Equity release use to soar
The popularity of equity release products will soar this year - despite the initial reticence of financial planners, according to experts.
Equity release, in the form of reverse mortgages, home reversion schemes and shared appreciation mortgages, is a $1.2 billion industry in Australia.
There are around 16 product providers and 90 per cent are regulated by the Senior Australians Equity Release Association of Lenders (SEQUAL).
"I think [the use of equity release products] is going to become inevitable. The house is a lifestyle asset, nothing more," SEQUAL executive director Kieren Dell says.
"In Australia we have a demographically aging population and people are retiring with very little money in superannuation. Perhaps they've been paying compulsory super for 10 to 15 years, so people are retiring who have only one to three years worth of income and their major asset is the family home. Their property is tax free. It's inevitable they will have to draw on that to fund retirement. They either downsize or draw down equity from the family home."
Home reversion schemes allow retirees to sell all or part of their home at a discounted price - usually between 35 per cent and 60 per cent of what your home is worth. But the homeowner can continue living in their property until they move out or die.
Increasingly advisers are realising the importance of home equity release. "The attitude of financial planners is changing. Twelve months ago I spoke to financial planners and the FPA and they didn't want to know. Now they've started to see [equity release] as a valid financial strategy," Dell says.
The Mortgage Industry Association of Australia has a SEQUAL accreditation request course and equity release plans training, which Dell anticipates many planners will participate in during 2007.
Retirement Living Choices senior consultant Peter Duff is concerned reverse mortgages will be mis-sold. Duff has 35 years' experience as a financial adviser, the last 20 years as a senior Australians' advocate.
"Reverse mortgage providers are keen to sign up financial planning dealer groups where large numbers of retirees are serviced by their financial planners. Some dealer groups have signed up exclusive arrangements with providers allowing their advisers to sell the product. The danger is that an adviser is limited to one product which may not suit all clients," Duff says.
While consumers have become increasingly knowledgeable about home equity products, there is still a major need for consumer education, according to Dell. He is considering campaigns with Centrelink and the Federal Government.
Industry commentator Paul Resnik also believes social pressure will boost the number of reverse mortgages written this year. Resnik warns planners and mortgage brokers must clearly illustrate the consequences to their clients so they can make a responsible decision.
- Victoria Young Insurers warn of PI pain for planners
Insurers and brokers warn professional indemnity (PI) premiums will rise if the Financial Industry Complaints Service (FICS) pushes ahead to raise the $100,000 compensation limit for negligent financial advice this year.
BMS Austpac insurance broker Schuyler Elia says affordability has increased but expects a market correction before the renewal period in March to cushion the blow from the Westpoint collapse.
"I don't think they're going to be sizable increases - they'll be raised over a period of time," Elia says.
He says the costs will be incremental unlike the affordability crisis following the 2002 HIH insurance collapse when premiums increased by 50 per cent to 100 per cent.
"Everybody's a bit smarter after HIH. They'll stay in there and try and ride this out," he says.
Insurers are caught between re-insurers and industry associations pushing for change, the broker says.
"An insurer's basically stuck in the middle. They have the choice: increase [premiums] or get out of the market," he says.
One PI underwriter, who preferred not to be named, says some insurers will withdraw from PI cover altogether because they do not want to lose control of their claims to FICS.
Dual Australia portfolio manager Leo Abbrusso agrees underwriters could pull out of providing cover if monetary limits are increased because of restrictions it will place on insurers.
"If they do increase the FICS limits it makes a mockery of the PI policy, [which is] there to protect planners," Abbrusso says.
The external disputes resolution scheme has come under fire for providing no recourse for planners to appeal a complaint and the process by which compensation is given has been the subject of heated debate.
Two main options have been discussed to meet the compensation shortfall: provide greater financial protection to the consumer by mandating additional insurance cover and raising compensation or having a safety net to protect consumers should the insurance solution not respond.
Cover that responds to FICS will ultimately cost more if penalties increase, PI insurer Vero Profin general manager Alex Green says.
"While FICS does an efficient job of determining smaller claims . it is potentially problematic to increase the size of claims that may be settled when they are not open to a full and open assessment," Green says.
FICS proposed last year to raise the limits to $250,000, a move which was "grossly unfair" to planners, Boutique Financial Planners Principals Group Tony Gillett says.
Gillett adds the small number of PI insurers will be left with no option but to increase their cover.
A $250,000 limit would disadvantage about two thirds of FICS' 2600 members - smaller planners who have a maximum PI cover of $100,000 and would be left $150,000 out of pocket if FICS found in favour of a client claiming negligent advice.
