What do people mean by junk insurance? Several types of insurance cover were referred to as "junk insurance" during the proceedings of the recent Australian Royal Commission. The hallmark of junk insurance is usually two things:

• A very low ratio of claims to premium
• A high ratio of declined to accepted claims

What is a low claims ratio? The average for life insurance in New Zealand is about 60%, for trauma and income protection it is much higher. For health insurance, likewise. While regulators aren’t talking about a specific number, claims ratios that are only 30%, or lower, look suspiciously poor value for customers. Added to that, they tend to be sold with no advice, often is situations that are not supportive of the client making a good decision.

Gap insurance, for example, is meant to cover the difference between the value of a car and any finance remaining outstanding, in the event the car is written off during the period of the loan. It is hard for the consumer to assess the value of the contract, and they are perhaps more focused on getting the car and the loan needed to acquire it.

Redundancy insurance has also been criticised for being sold to people who could never qualify for a claim payment under the terms of the contract.

What is a high ratio of declined claims? In the absence of good industry data it is hard to say. Once again, no one wants to force a hard rule that might ban important categories of cover. Especially while work has to be done to agree common standards for reporting. However, if more than half of all claims are declined that could be a sign that a majority of holders of the policy are not clear on what it is meant to cover them for, or that the terms were difficult to understand, or too narrow.

A recent consultation on the conduct of financial institutions includes options to prevent products and sales situations like these. Although for insurers this may be a headache, advisers should view it as an opportunity. Advisers tend to sell the best contracts and offer advice extensively on living benefits: income protection, health insurance, trauma, and so on. These are all the products with the highest claims payment rates. Advisers tend to focus on the products with the best features and options for clients. Stories about junk insurance are an opportunity to highlight quality and the value of what you offer.