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Where Insurance Fits In Wealth Risk Approaches

Jackie Bennion, Deputy Editor, London, 28 October 2020

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As part of a series of articles on the intersection of risk management and insurance, this news service talks to experts in areas such as behavioural finance and private banking.

In a recent survey of UK business leaders on the long-tail risks of the pandemic, nearly two-thirds said that the event has exposed new vulnerabilities that require significant changes in how they prepare for threats. Aon consultancy group, co-partner of the study, suggested that businesses not only need to be widening the range of threats being considered but rethink who in their firms are responsible for anticipating these threats and insuring against them.

So what does this mean for wealth managers?

“To use insurance effectively in the client solution requires taking a completely holistic, client-centric perspective,” Greg Davies suggests. WealthBriefing spoke to Davies, a behavioural scientist at research group Oxford Risk, and others from different sectors about managing risk and what can be learned from the insurance industry in particular.

“Even with common types of insurance, such as longevity risk, annuities or life insurance, these are seldom incorporated into wealth advisory solutions quite as well as they could be," Davies continued. He says that wealth managers don't lack the skills to use every tool at their disposal, but rather that those skills are compartmentalised when managing clients' needs. “Investing is often seen quite separately from planning, and insurance knowledge is on the far side of both”, he said. In other words solutions for clients are often found in isolation.

Davies' comments come at a time when different ways of thinking about risks and how to manage them are under a harsh spotlight because of the pandemic and the associated market and economic fallout. This news service is examining the ways wealth managers could and should address risk management, such as revisiting the toolbox of insurance. 

Davies also sees “emotional insurance” as another factor wealth managers need to get to grips with, ie, “taking the cost of time and effort to prepare clients effectively for times of volatility so they don’t incur much larger costs from selling at the bottom and over-trading, for example.”

Where he believes the insurance industry has used behavioural finance effectively is in encouraging people to become healthy in return for lower premiums. Another is using in-car devices to track and improve driving behaviour and safety.

There is also a lot of behavioural finance in insurance pricing, although pricing outcomes aren’t always positive based on people’s actual behaviour. "But they can influence people to change to less risky behaviour,” he said.

Senior partner and head of risk settlement at consultancy group Aon, Martin Bird, says that wealth planners can learn a lot from how pension funds use insurance products to manage risk. Longevity insurance is one example. In an ageing society where people are living much longer than in previous generations, the measure gives sponsoring employers and pension trustees a degree of certainty about how long they will have to make payments to members.

Bird agrees with Davies that understanding the behavioural decision-making of buying risk insurance are critical. In research the consultancy did last year to assess trustees’ understanding of longevity risk and what biases might be affecting those decisions, “regret aversion” was a common problem, Bird explained. This is where trustees don’t want to make a decision that may prove to be a mistake and one the client will regret.

“Also trustees may have reservations about using insurance to reduce their risk because the risk never materialises, or they could have actually gained from running the risk,” he said.

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