FICS has since backed away from that figure and is canvassing the industry's views on an appropriate amount. It has held meetings with a number of associations and insurers and expects to implement the rise in the first half of the year.
"We're going to try and generate a whole number of options," FICS national relations manager Trevor Slater said. "It's a lot more consultative."
Slater warns a rise is inevitable because ASIC has told FICS to resolve a wave of complaints from investors in the Westpoint collapse.
"They feel as time goes on we're cutting out consumers. It is a tricky situation," Slater said.
He says any rise in insurance premiums will hurt planners and needs to be part of the consultation process.
"It is something that would be of concern to FICS," he says.
Monetary limits for financial advice were last raised in 1999 and life insurance was capped in 1991.
- Madeleine Collins Eye on insurance
Changes are afoot in the insurance market. Just look around Australia's sporting arenas and you will see many names in insurance vying for the public's attention - CommInsure at the cricket and Aviva at the tennis, for example. They are becoming more visible than fund managers.
Australians are chronically underinsured and how this should be tackled is a question many insurers have been grappling with. From simpler underwriting processes to simpler products and cheaper options, different insurers have been finding different solutions. For that reason, there are likely to be a number of developments in insurance this year.
The first, according to CommInsure executive manager of business growth services Jeff Scott, is EAPPS - electronic transfer forms. "An adviser or client goes online, fills out a form online, sends an email to the insurance company and the insurance company processes it immediately," Scott says.
"Currently, they fill out 40 pages of forms in snail mail.
"The other issue we've looked at is for underwriting is more people need access.
"Some companies are offering limited duration policies instead of life insurance for the rest of your life. It may only last five to 10 or 15 years.
"What they realise is that there are plenty of long-term degenerative conditions where the short-term prognosis is good but long-term is poor, for example, diabetes."
Previously, diabetes was often excluded so it will now offer some sufferers insurance but not for life. CommInsure is one insurance company that has been offering this for the past three years.
Mobile underwriters are another fairly new trend. Normally, insurers have stayed in their ivory towers, but now they are going out to the advisers to talk to them so they know upfront whether clients are likely to be successful in obtaining insurance.
Things that might be further away than 2007 include the Orasure saliva testing device. While it is used in the United States to detect nicotine, steroids, HIV, glucose, cholesterol, creatine, hepatitis B and C, and uric acid, it is not yet valid in Australia as a HIV test, which means a blood test is still necessary. However, the Orasure test, which has a much quicker turnaround, is currently being used by the Victorian Police Department for random drug testing.
New methods of calculating healthy weight may also move to the overseas standards of body mass index instead of the current chest, waist and height factors used here.
"We've seen heightened competition in price and product and that will call on responses by all players to meet the competition," Zurich general manager of insurance and life insurance Barry Tompkinson says.
"We're also starting to be increasingly affected by technology. Some of that is coming to play in life underwriting with automatic underwriting, electronic applications both to intermediaries and end customers. The challenge we are facing is how to get value to middle Australia."
Zurich has launched its Ezi Cover range to make products simpler for up to $500,000 of cover.
The other call that insurers need to make is that while group insurance is operating on increasingly skinny margins, players need to ask themselves whether they can afford to be out of it, Tompkinson says.
"The differentiating factor for us all is in service, and for intermediaries being easy to deal with," he says.
Metlife head of institutional business Michael Burke says there are aspects of the US model that work, with technical solutions to make business-to-business solutions simpler, with better time cycles and more transparency.
For Australia to differentiate itself in the market, it can adopt principles that have succeeded in the US.
Metlife's large US business targets some very different products, but according to Burke, some of the products that sell well in the US were trialled in Australia many years ago but were unpopular. "We're more likely to transport US practice rather than product," he says.
Three parties are involved in insurance: the member, the super fund and the insurer. Generally speaking, the member has dialogue with the fund through the fund administrator to increase insurance beyond the default or to lodge a claim. Typically, the contact in that exercise is not always efficient.
Metlife would like to work closer with funds and clients in the insurance process. "We think technology and online claims will ultimately be a part of how we do business," Burke says.
"We think that there is a strong obligation on insurers to participate more fruitfully with funds in supporting education, understanding what insurance really means so that members have education on level of cover," he says.
- Julia Newbould Governor Macquarie's rivals step up
If the first few weeks of 2007 are anything to go by, the frenzy of private equity deals witnessed last year is set to continue.
