Death

Sydney Morning Herald

Saturday November 29, 2008

Simon Hoyle

Our natural optimism has stopped us taking wealth protection seriously, writes Simon Hoyle.

Australians are generally an upbeat lot. There are various theories about why: the climate and natural environment; our relatively young age as a nation. Whatever the reasons, there's a "she'll be right" attitude that reflects a world view that everything will be OK in the long run.

But there's a fine line between optimism and wilful ignorance. And new research by the financial services group ING suggests a "she'll be right" mentality could bring a lot of people undone financially.

The research builds on some earlier work by the Investment and Financial Services Association which found that most Australians are woefully underinsured - we're talking about life, trauma, income protection and total and permanent disability insurance here, not insurance for material possessions such as our cars and our homes and contents.

While the association identified that underinsurance exists, ING wanted to know why it exists. And the reason can be neatly summed up in just one word: optimism.

Most Australians simply do not believe they'll be subject to an event in which adequate insurance is necessary. An "it won't happen to me" or "she'll be right" mentality appears to be alive and well.

However, the reason that such an attitude crosses over from optimism to wilful ignorance is because it flies in the face of statistical evidence, and in the face of events taking place around us at this very moment.

We're living though the most severe financial crisis in memory. Specifically, we know that house prices are declining, the sharemarket has been in freefall, superannuation fund balances have plunged and unemployment is tipped to rise. Yet a significant proportion of respondents in the ING research say that should they die or lose their ability to earn an income in future, their financial "plan" revolves around selling the family home, a partner going back to work, or relying on their superannuation.

She'll be right.

The research, carried out for ING by the research firm Galileo Kaleidoscope, identified six broad reasons we generally do not have enough insurance.

First, the "she'll be right" attitude means that "we do not believe anything will happen, and if it did, we would somehow be able to battle through", it says.

Second, year after year of good economic times and positive investment markets mean that we have not yet made the mental switch from wealth creation to wealth protection. Assets such as property and shares, and our superannuation, are seen as "a kind of default insurance" which can be sold or accessed when necessary. We perceive little or no value in insurance.

Third, there's still an overwhelming mistrust of insurance companies and a belief that an insurance company won't pay a claim when it's made. "Insurance (in particular life insurance) companies are perceived as the 'bad guy'," the research says.

Fourth, life insurance is seen as too complicated. We don't know enough about the products, and we generally think it will cost more than it actually does.

Fifth, the belief that insurance is "for someone else" is genuine, and therefore life insurance rarely makes it on to the household agenda.

And sixth, we simply don't like to talk about insurance and to contemplate the issues that then arise, such as dying, leaving loved ones behind, or being totally and permanently disabled.

Gerard Kerr, ING's head of products, marketing and reinsurance, says the level of optimism uncovered in the survey is both reassuring and worrying. It's reassuring because it's exactly the kind of attitude needed to minimise the duration and severity of the economic slowdown. But it's worrying because it's stopping people from planning and protecting themselves properly.

"The big thing was the strength of the 'she'll be right' attitude," Kerr says. "In the research it said that these words were specifically said.

"But I guess the thing is to ensure that optimism is still balanced by realism as well. You don't want to lose that optimism, because it's a huge culture to have, but you want to balance it with a realistic component."

Kerr says the big challenge for the financial services industry in addressing the causes and effects of underinsurance is to somehow decouple the role played by insurance from the negative associations of the events that have to occur before insurance pays off.

"The thing I have always found with insurance is that because it's linked to a bad event, people associate insurance with that event," Kerr says. "It's about trying to divorce the two of them."

Apart from people not wanting to think about the ramifications of bad things happening, the research finds that there's also a clear sense that bad things only happen to other people. "I think there's also the attitude that 'that's not me you're talking about, that's you'," Kerr says.

But the approach that people should be taking is to "insure to be sure," Kerr says.

Kerr says the research finds that there's always an excuse for putting off thinking about why insurance is necessary.

He says single people say they'll put off the insurance decision until they have children. People with children say insurance is only for wealthy people. Wealthy people (who generally also tend to be older) assume they're too old or that it will cost too much at their age.

Kerr says the research was carried out in September, just after global equity markets slumped. He says the level of residual optimism back then surprised him, but he says it may have come off a little bit since then.

"You would think so," he says. "But then I never thought we'd start at such a high point, even in September.

"You'd think it may have come down a little bit, but when you think about what is happening overseas, how severe the slowdown potentially is, it hasn't happened here as badly. You look at what our research is saying, it's 'she'll be right', it's someone else, it's somewhere else - that mindset is still there.

"I think people sense that it is coming, but it's not here just yet."

Rebecca Kendal-Ward, a senior account director at Galileo Kaleidoscope, says there are big challenges ahead in changing our attitudes to insurance.

"Life insurance is about you dying - it's a very negative thing," she says. "Part of the barrier [to people buying it] is getting people to think about something that they do not want to think about.

"It's about the protection of something that is not tangible, or doesn't feel tangible. And it's not necessarily about what you get; it's about protecting other people in the event of something happening to you."

Kendal-Ward says life insurance ranks low on our list of "must-have" financial products - well behind car insurance and home and contents insurance. When asked to rank different types of insurance as "must-haves", 92 per cent said car insurance, 37 per cent said life insurance and 30 per cent said income protection insurance.

But when people started to think about being uninsured or underinsured, they began to explore some of the negative implications.

For example, Kendal-Ward says that 35 per cent of people who had no insurance realised that all of their debts would be passed on to their family.

Over-optimism and a misunderstanding of our current insurance arrangements could prove to be a costly combination - not only for ourselves, but for our immediate families. Earlier research by AXA and actuarial group DEXX&R found that 72 per cent of Australians aged between 25 and 65 thought they had some sort of life insurance; the percentage that actually had life insurance was 22 per cent. And 20 per cent of the same age group said they believed they had income protection insurance; the actual figure was 6 per cent.

So all the evidence suggests that even though we hope for the best, we really need to prepare better for the worst. That's particularly true when economic conditions mean it's more likely than ever that the financial resources we thought we could rely on to tide us over, should the worst happen, are evaporating before our very eyes.

How low would you go?

Over the coming two decades . . .

89 per cent say they are not likely to have an accident and be unableto work

88 per cent say events in the housing market will not cause them financial problems

86 per cent say events in financial markets will not cause them financial hardship

84 per cent say they will not become unemployed

83 per cent say they will not die

80 per cent say they will not become seriously ill

What are people's "plans" to cope, should the unthinkable happen?

63 per cent say they would fall back on superannuation, but in most cases the life insurance component of super is very low

50 per cent say they would sell some assets, but property and equity prices have declined, reducing the pool of available assets

49 per cent say their partner would have to go back to work or continue to work, but how feasible is this when unemployment levels are rising?

48 per cent say they have some insurance, but would still have to take other steps

47 per cent say they would turn to their broader family for financial support

41 per cent say they would sell the family home

32 per cent say they have no idea

On a scale from one to seven . . . where one is "gotta have it" and seven is "unnecessary"

3.0 - home contents insurance

3.2 - car insurance

3.3 - building insurance

3.5 - medical insurance

4.6 - income protection insurance

4.7 - life insurance

5.7 - trauma insurance

Must have it

92 per cent - car insurance

88 per cent - home contents insurance

81 per cent - building insurance

57 per cent - medical insurance

37 per cent - life insurance

30 per cent - income protection insurance

18 per cent - trauma insurance

Source: ING

© 2008 Sydney Morning Herald

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