How wealth planning software solves orphan challenge in insurance

Orphans in insurance can cause a multitude of compliance issues, and WealthTech company Kidbrooke believes wealth planning software is the way to fix the problem.

Kidbrooke has released a new report exploring how wealth planning software can help insurance companies improve compliance.

It started by explaining that in the advisory world an insurance company holds a client’s assets on their books while an Independent Financial Advisor (IFA) supports the client with financial advice. The insurance company will follow its regulations, such as Solvency 2, while the IFA would follow financial advice regulations.

When a client is separated from an IFA and loses access to an advisor for help with their financial planning. However, the client will still have assets on the insurance company’s balance sheet. This is referred to as an orphan and an insurance company could have thousands of orphans on their books.

Kidbrooke added that the challenge with orphans is a special case of the challenge of monetising dormant customer segments in the existing books. What makes orphans unique are their regulatory perspective.

Insurance companies do not typically have regulatory permits to offer financial advice, but they are required under regulations like Consumer Duty to ensure all clients on their books are professionally managed.

It stated, “This leads to the complex equation of ensuring consumer duty without being regulated as a financial advisor. Kidbrooke’s view is that this can only be accomplished through technology (or wealth planning software) and self-service tools, for example, powered by OutRank. It is worth noting that the regulatory solution for orphans can also benefit the IFAs in their role to create demand and customer satisfaction.”

Consumer Duty and orphans

Kidbrooke has spoken to regulators to assess the broader situation and general possibilities of supporting an orphan without being an advisor. However, it stressed that final approval is required on a case-by-case basis.

It stated that regulators are aware of the rising issue between financial advice and Consumer Duty. In general, there are two main considerations that need to be in place for self-service and not to be considered financial advice in a regulatory sense.

The first is that customer data needs to be current and updated. In a self-service context this means the customer would need to be engaged enough to consider spending time and effort to keep their data up to date.

The second consideration is that firms shouldn’t recommend a specific investment product as this would fall under regulated financial advice.

With these considerations in mind, Kidbrooke believes a forecasting and simulation engine within wealth planning software is beneficial from regulatory and customer perspectives.

Kidbrooke offered some tips for firms to consider. It stated that firms should build wealth planning solutions with customer data that is limited to the specific portfolio and not the wider situation of the customer. They should also focus on data that is easy to keep updated, such as age.

From a Consumer Duty perspective, firms could investigate if the customer has any financially unsuitable products on their books. This can be automated, and notifications can be communicated directly in digital channels potentially activating a dormant or orphaned customer.

Next, Kidbrooke outlined how a risk profile can be regulatory compliant when done correctly. It stated, “With a self-service risk profile one can educate a customer on how she should consider risk. For instance, a customer with a higher risk tolerance should have a larger exposure to equities. This way it is possible to help customers make better choices also in a self-service or self-advised context.”

The WealthTech company also urged firms to build wealth planning software solutions that include digital self-service forecasting and ‘what-if’ scenarios for all financial situations.

Other pieces of advice included creating an execution filter for when customers wanting to change an investment, mapping the financial position of a customer to what is happening in the market and pushing automated notifications to customers about their financial position, and offer automatic rebalancing and de-risking if the firm has information about the target time horizon of an investment.

It added, “At Kidbrooke we have seen the business effects of this type of solution. They support a more compliant setup where aspects such as promoting good outcomes and provide continuous monitoring also for dormant/orphaned or low-value clients. Customers also become more engaged and interested in their financial position when provided with self-service tools capable of supporting their financial understanding and decision-making.

“What is more, this also overcomes a major hurdle in data management. Well-designed wealth planning software solutions motivate the client to update existing data and even share more relevant data with the insurance company. This creates true engagement and potentially leads to more customer centric capabilities.”

Kidbrooke added that from its experience and research, customers that go through a self-service channel to learn about their personal finances are more prepared for a physical meeting and convert faster.

Read the full report here.

This story was originally published on FinTech Global