Leading the charge will of course be Macquarie Bank, but its domination of Australian banking and finance could be put under pressure by rivals such as Allco Finance Group (AFG) and Babcock and Brown (BNB) - the so-called mini-Macquaries.
Not unlike its namesake, Governor Lachlan Macquarie, Macquarie Bank is unafraid to put its name to almost any form of infrastructure. As a new year dawns, so a new deal looms for the bank enviously referred to as the Millionaire Factory.
Macquarie is said to be backing the $6 billion-plus management buyout of Australia's biggest gas distributor, Alinta. The bank, which increased its net profit after tax by 51 per cent to $730 million in the half year to September 2006, is also heavily involved in the private equity consortium purchasing Australia's flagship airline, Qantas.
Macquarie, however, is not the only institution hopping on the private equity express train. David Coe's Allco Finance Group (AFG) is the lead investor in the $10 billion Qantas bid with a potential 26.8 per cent, or $950 million, stake in the business.
Most of that stake will go to Allco Equity Partners (AEP), with AFG keeping 8.4 per cent as the seed asset for a new wholesale private equity fund.
In the words of one analyst at Aspect Huntley in Sydney, AFG is "ready to fire on all cylinders".
"AFG is ready to show it is a leading member of the Australian investment banking community," according to the research firm.
Not to be left on the sidelines, BNB announced at the close of 2006 it intends to buy a portfolio of US wind farms, which it intends to sell onto its subsidiary, Babcock and Brown Wind Partners.
Mike Younger, an analyst at Citigroup in Melbourne who covers BNB, is optimistic about its growth potential in 2007 but realistic in terms of its threat to Macquarie's dominance.
"The key difference between Macquarie and BNB is that BNB is coming from a much lower base," he says.
"It is a very, very different scale. For example, at the last recorded count in September, Macquarie had 8986 staff, compared to 768 at BNB."
Although Macquarie Bank increased its assets under management by a whopping $13 billion in 2006, compared to BNB's $10 billion growth, BNB's asset growth equated to a 50 per cent increase, while Macquarie's was just 8 per cent.
Younger predicts another strong year for BNB. "They put a lot of money to work towards the end of 2006, which we should see come to fruition this year. The market has a 20-25 per cent growth expectation for BNB in 2007, and even that prediction could prove conservative," he says.
- Charlie Corbett China on the boil
China is likely to keep Australian equity markets bubbling through 2007 although as in the later half of 2006 volatility is still likely to be a factor for the first six months of the year, according to AMP Capital Investors chief economist Shane Oliver.
"This cyclical correction may have further to run over the next six months or so as global growth moderates and the supply of commodities picks up. However, the long-term trend in commodity prices is likely to remain up on the back of strong long-term demand and a constrained supply response," Oliver says.
"This will mean a rough time for resources stocks in the short-term, but a favourable outlook for the longer-term."
China will also continue to drive demand for Australian resources after the Government had taken steps to kerb potentially dangerously high growth rates, he says.
"China's growth had become just a bit too strong and too skewed towards investment. This saw the authorities raise interest rates and introduce other measures to cool the rate of growth in investment," he says.
"However, recent indications are that growth in investment has slowed towards a more sustainable pace and GDP growth has come off the boil."
Russell Investments investment strategist Andrew Pease says equity markets are still undervalued and while a slowdown is expected in the US economy, this is unlikely to bring about a potentially economy damaging recession.
"It's important for investors here because recessions mean profits tank and risk premiums widen, where as a soft landing can actually be good as P/E ratios actually go up and the threat of inflation actually goes away and profits don't get hurt too badly, and that's an important distinction," Pease says.
He says global markets will continue to be driven by money looking for investments out of Asia and oil exporting countries.
One thing most economists and market watchers now appear certain of is that Australian interest rates will rise at least once more in the current cycle.
"The futures market has already priced one in for before the end of the first half of the year and there is slightly more than a 50 per cent chance that they may raise by March," ICAP chief economist Michael Thomas says.
Pease says major boosts for Australian equity markets in 2007 include superannuation changes due to be implemented on July 1, the role of the Future Fund on investing and the continuing rise of private equity.
"Presumably the Future Fund will also do some investing this year when it gets around to hiring a few people. It has $40 billion to invest and who knows how much of that will be put into equities," he says.
"There is a really strong supply and demand element to the Australian market at the moment, although this doesn't mean the market won't go down, it just means it takes a lot of bad news to keep it down."
-Stephen Blaxhall
